Nitish Mittersain: The Game Theorist The CEO, founder and joint MD of gaming unicorn takes us through his journey from being a gamer to building a large diversified gaming company. He is on Entrepreneur India's Digital Cover for February 2023

They say blessed are those who can follow their passion and turn that into their profession. Nitish Mittersain, CEO, founder and joint MD, Nazara Technologies is one of those few lucky people who not only converted his love for gaming into his career, but built a large business around it. That too, when smartphones had not arrived and nobody else was thinking of gaming as a business in India.

"I started coding games when I was seven. So, it became a lifelong passion for me. I used to see my friends and myself spend a lot of time in the computer centre playing games with each other. And it struck me that gaming has to become a large business in India. So, I jumped right into it without thinking too much. But, only when I really started the business, spent a few years in it, I realized the challenges of starting up a business," he said.

Mittersain was also lucky in having the support and encouragement of his parents. Despite gaming being a new sector back then, they pushed him to give it a try. That is how Mittersain launched Nazara Technologies in 2020 when he was still studying in college.

Cut to 2023 when there is a huge global market downturn and he still stays as confident and fearless as the first day of starting up. The gaming unicorn has reported a 31 per cent rise in its consolidated net profit to INR 22.4 Cr in the third quarter of financial year 2022-23 (FY23) from INR 17.1 Cr in the year-ago quarter. Revenue from operations surged nearly 70 per cent to INR 314.8 Cr in Q3 FY23 from INR 185.8 Cr in the December quarter of the previous year. Income from other avenues also nearly tripled to INR 11.5 Cr from INR 4 Cr in Q3 FY22.

Over the years, Nazara has developed a fairly conservative approach towards risk-taking and the way it approaches business. In fact, downturn in markets is usually the time when Nazara shines through.

"When markets are euphoric like they were in 2021, we shy away from very high valuations on investments. Because in the last five, or seven years, we have become very M&A-focused, euphoric times don't necessarily play out very well for us. And we sometimes get a sense of being a little left behind. But at the same time, when there's a downturn, market valuations have taken a beating globally, we see a lot of opportunities in that value zone, where we want to invest and grow these businesses," he said.

The differentiating factor

The company has had a track record of delivering profits and high returns on equity. Investors like Rakesh Jhunjhunwala often spoke about the potential of the company.

"We have been running a profitable business for many years and in this new age and space, I think that in itself is a superpower because most of the companies are losing money head over heels, and especially in tough environments like the one we are in now. They get very disrupted and defocused because they start laying off people. There's a lack of stability in internal teams. And therefore, I think this in itself becomes a big differentiator for us," he said.

Nazara's diversified business model also gives it stability in a disruptive space like gaming. That's why Mittersain likes to call his company 'a stable ship in a stormy sea'.

This blended business model has helped Nazara to show a decent margin profile while letting some of its strategic businesses aggressively invest in market leadership. It continues to build more around that space while finding the right balance, where it doesn't optimize profitability in the short term while losing sight of the larger picture.

"This is more relevant for us now as we become a listed company and we have our quarterly pressures of delivering numbers. But, I think taking a short-term focus will be painful for us in the mid-term to long term. So, the way we found our balance is we do not want to burn money, and we do not want to lose money. But in strategically important businesses, if you are reinvesting for growth, the margins are low, it's okay."

Betting on investments and acquisitions

Does the company have a strategic fit for the businesses that Nazara operates in? Does the business make sense for Nazara? Is this a business that can sustain in the long term? Can it be a profitable business? Can it be a cash cow for Nazara? Does it have any large concentration? How passionate is the founder? How committed is the founder? How is the team? What is the overall area that it's operating in? How are the financials looking? How is the company valued?

These are some of the things that Mittersain and his team ask when they acquire or invest in a company. The diversified gaming unicorn also has a clear no in terms of companies that it would never invest in or acquire or partner with.

"We find that startups making very large bones and very large losses are not conducive to our own DNA. Sometimes the burn is for a good reason. Sometimes a burn is not. But at least from a Nazara perspective, we can't handle very large burns. So you will largely find that we will stay away from companies that are making very large losses. We will wait for them to grow or to get to a place where they can start demonstrating better in terms of unit economics," he said.

Another key aspect for Nazara is that it doesn't want the founder of the startup it's acquiring to exit the business, rather likes to work with her or him to grow the revenues and value together. Lastly, even if the company fits into all the above criteria but the valuation expected is crazy, then it is a big no.

An area outside of gaming or adjacent to gaming that it will continue to invest in 2023 would be adtech. In January last year, it acquired a 55 per cent stake in programmatic advertising and monetization startup Datawrkz.

Is the time ripe for a sectoral regulator?

One of the things holding back India in terms of its ability to really dominate the gaming space is a lack of clarity on regulations, believes Mittersain. According to data shared by IBEF, India's gaming market size is estimated to be around $2.6 billion in FY22, and it is predicted to reach $8.6 billion by FY27.

"A lot of areas, especially in the skill-based real money gaming space, are operating in the grey. And that actually allows a lot of unscrupulous operators to operate freely. Companies like us have to be very reserved in how we approach it and we miss a large opportunity. So, I think getting clarity of regulation in terms of what is permissible and what is not and also from a taxation perspective, GST etc will allow the businesses to be built on a better foundation. You will also see a lot more capital into the ecosystem, which again is a big plus for growth," he said.

Nazara has stayed mildly hesitant about investing in skill-based real money games so far even though they are more scaled up in terms of revenues. "It is a large opportunity and I think companies like us can really bring discipline and responsible gaming to the consumers while entertaining. So to that extent, I think we should be playing in this space. But, we have just been cautious because of complete grey areas of operations here. There is a lack of clarity in terms of how it is to be taxed. And from Nazara's perspective, we are responsible for two lakhs of shareholders. I did not want to take a large bet without getting that clarity," he said.

Now that clarity is emerging, the options for Nazara are significant to make a play in this space. In fact, the company has been keeping a foot in the door to grab the opportunity as and when regulatory challenges diminish. That is why in August 2021, it acquired 100 per cent stake in Hyderabad-based skill gaming company OpenPlay Technologies for INR 186.4 crore. "So we will set up for it. Let's see how it plays out in credits," he said.

Untapped monetization potential and future of gaming

Most gaming companies in India have generated revenues through advertising or through skill based real money gaming. Mittersain feels it's time Indian gaming companies crack monetisation through in-app purchases. "Globally, billions and billions of dollars are spent on in-app purchases. I think a lot of Indian companies have struggled with games designed to generate or incentivize users to actually pay within the game. I think with a focus on that, we can hit the sweet spot," he said.

India has more than 900 gaming companies and Mittersain is optimistic about the future of the digital gaming industry. "India is reaching a phase in the digital world where in the next few years, a lot of the innovation globally will come out of India. I think it's a fantastic time to be an entrepreneur in India and especially in the gaming space," he said.

Mittersain also enjoys meeting young entrepreneurs as it keeps him relevant.

I don't want to become a dinosaur in this industry. So I love to meet young entrepreneurs from the industry, imbibe that energy and share my experiences.

As far as Nazara is concerned, Mittersain believes that the opportunity for gaming is so large in markets that it operates in, especially in India, that all it has to do over the next decade is keep walking forward without getting disrupted or taking backward steps.