Roblox goes public at $41.9 billion valuation in direct listing

Roblox, the platform for Lego-like user-generated games, went public today in a direct listing, where employees and investors finally get a chance to sell shares on the market. The initial price was far higher than the reference price of $45 a share, as the first trade was about $64.50 a share, giving the company a valuation of $41.9 billion.

The event isn’t an initial public offering, as the San Mateo, California-based company decided not to raise money for the company itself. But the direct listing tells the world just how valuable the public markets believe the company has become with its 32.6 million daily active users.

Roblox‘s employees and shareholders sold more than 388.2 million shares out of a total 650 million available. The shares are trading under the RBLX stock symbol on the New York Stock Exchange. Shares are already trading above $70 a share.[Updated 1:50 p.m. 3/10/21: Shares closed at $69.50 a share, giving the company a valuation of $45.2 billion.]

“It’s a nice moment to step back,” said Roblox chief business officer Craig Donato in an interview with GamesBeat today. “We don’t normally take these moments to touch the trophy. We’re so always focused on what’s next. It’s nice to just take the moment for today to reflect on that.”

Though it chose not to raise money today, Roblox itself still has plenty of cash, as it brought in $520 million in private funds last month at a $29.5 billion valuation, which was seven times its value from a funding round from nearly a year before. The reason for that skyrocketing valuation is that the company saw huge increases in players during the pandemic. And since the company gets a 30% cut from the revenues generated by its user-generated games, the company’s bookings for 2020 were $1.9 billion, double what they were the year before.

“This will raise the visibility to the company, which is super important as we try to hire more and more folks to the company,” Donato said. “Raising the profile of the company and supporting our recruiting efforts is a great thing. As you know, we have big aspirations for where Roblox can go. And one of the things that we need to make sure that we are able to do is really to step into that vision, and that requires a lot more people. So hiring remains a big focus for us.”

With the higher-than-expected valuation, Roblox will be able to raise money in the future at a much higher price than it could have just a short time ago. And if any other company wanted to acquire Roblox, it will be far more expensive after today.

If the direct listing goes well, then Roblox’s value will be high, and it will be able to raise money for itself in the future without worrying if it is leaving money on the table by mispricing its stock, as the market will have established its stock price. And it will be another vote of confidence for game platforms, where a company creates the foundations for games rather than making games itself, said Roger Lee, the managing director at Battery Ventures (which is not an investor), an interview with GamesBeat.

Above: Roblox CEO and founder Dave Baszucki rings the opening bell at the New York Stock Exchange.

Image Credit: Roblox

But there are some risks, as losses are going up as the company expands. Roblox recently reported that it lost $253.3 million on revenues of $923.9 million for the year ended December 31.

“I think the unit economics and our business are strong, they have been strong, and they’ll continue to be strong,” Donato said. “That said, I think our inclination is to invest in long term success. We will always be looking at can we pay the creator community more money. Can we invest in our infrastructure to enable the experiences to be more sophisticated, more advanced, or involve new use cases? While we do pretty much care about the bottom line, I’d say we’re in the mode of very much investing in our long-term success.”

The company’s free cash flow, or money coming in the door, was $411.2 million in 2020, significantly more than its net losses.

“We’re fortunate in that our business has been cashflow positive for a number of years,” Donato said. “We are saving more money than we’re spending. That said it’s nice to be able to raise some additional money to have an increase in the size of our cash reserves for investments that we want to make. We’re a thoughtful company in terms of how we spend our money.”

The company will use the proceeds from the previous $520 million to hire more people. Right now, Roblox has more than 1,000 people, including more than 500 that were hired during COVID-19.

“I think we’re in the early innings of a very long game,” Donato said. “So we know we want people that are invested in us, the long-term opportunity.”

The metaverse

Above: How to make a metaverse

Image Credit: Roblox

As I wrote on Friday, I see its pending success or failure as a stock as a kind of referendum on the metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One. Is that a reason to buy the company’s stock next week?

As much as anyone, Roblox CEO Dave Baszucki is a kind of James Halliday figure, the fictional billionaire who built the Oasis, or the version of the metaverse in Ernest Cline’s sci-fi novel Ready Player One. (OK, maybe he’s more like Ogden Morrow, the cofounder of the Oasis in the novel). Like Halliday, Baszucki is the visionary who dreamed of building the metaverse in the early days of his company 17 years ago.

Baszucki and his cofounder, Erik Cassel, played around with physics in a virtual world, and they coded a platform where kids and adults could interact in 3D simulated virtual environments. The materials were physically accurate blocks, like a world full of virtual Legos, and users could build whatever they wanted. They wound up building games, and those user-generated games became the foundation for a business behemoth. Sadly, Cassel passed away a while ago, but Baszucki never neglects to mention him when talking about the company’s early days.

Roblox’s games have become so popular that people have played the best titles billions of times. On average, 32.6 million people come to Roblox every day. More than 1.25 million creators have made money in Roblox. In the year ended December 31, 2020, users spent 30.6 billion hours engaged on the platform, an average of 2.6 hours per daily active user each day.

The next steps are building more features that can enable the metaverse, where people would spend more time and engage in a wider variety of activities.

“I think that the next big chapter for us is really expanding the different types of use cases that happen on our platform,” Donato said. “We’ve already started on that. Obviously, a lot of people come to Roblox to share adventures and hang out with friends. But we’ve invested heavily in in music and other forms of socially consumed entertainment. We’ve done concerts and launch parties, as well as events with video providers like our working friends Warner Bros around DC Comics. So there’s all sorts of things we’re going to do there.”

While that growth is good, it raises Roblox’s costs. The company has more than 2,300 paid moderators, who serve as contractors, and their job is to ensure civility.

“We’ve been investing in safety and moderation systems since day one. We continue to constantly be pushing what we do in those areas,” Donato said. “Our chat filter for years has been age sensitive. So we’re filtering not just on the age of the speaker, but the person that sees on the other end. We’re double filtering it based on age. So we’ve invested a lot of infrastructure, not just doing basic level mom moderation, but context sensitive moderation. And that level investment will actually serve us well, as we move into the next chapter.”

Much like Disney, Roblox is just beginning to see its audience get older and cross multiple generations.

“As our audience grows up and ages up, I actually think it’s an advantage because a lot of the infrastructure that we need to put in place to maintain safety and civility is actually very well served and needed for people of all ages,” Donato said. “It just needs to be built in a way that it’s age and context sensitive.”

He added, “I’m excited about the work we’re going to be doing in education. We will invest more in educational experiences on our platform. And we’ve been doing some work-related experiences.”

A venture capitalist’s view

Above: Roblox’s annual figures

Image Credit: Roblox

Lee said that he saw Roblox through the lens of his children, who are in their younger years.

“My older and middle child were spending tons of time on Roblox, and that was my first view of how special and innovative the company was,” he said. “It was the experience of watching my children in the Roblox community that opened my eyes to what they were doing. And Dave is a spectacular leader, who has been very clear with his vision from day one. It’s very rare to have such clarity.”

He added, “I’ve always been a believer in the metaverse. I thought the first incarnation of Second Life was the 1.0 version of what the metaverse could be. And then we went off into social media land for the next 15 years and we had very lightweight versions of it, with Facebook and Instagram, and Snap. And I think the emergence of Roblox has very quietly, very steadily become the real metaverse where it’s not this centrally controlled platform or environment. It’s this distributed platform that the creators can build on their own.”

As for the frenzy in the investment and acquisitions market for games, Lee said, “I think one of the things people will appreciate over time is actually how sticky the consumers are with these games. There’s a belief that the revenue for these games is not very durable. And when you actually look at the revenue for these franchises, and how loyal the players are, they’re much stickier, they’re much more engaged, and they’re much more loyal than I think most people appreciate.”

A Roblox investor’s view

Above: Roblox opened trading higher than expected on the NYSE.

Image Credit: Roblox

Neil Rimer, a partner at Index Ventures (one of Roblox’s biggest backers) said in a blog post that he views Roblox as a new type of media company, much like Disney was when it emerged as a high growth company in the 1950s.

“In many ways, Roblox … could be considered a 21st-century Disney: a category-defining media company that capitalized on major demographic and technological changes to create totally new forms of entertainment and human interaction,” Rimer wrote. “Unlike Disney which has to find a common denominator to justify the cost of its productions and attractions, Roblox offers every group of visitors their own personal amusement park to explore that is tailored to their age and interests on any given day.”

He added, “Roblox is probably the greatest contemporary example of a founder taking a very long view and never — not for a millisecond — doubting the relevance of the ultimate vision as they patiently build the broad foundation to underpin it. To arrive where it is today, Roblox had to resist the temptation to jump on the latest ‘hot’ game genre and try to build its own version of Minecraft, Clash of Clans or Fortnite. Instead, Dave remained humbly focused on ensuring that Roblox would be the place the next version of these games could be built.”

A developer’s view

Yonathan Raz-Fridman, the CEO of Supersocial, believes enough in Roblox that he has created a development studio to make games for Roblox. While Roblox has eight million creators and 1.25 million who have made money from making games, Raz-Fridman is betting that bigger studios can raise the quality bar and provide better experiences inside the world of Roblox than outside of it.

“We’re seeing a lot of just overall growth in the developer community, both studios coming in, as well as the studios that started in Roblox getting bigger and bigger,” Donato said. “The common use case [in the past] was a single developer. Now, all of our top experiences are built by teams of 10 or more people.”