Gaming Startup Improbable Creates Blockchain Project. VCs Say It’s Worth $1 Billion

(Bloomberg) -- One of the most lavishly funded European video game startups of recent years, Improbable Worlds Ltd., said it can bridge the two technologies that venture capitalists are most excited about right now: blockchain and the metaverse. As a result, its backers committed about $150 million to Improbable’s new project, M².

Pronounced “M Squared,” the blockchain-enabled system promises to allow different virtual worlds to connect with one another. The new investment—led by a pair of longtime Improbable backers, Andreessen Horowitz and SoftBank Group Corp.—values M² at $1 billion, Improbable said.

The deal offers a reset of sorts. Over a 14-month period starting in 2017, investors showered Improbable with $550 million and pushed the London startup’s valuation to about $2 billion. Although the blockchain venture is valued at half that, Improbable said M² is an independent entity.

The latest investment is a bet on a future separate from what Improbable was doing in the past, said Herman Narula, the co-founder and chief executive officer of Improbable and the leader of M². “We’ve basically deep-pivoted our tech and R&D and other stuff toward web3 over the last year, and this is the product of that,” he said.

Founded in 2012, Improbable provides software to support large-scale online multiplayer games. Despite strong financial backing, the company has faced numerous setbacks including the failure of multiple games using Improbable’s technology and high turnover among its top leaders. Narula acknowledged that the company’s early technology was expensive and difficult to use. “It was more challenging to operate than it needed to be,” he said.

Last year, Improbable revealed a new product, Morpheus, that allows more than 10,000 players to be in the same virtual space. For comparison, Fortnite, an online battle game with more than 350 million registered players, has a limit of 100 people in individual game sessions. The ability to have more players in a digital world would help make the metaverse a reality, Narula said.

The metaverse became a buzzword in Silicon Valley last year after Facebook changed its name to Meta Platforms Inc. The move reflected a growing focus on creating a more immersive version of the internet, but critics say the concept is overhyped and unproven as a business. Meta reported a quarterly loss of $3.3 billion from its metaverse investments and saw its stock plunge an astonishing 27% in February.

In Improbable’s metaverse plans, Morpheus and M² go together, enabling many people to play together and move between blockchain-based worlds. M² also allows players to use nonfungible tokens that link to virtual objects like toys or outfits in these digital spaces.

There can be risks to linking different games. Axie Infinity, a top crypto game, was affected by a $600 million hack due to a security weakness in a bridge that connects the game to the Ethereum blockchain. Narula called such bridges “a fairly crude solution” for linking blockchains and said his team plans to release a white paper about M²’s approach to cybersecurity.

The use of NFTs in video games is another thorny issue. Many gamers see them as a cash grab. At the Game Developers Conference last month, representatives of  Electronic Arts Inc., Square Enix Holdings Co. and  Ubisoft Entertainment SA were booed after expressing interest in NFTs or discussing their work with the technology.

Gamers might feel differently after trying M²’s implementation, Narula said. It would allow owners of virtual goods to easily transport them across different games. “The assets I purchase, acquire or use really only have value if I can bring them into other spaces,” he said.

Yet another point of contention is in the way the M² deal itself is structured. Like many other crypto investments, the backers will eventually receive large piles of crypto tokens that grant them votes in the network’s management. In addition to Andreessen Horowitz and SoftBank, crypto-native investors, including Digital Currency Group, Ethereal Ventures and CMT, participated in the round. The influence—or, some say, control—of venture capitalists over web3 projects can be at odds with the ethos of decentralization.

In M²’s case, the deal won’t give the investors majority control of the project, Narula said. Eventually, he said, it will be governed by users: “We want to get to a place where the communities that make up the network have a lot more say.”

©2022 Bloomberg L.P.