Polycade is raising through sale of SAFE notes with a valuation cap of $12.5 million. With $388,262 in revenue in 2020, the company yields a revenue-to-valuation multiple of 32x. This revenue multiple is very high — higher even than most established companies in the gaming industry. Nintendo has a revenue multiple of 3.7x as of today. In 2020, Zynga acquired Peak Games for a multiple of around 2.7x. 

Even though Polycade allegedly doubled its sales between 2020 and 2021, according to the company’s unaudited finances, its revenue multiple is still high. That said, Polycade’s $12.5 million valuation is not very high compared to other hardware and technology companies.

Polycade provides classic games on arcade machines as well as games that can be played on consoles and PCs, so it operates in both the global gaming industry and the global arcade gaming industry. The entire global gaming industry is valued at around $236.7 billion in 2021 with a compound annual growth rate of 11%. North America accounts for 24.9% of the market, being valued at $58.8 billion. The global arcade gaming market was valued at $76 billion in 2021 and is expected to grow by 2% from 2021 to 2025. 

Despite the slow growth of the arcade gaming industry, there is room for growth in the gaming industry in general. The quality of games, new technologies, and accessibility to games are all factors that contribute to market growth. And despite arcade games’ growth being hindered by smartphone and modern gaming technologies, the arcade social gaming experience is arguably difficult to replicate. Even considering the declining popularity of arcade machines, Polycade provides “mid-core” games — games that appeal to both casual and hard-core players — that can be played on any at-home consoles. And according to research, the average revenue per paying user of mid-core games was three to five times higher than casual games. But the gaming industry is also very competitive, so Polycade has a lot of established, well-funded rivals to outperform.

Overall, the slow growth rate of the arcade gaming market, competitive landscape and faster growth rate of the gaming industry at large give Polycade a fairly average market rating.

Polycade co-founder and CEO Tyler Bushnell — son of Nolan Bushnell, founder of Atari and Chuck E. Cheese — has more than 15 years of experience in gaming and software engineering. Prior to founding Polycade, Bushnell founded Izolo Internet Applications, an enterprise resource planning platform. Bushnell also tried to start an escape room venture with his brother before starting Polycade, but could not secure funding for the venture. The CEO has also developed a few gaming platforms for bartop touchscreen games. 

Co-founder and COO Jake Galler also has more than 15 years of experience in the media and production industry. Galler was an early employee of Pluto TV, a free streaming platform that has surpassed $1 billion in revenue. Galler built and licensed half of the videos and movies during his time at Pluto TV. Galler was also a development executive at Craig Anderson Productions, a media and film production company. During his time there, he developed projects that were sold to Universal, Sony Pictures, Fox, and other media companies. Galler is also an alum of the Techstars incubator program.

Other team members include a chief technology officer, software engineers, and a sales manager. Polycade has notable advisors and investors, including Kevin Lin (co-founder of Twitch), Wavemaker Labs (investor in Miso Robotics), and Toy Ventures (investor in Slack and Discord), to name a few. Although Polycade has a strong founding and technical team, it still lacks essential team members in marketing, product management, and finance.

Polycade provides “mid-core” video games that are fun to play, easy to learn, and hard to master in social settings. Unlike arcade machines that can be purchased from Creative Arcade or Etsy — which tend to include a limited selection of games — Polycade’s machines offer both modern and classic games that can be played in various formats. Customers can buy consoles and play on their own PC or TV or buy an arcade machine to install in their home. And businesses can purchase machines with “pay to play” features. Polycade offers five different arcade machine models ranging from light plug-in machines to big machines that accommodate up to four players. Polycade is also developing features to help users build their own arcade machines. 

Polycade’s game library contains more than 100 games. It also combines games from different sources, such as Steam and GOG, into one library for easy access. The platform constantly updates, so customers don’t have to replace their machines when new games and features are released. The company’s main target is the “street” market, including sports bars and restaurants. Polycade makes it easy for businesses to run its arcade machines through the Polycade remote admin system. The platform can also be accessed and managed online, so businesses can get reports and data on their locations from anywhere. Polycade’s cloud-based technology also detects broken machines and other problems.

Companies like Piepacker are also bringing retro games back by targeting consumers directly and offering a free gaming experience. But what differentiates Polycade is its free business-to-consumer gaming software that saves users’ data. This allows users to continue their games on arcade machines in social settings, like bars or restaurants. Additionally, Polycade offers a high level of customization. Users can choose the game’s level of difficulty, how much time they want to spend playing, and how many players they play with.

Polycade’s machines are on the pricier side of the market. The cheapest arcade machine is the Polycade Lite, which is suitable for homes or apartments and sold for $2,499. Arcade machines from Sam’s Club or GameStop sell for less than $1,000. But Polycade’s modern design and extensive game library give it an advantage over the competition.

Polycade has generated more than $2 million in sales since its founding in 2015. Although its revenue decreased by 18% from 2019 to 2020, going from $477,619 to $388,262, the company claims that its sales more than doubled in 2021. But investors should keep in mind that these financials are unaudited. 

Polycade has also raised more than $2 million to date. The company is supported by notable investors and advisory boards, including Twitch co-founder Kevin Lin, Wavemaker Labs, and Toy Ventures. Polycade previously raised more than $165,000 on Indiegogo and more than $125,000 on Kickstarter. Polycade has also worked with celebrities to establish its social media presence. Comedian Jimmy O. Yang, restaurant and bar owner David Grutman, and American rapper Ludacris have all used Polycade on Instagram. 

Overall, Polycade’s performance has been decent. However, it’s also important to note that for a company that’s been operating for more than six years, Polycade’s revenue is not very impressive when compared to other hardware companies. Polycade’s gross revenue margin is -23%, meaning the money it costs the company to sell its products exceeds the amount of revenue it’s generating. Polycade also has a high burn rate of $84,659.25 per month, although this could be justified due to its high-quality games and the machines it’s developing.

Despite Polycade’s low margin and losses, its revenue progress and development of its high-quality machines are good signs for the business. Polycade could also start developing its own games in the future, expanding beyond what’s already available in the retrogaming market.

Polycade comes with some risks. First is market risk. From 1999 to 2004, arcade industry revenue fell by 87%. Today, the arcade industry’s compound annual growth rate is a sluggish 2%, compared to 35% for the augmented reality and virtual reality industry. 

Even though Polycade offers high-quality products, in order for businesses to buy them, the machines need to pay for themselves — which is not guaranteed. Polycade expects it will take businesses a year to pay off the pay-to-play arcade machine hardware. And Polycade is more expensive than many other arcade machines. If Polycade’s machines are not able to generate profit for the businesses that buy them within a short period of time, then Polycade is likely to lose business. 

Polycade’s direct-to-consumer products like Polycade Lite are also expensive compared to generic arcade machine brands and other game consoles. There is no guarantee that  customers would choose to pay more than $2,000 for an arcade machine rather than just use Polycade’s free software with a console they already own. Though Polycade sells gaming software and consoles in addition to its arcade machines, its revenue mostly relies on its ability to sell machines.

Polycade’s success depends on its ability to attract customers who are willing to adopt an old-fashioned and increasingly unpopular gaming experience. Since the release of at-home consoles, most gamers seem to prefer playing games at home rather than going out and spending money on arcade machines. And with streaming services like Twitch, which allow players to interact and form communities online, many players are already getting the social experience that Polycade wants to revive. So in order to attract customers, Polycade needs to find a way to keep arcades exciting and maintain its growth rate. 

The company’s revenue has doubled in 2021, according to Polycade’s unaudited financials on the raise page. However, the growth rate may not last if businesses adopting Polycade machines don’t see profitability quickly enough. The high price of the arcade machines may also deter potential consumers. The company’s increasing revenue in 2021 could be because COVID-19 social distancing restrictions are loosening up. If this is only a temporary phenomenon, Polycade’s growth could prove unsustainable in the long run. 

Additionally, the company’s pay-to-play units are still under development. There is no guarantee that businesses will want to adopt Polycade’s machines, and the company has little solid data to offer on the machines’ earning potential. Finally, Polycade’s team lacks a marketing director to attract customers and market the company’s products. This could impact its direct-to-customer and business-to-business sales and partnerships.

Though at-home video game consoles like Xbox and PlayStation have largely overtaken arcades, many people could argue they can never replace the arcade experience. The fact that 72% of millennials prefer to spend money on experiences rather than material things could help Polycade achieve its ultimate goal of reviving the social gaming experience of arcades. 

Although the classic arcade industry itself might not have very high potential, Polycade combines classic and modern gaming experiences through arcade machines, consoles, and PCs. The arcade industry likely declined mainly due to the lack of innovation and because machines did not keep up with new game releases. But businesses can use Polycade machines to upgrade and continually add games instead of having machines with a single pre-installed game. The company’s direct-to-consumer channel is also strategic. Even if customers don’t directly buy arcade machines for their homes due to the high price, Polycade provides its Arcade Gaming Software for free. The software saves players’ data so they can continue playing on pay-to-play arcade machines by logging in with their mobile devices in restaurants or bars and get the social experience Polycade wants to recreate. 

The company’s founders have extensive experience in the gaming, media, and software development industry, which gives it a huge advantage. Lastly, the gaming industry as a whole is a big and growing industry. Taking all these factors together, Polycade has the potential to revive the stagnant arcade gaming industry.

Polycade aims to revive the social arcade gaming experience through its gaming software and modern arcade machines. Since its founding in 2015, the company has made more than $2 million in inbound sales. It also has a strong founding team with plenty of industry experience. Although the arcade industry has been stagnant for years in terms of innovation and market growth, Polycade could change that through its free gaming software and well-designed hardware. As people are emerging from quarantine and looking to reignite their social lives, this could be the perfect time for Polycade’s product to hit the market. 

However, Polycade’s products have proven expensive to manufacture, resulting in a negative revenue margin. As a result, its current valuation is too high. It is unclear if businesses will choose to invest in Polycade’s pay-to-play arcade machines when the machines have not yet proven to be profitable. The team also currently lacks a strong marketing and sales team, which could hurt Polycade’s sales in the long run. Overall, KingsCrowd has rated Polycade a Neutral Deal.

For questions regarding the KingsCrowd staff pick or ratings for this company, please reach out to support@kingscrowd.com.

Analysis written by Yasmin Sharbaf, November 5, 2021.