Epic Games (33 Years)

History of Epic Games

‍Epic Games, founded initially as Potomac Computer Systems in 1991 by Tim Sweeney, has a rich and fascinating history that has shaped the modern gaming industry. Here is a look at its major milestones over the past 33 years, a breakdown of its $8.12 billion in funding, and what investor liquidity might look like in the next 3-5 years:

1991-1998: Potomac Computer Systems and ZZT

Tim Sweeney founded Potomac Computer Systems in his parents basement in Maryland while studying mechanical engineering at the University of Maryland. His first product was a shareware game called ZZT in 1991, which was a puzzle/adventure game (see image above) featuring a simple text-based interface for the PC gaming market.Following the modest success of ZZT, Sweeney rebranded Potomac Computer Systems to Epic MegaGames in 1992 as they began operating more as a publisher for other games than just a developer of first-party games.Throughout the 1990s, Epic released several successful games, including:

• Jill of the Jungle (1992): A 2D action-platformer
• Epic Pinball (1995): A pinball simulation game

• Jazz Jackrabbit (1994): A fast-paced platformer that showcased the studio's ability to create visually appealing and entertaining games for PC

During this era, Epic also began experimenting with 3D engines and multiplayer-focused games, setting the foundation for their proprietary gaming technology: Unreal Engine.

1998-2002: The Unreal Engine

First Person Shooter (FPS) Game: The release of the game Unreal in 1998 marked a turning point for Epic MegaGames. Unreal was an FPS game that set new technical benchmarks with its groundbreaking 3D engine, called Unreal Engine. The game’s visuals, artificial intelligence (AI), and multiplayer features stood out in the competitive FPS genre, putting Epic on the map as a leader in both game development and engine technology.

Unreal Engine became a critical component of Epic’s future, not only powering their own games but also licensing it to other developers. Unreal Engine would eventually evolve into one of the most widely used engines in the gaming industry today (Slashdata).

After Unreal's success, Epic dropped the Mega part of its name, becoming simply Epic Games.

Unreal Engine: While Epic's focus was on growing the player community around their game Unreal, they began licensing the next version of their engine, Unreal Engine 2, to external developers. The engine became widely adopted across the gaming industry, powering various successful titles, such as Tom Clancy's Splinter Cell (2002) and America's Army (2002), a game developed by the U.S. military as a recruitment tool.

Unreal Engine 2’s flexibility and graphical prowess further solidified Epic’s reputation as a premier provider of game development tools.

2003-2005: Expansion to Consoles

While Epic Games had largely focused on PC gaming throughout the 1990s and early 2000s, the console market was growing rapidly with Microsoft’s Xbox 360 and Sony’s PlayStation 3. In 2003, Epic started developing what would become Unreal Engine 3, focusing on making the technology suitable for next-gen consoles.
Unreal Engine 3 represented a significant leap forward in terms of graphical fidelity, offering features like:

• Dynamic lighting and shadows which made environments more realistic
• Advanced shaders which improved the look of textures and materials
• Physics-based interactions which created more dynamic & destructible environments

The development of Unreal Engine 3 was a major investment for Epic, but the engine would eventually become the go-to tool for creating next-gen games on both PC and consoles.

2006-2011: Huge Hit Success with Gears of War

In 2006, Epic Games released a major first-party hit with Gears of War as an exclusive for Microsoft’s Xbox 360. This third-person game transformed Epic into a major console developer and was a commercial success for the company.

The success of Gears of War cemented Epic’s partnership with Microsoft, and the franchise became one of the most popular IPs on the Xbox platform, with multiple sequels released in the following years.

During this time, Epic’s Unreal Engine 3 continued to grow as they powered many of the major games of the time, such as BioShock, Mass Effect, and Batman: Arkham Asylum.

2011-2017: The Emergence of Fortnite

In 2011, Epic Games began working on a new project called Fortnite, originally envisioned as a cooperative survival game (Fortnite: Save the World) where players built fortifications and defended against waves of monsters. The game's development was slow and would not be released until 2017, long after its initial announcement.

Battle Royale: In 2015, a game called H1Z1 came out and spearheaded a new gameplay format; Battle Royale. Unfortunately, H1Z1 was executed poorly amidst a flurry of technical difficulties, and the game faded quickly. However, the battle royale format did not go unnoticed, and the genre truly exploded upon the release of a game called PlayerUnknown’s Battlegrounds (PUBG) in March of 2017.

Seeing the genre’s popularity, Epic quickly adapted Fortnite to include a battle royale mode, releasing Fortnite Battle Royale in September of 2017 (just 6 months after PUBG’s release) as a free-to-play game. The decision was monumental for the company’s future as Fortnite Battle Royale became a global phenomenon, amassing hundreds of millions of players and becoming a cultural sensation. Its blend of fast-paced combat, building mechanics, and vibrant art style appealed to a wide audience, especially younger players.

In its first year, Fortnite made over $5b in revenue for Epic Games.
Fortnite redefined what a game could be by incorporating live events, in-game concerts, and cross-promotions with popular franchises (Marvel, Star Wars, etc.). The game became a platform for social interaction and entertainment, not just competition, and their success and techniques are being replicated across the entire gaming industry to this day.

2018-2020: Epic Games Store and Lawsuits Against Apple

In 2018, Epic Games launched the Epic Games Store, a digital distribution platform designed to compete with Steam. The platform drew attention for its favorable revenue split for developers and regular giveaways of free games, quickly attracting users and developers alike.

In 2020, Epic Games became embroiled in a legal battle with Apple after Epic introduced a direct payment option in Fortnite to circumvent Apple's 30% fee on in-app purchases. This resulted in Fortnite being removed from the App Store (video trailer: #FreeFortnite), sparking a high-profile antitrust lawsuit that challenged Apple and Google's duopoly power as platform holders.

2021-Now: UEFN, Partnerships, Fines, and Legal Battles‍

Since 2021, Epic Games has been highly active in both expanding its core offerings and navigating legal, financial, and technological developments. Here is a summary of a few of their key initiatives and events the past few years:

• Fortnite: continued focus on the Fortnite title, battle passes, IP integrations, and its continued financial success (yet the business is actively trying to diversify away from single content risk).
• Fines: in 2022, Epic settled with the U.S. Federal Trade Commission (FTC) for $520 million over allegations that it violated children’s privacy and tricked users into unwanted charges in Fortnite.
• UEFN: launched in 2023, the Unreal Editor for Fortnite (UEFN) is their UGC (user-generated content) platform to mimic the success that we have seen in Roblox.
• Lego and Sony: the company raised $2b from Sony and Lego in 2022 and has since partnered with them on a variety of fronts (including the Lego Fortnite game and modes).
• Disney: in early 2024, Epic raised $1.4b from Disney and will be creating IP integrations (likely in the form of virtual world theme parks) with Disney IP on UEFN.
• Legal Battles: their legal fight against Apple and Google is ongoing and has resulted in a variety of concessions for both sides. Notably, app developers are able to link out to external payment options, yet Apple and Google are making it extremely hard for Fortnite to be re-integrated to their platforms.

Epic Games: M&A, Cap Table, Exit Opportunities

M&A Has Been a Mixed Bag for Epic Games

Since 2019, Epic Games has acquired 21 companies (listed above by year with a brief description of each one). Many of those companies were acquired during a high valuation environment, which means that those acquisitions likely have a high watermark to achieve a return on investment. For example, Epic bought Rocket League in May 2019 and then Fall Guys in March 2021.

Additionally, Epic Games has been shutting down (Houseparty), divesting (Bandcamp), and sold off (Super Awesome) other assets in their portfolio over the past couple of years.

We believe that Epic Games's current efforts are a reaction to investor pressure to focus on the core business units (Fortnite, UEFN partnerships, Unreal Engine, and Epic Games Store).‍

Funding History: $8.12 billion

Since 2012, Epic Games has raised $8.12 billion in capital from external investors. The above chart shows the valuation of the company by round and year.

The above shows the breakdown of the strategic investors and financial investors who have invested into Epic Games (note: we listed Tencent on the financial side as they have not pursued IP partnerships or integrations with Epic Games and have primarily approached this as a financial and diversification investment into the US gaming market). It is possible that not all of these groups are still on the cap table as the secondary market for Epic Games is quite active.

As the company explores a potential exit in the future, strategic investors (who benefit from partnerships and IP integrations) may not be in favor due to ownership limits for public companies or an acquirer’s incentives to stop/limit certain IP partnerships. This could create complexity for the company’s management team as the institutional investors (BlackRock, Fidelity, Altimeter, etc) are purely aligned with only the financial returns.

Takeaway: Epic Games has a 33-year history of building games, technology, and experiences that billions of people around the world have enjoyed. Its success has had an imprint on the gaming industry that few of its peers or predecessors have had. As of late, the mobile gaming industry is drafting on the expensive pursuit (and success) of Epic’s legal challenge of the mobile duopoly held by Apple and Google (app store fees and walled gardens).

Epic’s storied success has attracted $8.12 billion in external investment from sophisticated groups who will inevitably want liquidity on that investment. We believe that the most likely path for Epic Games is to stay private for the foreseeable future (next 3-5 years) and that an IPO is unlikely in the near term (due to the high profitability bar for new IPOs, especially in gaming). The secondary market will remain active around this company’s cap table as investors and insiders seek liquidity on a 33-year story.