Playing for profits

With 2.6 billion minutes spent on Facebook each day worldwide, and more than 150 million users, the potential of social networking is enormous. Through the relatively new phenomenon of social gaming, venture capitalists are hoping they have found a way to tap into it.

A new genre of online game-playing has emerged since social networking giants such as Facebook and MySpace took the internet by storm. These games are known as social games, and are designed for use within social networking sites so that users can play games with their friends online. The games plug in to social sites, sitting in side-bars or pop-ups, similar to traditional web advertising.

In 2008, venture firms invested in online gaming companies in countries including China, India, Israel, Korea, the UK and the US – and this is not an exhaustive list. In the first ten months of 2008, nearly $500 million was invested in online games providers by venture capital and media firms in the US alone (source: virtual worlds management. com).

In October last year, online games provider Playfish secured $17 million in a Series B financing round led by venture firms Accel Partners and Index Ventures to develop a series of social network plug-ins.

Hussein Kanji, an Accel partner who was involved in the deal, says: “Investing in traditional console-based video games is similar to investing in the movies. You spend millions and then end up spending up to a quarter of your revenue marketing them. In the online world, however, it is both cheaper and quicker to build games, and you can be more sensitive to the needs of customers by making real-time adjustments in response to feedback and by watching how people play.”

Playfish counted 17 million users in December 2008 – from zero users when Accel seeded the company a year previously. “All of this growth came with no advertising spend,” Kanji says.

The greatest risk in such investment, according to Sumant Mandal, a partner of California-based Clearstone Venture Partners, is making sure that game content is globally consumable, particularly as a lot of games are being built in China and India. “Some games work really well and become extremely famous worldwide, but if they don't then we never hear of them,” he says.

One way to secure global appetite is to formulate games based on events with a high level of media exposure, as was demonstrated by the plethora of “Bush bashing” games which surfaced after an Iraqi journalist hurled his shoes at US President George Bush during a press conference in December 2008. Kanji says there is a need to build multiple games to address several market segments at once in order to maximise success rates.

One of the biggest venture deals in the space last year was a Kleiner Perkins Caulfield&Byers-led $29 million financing round for Zynga, another social networking plug-in developer. Zynga now has more than 55 million registered players across social sites Facebook, My Space, Bebo,Hi5 and Friendster.

Other 2008 investments included: Austin, Texas-based Challenge Online Games, which secured $4.5 million in Series A funding from Sequoia Capital in July; a $6 million series B round invested by venture firms PAC-LINK and Japan Asia Investment Company in Shanghai-based Utizen Games in August; and the $6.7 million raised by Metaplace, a San Diego-headquartered online virtual worlds publisher, from Charles River Ventures and Crescendo Ventures.

So what is the future of this nascent sector? Predictions include games with advanced graphics, customisable avatars and multiple players across multiple platforms. Norm Fogelsong, general partner at Menlo Park-based venture capital firm Institutional Venture Partners, predicts that “there will be some new uber-social networks that will allow you to [play and] update your profiles on several different sites at once.”

For venture capitalists, that means there's plenty to play for. In fact Seoul-based social networking provider Nurien Software has just secured $10 million in financing, led by Northern Light Venture Capital, for a new social platform which allows users to create one-of a kind 3D avatars and objects, share photos, videos and messages, and participate in games all within their own 3D rooms.