Improbable closes in on £100mn in new funding despite biggest loss

SoftBank-backed Improbable is closing in on £100mn in new funding, marking a turning point at the UK creator of virtual-world technology after its biggest loss in 2021 left its finances in a precarious state.

Improbable’s latest funding round, led by blockchain technology company Elrond, would value London-based Improbable at more than £3bn, the company said, an increase from its £2.5bn valuation in 2018.

The financing comes despite the generally weak investment climate for lossmaking tech start-ups and Improbable’s decade-long struggle to develop blockbuster video games, an effort it has now abandoned.

Improbable recorded a loss of £152mn in 2021, according to a snapshot of accounts the company shared with the Financial Times, meaning it had burnt through almost all the money it had raised from investors since launching in 2012.

The business made headlines in 2017 when it raised $500mn from SoftBank, then the biggest ever funding round for a British start-up. At the end of 2021, Improbable had £57mn in the bank.

Herman Narula, Improbable’s co-founder and chief executive, said its recent pivot to building “metaverses” or immersive virtual social environments had driven a dramatic change in the company’s fortunes that should see its revenues triple in 2022 to more than $100mn.

“We are now a financially sustainable business with a really interesting growth rate because we found product-market fit in a new sector,” Narula said in an interview with the FT. 

“We are excited to invest and build together, at a critical time when the value and utility of the metaverse are being defined and shaped,” said Beniamin Mincu, founder and chief executive of Elrond.

Founded by a trio of gaming enthusiasts, Improbable struggled for years to deliver its original vision of a new generation of video games set in vast worlds with thousands of players at the same time.

Efforts to use its technology for simulations of real-world environments also faltered outside of the defence market, where it currently works with the UK and US militaries.

Narula conceded that Improbable’s previous business model was “challenged” after failing to create a hit game. It had tried both licensing its technology to games developers and building its own games. Neither approach resulted in success.

The company’s technology has faced scepticism from some in the gaming industry who found earlier versions of it costly and difficult to use, the FT reported last year.

Narula said the losses in 2021 reflected the effect of “unproductive assets” related to its gaming efforts, including its North American games development studios in Seattle and Edmonton, which the company sold this year. It has also shut down its China subsidiary.

Improbable will be profitable this year, including the proceeds of asset sales, Narula said, and he expects operating profitability to come in 2023, based on work it has already been contracted to do.

The company is paid up front to build a virtual world for clients and then receives regular income to operate it, including from sales of And digital assets for metaverse inhabitants to wear, build or trade.

Its collaboration with Yuga Labs, creators of the Bored Ape Yacht Club — a popular collection of non-fungible tokens or NFTs — to create its “Otherside” virtual world, will form a “big part of our revenue” in 2022, he said. This is likely to run into tens of millions of dollars over time, although Otherside has not yet launched.

Improbable’s latest funding round follows a $150mn raising in April led by SoftBank and Andreessen Horowitz to establish M2, a metaverse platform involving blockchain technology. That money went into a subsidiary vehicle that will eventually be spun out.

Some of that income will from this year be paid in ApeCoin, a cryptocurrency issued to Bored Ape holders and Yuga’s partners this year, as well as land holdings in the Otherside. Crypto and NFT prices have been volatile this year, with the value of one ApeCoin climbing as high as $27.79 in April before falling to a low of $3.05 in June, according to Coinbase.

“We recognise the potential illiquidity of crypto assets and so we don’t run our business as though we can be sustainable on the basis of those inputs,” Narula said, adding that the tokens could become more valuable if the projects Improbable works on become successful.

Improbable said it would recognise ApeCoin as revenue when the Otherside project reaches certain milestones, at whatever the market price is at that time. The high-profile Bored Apes collaboration also helped to attract a “broad base of customers” to its metaverse business, most of whom come from outside gaming, Narula added.