Inside Mechanism Capital
Authors: Cosmos Kramer and Swiss
Mechanism Capital’s Web3 Gaming Thesis
Mechanism Capital is a venture capital firm betting on web3's potential to enable immersive gaming experiences. Since its 2020 launch, the firm has invested in approximately 71 teams, according to Crunchbase. Mechanism has remained an active investor in the industry despite sector-specific headwinds, primarily focusing on immersive gaming experiences and the creator economy.
There are countless ways in which teams are working to enhance the gameplay experience in web3. Mechanism’s web3 gaming thesis revolves around enabling interoperability across different devices and platforms, as well as exploring additional monetization models beyond the conventional in-app purchase model. The firm has shown a particular interest in bringing browser-based games with a lower barrier to entry into the web3 space, but it does not limit its investable universe to the browser. They're also interested in multiplayer PVP competitive games, provided developers implement sufficient anti-cheat prevention.
While web2 and web3 may not be directly competitive, Mechanism believes companies are still waiting to see if web3 is a viable option before fully committing. The firm believes market validation will drive centralized platforms to adopt web3 technologies fully, but standing in the way is the concern about potential brand risks and player backlashes if they embrace web3. Until true market validation for web3 gaming manifests, Mechanism suggests that founders need to allay these potential concerns in their pitches.
Tactically speaking, Mechanism bases their trades and investments on supply economics, project fundamentals, and general market narrative as guidance. They have a great deal of flexibility in their investment strategies, ranging from secondary liquid investments to leading VC deals, DeFi yield farming, and delta-neutral strategies.
Portfolio Highlights
Avalon
Team size: 25 employees
HQ Location: Orlando, FL
Founded: 2022
Mechanism Capital co-led Avalon’s $13M seed round, which was announced in February of 2023. Avalon is a next-generation platform to create games and virtual experiences, whose goal is to enable creators and designers alike to build interoperable games quickly.
Avalon has not announced which layer-1 blockchain they will utilize, but some of the team has expressed affinity towards layer-2 ETH protocols for their scalability and ownership purposes. Avalon is considering using generative AI tech to allow users to create their own worlds; if this comes to fruition, we believe they’d be looking to partner with AI firms to implement such features over the long term.
The developers of Avalon have expressed their commitment to creating a gaming platform that is accessible to players of all skill levels. This low barrier to entry and ease of accessibility align strongly with Mechanism Capital's investment philosophy. In addition, the team’s blue-chip gaming background underscores the potential of this investment opportunity. Given these factors, it is clear why Mechanism Capital chose to participate in this larger-than-usual seed round, even in the midst of a bear market.
reNFT
Team size: 13 employees
HQ Location: Phoenix, AZ
Founded: 2020
In July 2022, Mechanism Capital co-led reNFT’s $5 million financing round. reNFT is expanding its rental protocol, which allows for the borrowing and lending of NFTs. The funds raised in this venture round were allocated to expand reNFT's product suite, accelerate hiring efforts, and capture integrations across multiple blockchains.
A key goal of reNFT is to provide web3 gaming projects with a turnkey whitelabel solution for integrating NFT renting, lending, reward sharing, and GameFi automation into their proprietary ecosystems. This all-in-one solution eliminates the need for scholarship managers, resulting in significant cost savings of 15-30% and increased revenue for both asset holders and renters.
While Mechanism Capital may have backed reNFT for multiple reasons, we believe reNFT's successful integration with Castle Crush was the true draw to the deal. As a mobile game with over 100 million downloads and 1 million active players, Castle Crush recently introduced NFTs to its platform. In just over a month, reNFT has seen approximately 20,000 transactions. Additionally, reNFT is already live on Ethereum, Polygon, and Avalanche Mainnet C-Chain, which made it an attractive investment opportunity for Mechanism Capital to lead.
Leadership Snapshot
Steve Cho
Steve Cho, currently a partner at Mechanism Capital, previously worked at Apple for four and a half years managing and growing the free-to-play games business. While growing this segment, his attention turned to the areas of user generated content experiences and NFT/blockchain technology. He assists with Mechanism’s deal flow in web3 gaming and other decentralized applications.
To gain insight into Steve's perspective and the opportunities that excite him, we have curated a few bullet points below.
Emphasizes the importance of collaboration in the web3 space and designing gameplay mechanics that take advantage of web3's unique features to create a truly original user experience.
Believes that web3 will ultimately be able to leverage different formats and smart contracts to enable various monetization models beyond the conventional in-app purchase model, which only works well for a web 2.0 and 2.5 world.
Suggests that web3 gaming developers should focus on creating innovative gameplay styles instead of redeploying standard games and sprinkling some web3 dust on them. He encourages developers to think differently and be willing to take risks by creating games that are new, innovative, and creatively stimulating.
Believes that the best metaverse experience will be an open one, where content creation comes from passionate individuals who enjoy the experience.
Sees a massive opportunity for job creation for those who build creator tools that will enable anyone to create using any type of device.
Believes that negotiating with Apple to get into their app store is more about aligning user-centric products or services that fit with Apple's values around trust, safety, security, and privacy.
Believes that we are heading towards another "platinum age" of gaming, and is excited about the potential for creative and innovative projects in this space.
In Conclusion
Through their active involvement in the industry and their investments in innovative startups such as Avalon and reNFT, Mechanism Capital is helping to shape the future of gaming and drive the adoption of web3 technologies. Their thesis serves as a guidepost for investors and entrepreneurs alike. If you are an early-stage web3 gaming company with questions about this research, drop us a line at contact@cryptochemistry.io or subscribe to our Chem’s Blend newsletter to receive more research like this.