Where are the investment opportunities in the kids digital space?
Where are the investment opportunities in the kids digital space?
My Gandalfian methods1 for deciding what I’ll do next are as much about wandering into the past as they are about mulling the future. Thinking about some of the long-term opportunities in the kids and teens digital media space, I realised it was much easier to think about this through the recent market successes (i.e. what doesn’t need to be solved). So let’s take a quick look at the material acquisitions and one IPO over the last few years to see what they crossed of the list.
A short preamble for anyone who doesn’t know the kids space. Ten years ago, the response of investors to building digital platforms for kids was mostly unstifled yawning. To be fair (ish), this was just after the Great Kids Virtual World Crash (GKVWC): after Club Penguin’s acquisition by Disney (there’s a good interview with the founder here), the shift to mobile killed many of the more interesting Flash-based environments like Moshi Monsters, Fight My Monster, Poptropica and Bin Weevils. But the absence of obvious places to go wasn’t, it turns out, evidence of the absence of young audiences: 2013 was around the time that young audiences (<13) became both the fastest growing and most invisible digital audience in the world.
The industry-defining (problem-solving) successes
These importance of these deals are mostly, but not entirely, reflected in the price-tags/valuations but also the blue chip calibre of the acquiring company.
Minecraft (acquired by Microsoft)
Solved for: crafting at scale, a successor to virtual worlds
To some (arguable) degree a proto-Roblox, Minecraft was the true successor to the virtual world genre. Tapping into (and respecting) both young audiences and a relatively nascent YouTube, it became an unstoppable answer to the question of how scalable can a kids game really be?
Roblox (IPO)
Solved for: UGC tools, distribution, social (controversial!)
Although Roblox was undoubtedly accelerated by Covid, it had been a quietly growing giant amongst kids for years. Although Roblox has always felt old-school (just look at the UX), the team proved that you can create a set of tools and distribution for a specific demographic cohort and they’ll grow with you. It also firmly established that (again!) you can build a multi-billion dollar outcome with young audiences (yes, yes and users over 13 etc).
Moonbug (acquired by Candle Media)
Solved for: ValidatioYouTube-originated IP
Like every sector, the incumbents (media companies) didn’t believe that IP developed for small screens could possibly become as big or bigger than traditionally crafted content. While everyone was hunting for the new Paw Patrol in broadcast pitches, YT channels like Bluey and Cocomelon became exactly that in plain sight. Moonbug executed flawlessly, acquiring the the top channels and crafting a pre-school IP empire.
SuperAwesome (acquired by Epic Games2)
Solved for: kid-safe ads, parent verification
Kids TV generated ~$1.5b of ad revenue in 2013 and for years managed to maintain a Wile E Coyote level of gravity defiance as young eyeballs migrated elsewhere. Slowly and then quickly, the ad dollars eventually followed and today kids digital ad spending is one of the fastest growing in the world. It also helped underwrite the economic thesis for child-direct communities (which were enabled by SuperAwesome’s parent verification sservice).
Toca Boca (acquired by Spin Master) and StoryToys (acquired by Team17)
Solved for: sustainable kids gaming
Although it’s going back a few years, Spin Master’s acquisition of Toca Boca really started the ball rolling for kids digital dealmaking (I still think it’s one of the best young audience IPs). Team17’s relatively recent acquisition of Storytoys underlined the ongoing opportunity in the kids gaming space for well-managed companies.
Two Hat (acquired by Microsoft)
Solved for: content moderation tools
While content moderation for young audiences certainly isn’t solved, it has definitely been productised successfully both in the forms of software but also Trust and Safety teams.
GoHenry (acquired by Acorns) and kids fintech (~$1.8b invested)
Solved for: independent purchasing
Allowance and pocket money has historically been a cash business. And for a long time, the digital payment method for kids was via parental cards and persistence. In the last four years, almost $1.5b3 has been invested in kids fintech to allow empowered (and independent) spending by the under-16 audience. Combined with more support for family accounts by Apple Pay (and others), Gen Alpha is now not just an influencer of family spending but a standalone digital consumer.
YouTube and YouTube Kids (acquired by Google)
Solved for: kids video streaming4
Even after eighteen years of existence, YouTube’s relationship with young audiences is still complicated. Although it has been one of the most egregious of blind-eye-turners to young audiences, it remains (by a magnitude) the largest investor in both kids video streaming services (Made For Kids content and separately YouTube Kids) and kids content creators (measured in ad dollars).
So what’s left?
The internet, and perhaps more specifically the attention economy5, wasn’t designed for kids so despite the growth in kidtech investment levels, there are still a lot of challenges remaining for the ecosystem. My current list of unsolved and coherent6 problems (not all of which may actually be investable7) currently stands as:
1. Age-gating and age verification: in the history of human civilization I’m not sure there’s been a better designed incentive for lying than age-gates. I’ve been in countless conversations over the years which can be summarised as ‘please build an internet lie-detector for date-of-birth’. SuperAwesome’s Epic Games’ Kids Web Services has had a huge impact on the parental verification for part of this workflow but the need for some kind of trusted age API remains (cabined accounts are a very sensible interim step).
2. Relationship graphs: closely linked to 1 but discrete enough to list separately, all COPPA and age verification solutions are really adult verification. Outside of walled garden account systems, there isn’t a relationship graph per se. This would be an ideal solution for developers.
3. Sustainable kids app stores: App stores curate for parents, not for kids and for a long time, app developers really didn’t (still don’t?) want to be in the kids and family category. A long-term solution allows for fair monetization and some degree of commercial UA capability. It’s worth listening to the founder of Toca Boca on this general topic.
4. Solving both privacy and safety concerns in community moderation: Whenever you read the latest iteration of a ‘privacy for all’ argument made by a consumer platform you should assume it is accompanied by thousands of experienced community moderators eye-rolling across the internet. This debate is treated as binary whereas in reality it’s a gradient. Perhaps very trained LLMs will allow a better balance? Perhaps there ends up being a single outsourced company who wants to own this? I’m not sure.
"I’m thinking about telling my kids that they should start creating technology tools to moderate behavior in internet 3.0, because I think it’s going to be a huge challenge.” Bob Iger, from his excellent conversation with @karaswisher https://t.co/zNpGyyt2GD?
— Dylan Collins (@MrDylanCollins) February 1, 2022
5. Reliable user data on what Generation Alpha is actually doing: the vast majority of published data on kids activity is proxied through parents (privacy laws prevent anything more scalable). This challenge is compounded by the fact that kids behave in overlapping cohorts with both new and old trends.
6. Wishlists for kids: almost every Q3, almost every consumer product brand asks for a wishlisting function for their ad campaigns. And almost every initiative runs into the funnel conversion compliance challenge of parental verification. Amazon has, for obvious reasons, nailed this but there is room for other solutions.
7. Ecommerce for kids: although payment for kids has largely been solved with kids fintech investment (and Apple Pay family accounts) it’s still very difficult legally to actually point young audiences at a place designed to buy the things. It seems improbably that this situation remains forever.
8. Visibility for parents into their kids digital activity and/or a trusted digital parent brand: like many of the unsolved issues listed here, this is more a human problem than technology. The issue isn’t parental monitoring, it’s parental time and fluency. FamilyGamer is tackling part of this. Maybe AI solves the rest?
9. Social networks for kids: I get into a lot of arguments about this description, mostly because I don’t believe the words correspond to the actual problem. In my view, the true shape of the challenge is something like a) parents would like a social network for their kids, b) some kids (8-10 but probably not 10-12 brackets) would like an environment designed for them but definitely not labelled ‘kids’ and c) kids content owners would like a discrete place to engage digitally which doesn’t carry the brand safety challenges of regular social platforms. By definition any successful ‘social network for kids’ is going to have a limited user lifetime. However that’s not to say that building a community for kids can’t work (PopJam was a valiant effort, Zigazoo seems to be doing well) but I think everyone should be clear on what it isn’t.
10. Allowing kids to be paid as creators: the concept of allowing young (u16) digital creators to monetize tends to be a bit of a Rorschach test. Either you see this as equality of economic rights OR you proclaim it to be child labor and exploitation. On the basis of the recent NCAA NIL decision, it would seem that the direction of history is on the side of the former. But then bank people keep telling me that the world will basically end if kids are allowed to receive money directly so this may not resolve in a hurry.
11. Moving beyond brand integrations in games: as gaming eats up engagement hours from everywhere, the many-headed challenge beast of brand integrations in Roblox/UEFN experiences remains problematic for almost every stakeholder in the process. The long-term solution moves beyond short-term marketing budgets and into longer-term (probably revenue-focused) brand thinking. Much to be done (also this is worthy of a standalone post at some point).
[12]. This is not a thing but there was a point in time when it might have been
I feel there are a lot of people looking back at the last gen of kids virtual worlds (Club Penguin, Fight My Monster, Moshi Monsters, Poptropica, Bin Weevils etc) and wondering how to re-boot them with an NFT model right about now…
— Dylan Collins (@MrDylanCollins) September 8, 2021
Shall we talk about money?
At the risk of writing literally forever on this topic, I do want to touch on the actual investing bit. Historically the greatest value creation challenge has been the asymmetry between the cost of the problem and the value of the solution i.e. very bluntly, the kids audience doesn’t generate enough revenue to justify much investment (this is as true for enterprise product adoption as it is for general investment cases). However I think we have passed (or at least are in the process of passing) an inflection point where this stops being true. At a macro level, the kids space now represents a pretty simple bull investment case: more kids spending more time online with more tools and economic empowerment versus a general underinvestment trend (it’s hard, it’s kids etc.). Opportunity! Ironically this is at precisely the moment that the most obvious acquirers of companies (legacy kids’ media companies) have the least firepower to do deals. It’s pretty notable that in the above list of defining industry deals over the last few years there is only one kids industry name (Spin Master) on the acquiring side8.
The highest probability exits in this sector over the next decade will come from PE funds (true in many sectors but also here, several major names have done work on the space), non-kids consumer platforms (games, streaming, perhaps ecommerce) and Roblox. Armchair investment banking aside, the more important point (attention founders) is that companies will need to have real and sustainable P&Ls for these deals to happen. Yes there will always be exceptions for acquihires and feature tuck-ins but in general if you are building in this space, assume that revenue growth alone won’t be sufficient.
I’m sure I’ve got some gaps! Feedback, counter-views and new ideas (and startups!) welcome.
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Wandering around trying to learn new things and seeing what happens when I pull on certain threads
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Currently in a slightly Schrodinger’s Cat corporate status
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This remains my quick/dirty estimate across the likes of Greenlight, Currency, Step, GoHenry etc. but probably understates total dollars in.
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I realise this description will lead to a bunch of angry DMs from Sensical, Kidoodle and other folks and yes I obviously know it’s not totally true. It is however, kind of true.
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Despite popularising the former statement I now feel that focusing on the attention economy is probably a more useful description.
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I am mulling a couple of other problem statements in the youth space but not yet clear that they are truly generalisable rather than being specific to some big companies.
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And by ‘investable’ I don’t necessarily mean with VC models. Some might be, most won’t.
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To be fair to a few companies who I can’t name, this wasn’t always for the lack of trying.
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