OIO reveals Auckland's Grinding Gear Games sold for more than $100m

PLUS: A visit to the 114-person West Auckland startup, where Chinese giant Tencent took a majority investment last week.

UPDATE / May 31: An Overseas Investment Office decision approving Tencent's investment in Grinding Gear Games has revealed the purchase price, or at least its lower limit.

The agency green-lit Tencent to take up to a 100% stake in the West Auckland company (in the event, it took 80%) for a "consideration that exceeds $100 million."

$100m is the threshold at which a deal has to be run by the OIO.

Before Grinding Gear Games, the $100m line was most recently crossed by another Auckland tech, PowerbyProxi, sold to Apple.

Like the PowerbyProxi, Grinding Gear Games is keeping all of its Auckland staff, and expanding locally.

EARLIER / May 27: Chinese gaming giant Tencent has taken majority control of New Zealand's largest gaming developer, Grinding Gear Games — maker of the online role-playing game, Path of Exile.

A price has not been disclosed, but this West Auckland startup is making a profit, and has two million players worldwide signed up.

Easily the largest single shareholder in Grinding Gear Games ahead of the deal was co-founder and managing director Chris Wilson who had a 42.76% stake. A Companies Office update puts Tencent on 80%, with Mr Wilson's holding now 13.17%.

Today, Grinding is a big operation. Its location isn't promising: an office building near a Pak N Save in a non-descript shopping centre, which it shares with a couple of government agencies. But when you walk in and see all of its 114 staff on one open plan floor, you can't fail to be impressed.

Wilson has immediate plans to scale up to 130 staff.

Longer term, he sees "hundreds" of new hires and his company taking another floor on its building. Yes, the same building; he wants to stay in blue-collar Henderson, where most of his young staff live. He likes the suburb. 

On one side of the office, all the fluorescent lights are switched off. The staff there prefer it dimmer. In the centre are the only three walled offices (albeit with glass walls), where Wilson and his two co-founders sit. 

There's a projector in a rec room for watching movies, and the soft drinks in the company cafe area are free (in the great tradition of startups, no staff are actually in the rec area when NBR visits, though it was late morning).

While he muses about occupying two floors Wilson, does not want the company to get any bigger. He has no plans for a second game.

Wilson is modest and self-effacing and not keen on being photographed, saying he would prefer Exile to be portrayed as the product of the whole company. He won't say the size of his payday with Tencent, and seems to have no plans to splash out on a new pad or car. "I'm happy with my current house and I don't drive," he says.

A small slice of Grinding Gear Games' office.

I get the impression he doesn't think a heck of a lot about the world outside Exile. He both plays the game — making no attempt to hide his identity — and works on it. A lot. What sort of hours? 

"Honestly, way too many in the early days. It's still more than a full-time job, but becoming more manageable as we scale up the team to help with administrative tasks," he says.

"I like to be very hands-on with the product, so I try to spend more than half my time working on the game. This can push admin tasks into the evening and weekends, but I'm used to it."

While he seems to have only limited interested in material reward, Wilson does think about the bottom line.

The target audience
When I tell him one of my friends, a lawyer, is something of a fan of RPGs, including Exile, and that his wife complains he spends around a third of his life playing them, Wilson's eyes light up.

"That's good that he's a lawyer. He can buy a lot of stuff," he says. 

Exile is free, but has in-game purchases. Wilson says the keenest players spend thousands a year on extras like flasher virtual clothes (the extras are purely cosmetic; you can't pay to get ahead in the game).

Most players are males between 25 and 35 he says, though more female players are starting to come onboard.

I ask what assistance Grinding has had from Crown agencies like Callaghan Innovation. Little, Wilson says. The only leg-up was a modest $9000 from NZTE. Grinding has pulled itself up by its bootstraps from the get-go.

It's ironic in a week where communications minister Clare Curran has asked officials to "map" the gaming industry. 

The early days
Grinding's genesis came when Wilson was playing an online role-playing game, and got chatting to another player who was logged on from Sweden: Erik Olofsson.  

The pair talked about creating their own RPG. But unlike most such chats, it didn't stop at mere fancy. Olofsson — a designer — actually jumped on a plane and flew down to New Zealand to collaborate with Wilson, who was wiling away his post-university years on a series of contract-programming jobs (the third founder was Jonathan Rogers, who featured in an NBR Ask Me Anything session back in 2013. Post-deal, Olofsson and Rogers have 3.41% stakes).

Grinding Gear Games first became widely known in 2012 when the crowdfunded $US200,000 to develop Exile via Kickstarter. 

Another crowdfunding round, in 2013, saw $US2.5m come in through the door as the number of Exile gamers climbed to 140,000 and Grinding Gear staff to 20.

Wilson says Exile now has two million active users worldwide but he won't reveal a mix between those who play for free and those who pay. He does say rabid fans can spend thousands a year on the game through in-game purchases.

"We have been profitable since we commercially released the first version of the game in 2012," he says.

The company quickly got to the top tier, along with along with Wellington's PikPok and Dunedin's RocketWerkz in the top-tier of New Zealand gaming. RocketWerkz also has Tencent backing; the Chinese company took a 25% stake in 2016.

Today, according to the New Zealand Game Developers' Association (NZGDA), Grinding Gear Games is our largest game developer full-stop. It employs roughly 1 in five people who work in the industry.

The deal
The Hong Kong-listed Tencent bills itself as the world's largest online gaming company (in fact, it's giddy market cap of $US503b makes it the world's fifth most valuable company full-stop) but Mr Wilson says Grinding Gear will be keeping it Kiwi.

All staff will stay and it will stay local. In fact, there are plans to boost numbers to 130 over the coming year.

Wilson, Olofsson and Rogers will stay on. 

It was Tencent — already the Chinese publisher for Exile — who made the first approach, and negotiations took a full year.

Wilson he and his fellow co-founders negotiated for themselves. They only brought in lawyers to look over the final terms of the contracts. As with other areas, like HR and accounts, they learnt as they went.

The game is served from a strong of IBM data centres around the world, and there's no change anticipated on that front, either. "They're probably not the cheapest, but they're reliable," Wilson says. There was no strategy it to go with Big Blue. Rather it was a case of Grinding's original provider being bought out by another, which was in turn taken over by IBM. 

A scene from Grinding Gear Games' signature title, Path of Exile.

Welcomed by the industry
"This is fantastic news for the team at Grinding Gear Games," NZGDA chairman Michael Vermeulen says of the Grinding-Tencent deal.

"It's is a great fit. Tencent is the largest games publisher in the world, has a strong reputation and is known for respecting the creative independence of the companies they invest in."

Mr Vermeulen says the investment in Grinding Gear Games is also an endorsement of the quality of the New Zealand video games industry in general.

"International publishers and investors have been increasingly interested in New Zealand-made games but our challenge as an industry is to build more studios of scale so we can take advantage of those opportunities. Interactive gaming is a growing global market that New Zealand businesses can successfully compete in with the right support," he says.

"The video games industry is the largest entertainment industry in the world, valued at $US108.9 billion. New Zealand’s games industry was worth $524 million in 2016/17, of which $100m was exports of New Zealand creative software."

If Chris Wilson has his way, it will get a lot bigger over the next few years.

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