Massively multiplayer ventures

Videogames are hot in the venture capital world these days. Last month Scottish videogame developer Realtime Worlds scooped up $31 million (€23.2 million) in funding from US VC firm New Enterprise Associates. In November, VC company Sevin Rosen even hired Electronic Arts Canada’s former chief operating officer as its entrepreneur-in-residence, as the firm looks for investments specifically in the videogame space.

But some of the most interesting activity is taking place in the niche videogame market of massively multiplayer online (MMO) games, in which players pay a subscription fee and go online to play the game with thousands—or even millions—of other users. It’s a videogame genre that includes such lucrative success stories as the sword-and-sorcery games World of Warcraft, from Irvine, California-based Blizzard Entertainment, and Sony’s EverQuest. MMOs are estimated to have brought in more than $700 million in revenue last year, which is a relatively small part of the $7 billion videogame industry as a whole. But it’s a large enough slice for VC players to get in on the investment game.

Jeff Loomans of Sierra Ventures

Jeff Loomans, a partner at Silicon Valley VC firm Sierra Ventures, is one of them. Sierra and Benchmark Capital just invested $18.5 in Series-A round funding in California-based Red 5 Studios, which has yet to produce a product, but is headed up by the original development team of World of Warcraft. “There probably aren’t many more attractive spaces, certainly to me and to Sierra in general right now, given the phenomenal growth we’re seeing,” says Loomans.

After all, revenue and subscribers for MMOs grew an amazing 75 percent in 2005, with more than a 20 percent estimated growth in 2006. Those kinds of numbers are much better than traditional non-online games, which tend to have a shelf life of about three months. World of Warcraft has been running for more than two years so far, with more than seven million subscribers worldwide each paying about $18 per month, and shows no sign of slowing down.

“We saw the most attractive team we could imagine for doing it,” says Loomans. “We believe that to invest in MMOs, it’s still about making the best gain. Ultimately, the best IP and the best long-running franchise will win.” It’s no wonder that Red 5 Studios—which boasts Mark Kern, the lead developer for World of Warcraft as its CEO—was attractive.

“Traditionally, VCs would invest in software and IT and so forth,” says Loomans. “A lot of those markets may be growing flat—10, 15 percent a year compound. If you can get the best [MMO] firm in a market growing this fast, that’s an extremely attractive proposition for an investor.”

Whereas some people would have questioned investing in individual game titles in the past, he says, a game studio now can release a game and have a continuous revenue stream. “And they look and feel and act a lot like very, very large home-run capital investments have in the past,” says Loomans. Time will tell how many other VCs will step up to the plate.

A more in-depth feature on investment in videogame developers will appear in the February issue of IP Investor (www.IP-Investor.com).