Liveblogging from Inside Social Apps, New York: Investing in Social and Mobile Games
Live from New York, we’re at the Inside Social Apps conference at the New Yorker Hotel. For the last session of the day, Eric Goldberg, managing director of Crossover Technologies lead a panel consisting of Atul Bagga, senior analyst – video games & China internet, Lazard Capital Markets, Mike Foley, SVP of corporate development, Electronic Arts, Eric Tilenius, executive-in-residence, ScaleVP and Rick Thompson, general partner, Signia Venture Partners as they weighed in on what investors and publishers were looking for when they invested in mobile and social games.
The Following is a paraphrased account of what was said on the panel.
Goldberg: I’m going to give you a brief overview of the investing market. This is not a happy story. In February Rick, Atul and I predicted there would be a decline in social gaming. Zynga has gone from $12 to $2 in the stock market. In the secondary market has also seen a sharp retreat. According to Pando Daily, only 20 percent of seeded companies will receive institutional funding. What is going on with the state of investment?
Bagga: There has been a mismatch of expectations in the secondary market. About 12 to 15 months ago, companies like Groupon, Facebook and Zynga were extremely popular. However, when they went public and investors expectations were not met. For Zynga in particular, the expectation was that the company would mitigate some of the risk in the social gaming market when that didn’t happen and then Facebook’s debut was something of a double whammy. Right now Zynga’s value is close to its cash and real estate assets which means investors are assigning zero value to its business. This will not only affect investors who want to get their investment back, but will affect M&A in the industry because Zynga was such a big buyer.
Goldberg: Rick, you’ve still be investing while most of your peers are retreating from the field. Why?
Thompson: If we do three pure game deals next year we’ll have met our quota. The things that we’re looking for are games with a new angle, and game companies with a new angle. We invest in ideas, so we’re investing before there is a business. We’re looking for passionate people who can execute on an idea.
Goldberg: Eric, Scale Venture partners have had some investments change their business models after the investment has been made. What do you look for?
Tilenius: We’re a later stage company, so we’re looking for metrics that will indicate solid traction. The irony of that is companies that are successful and are seeing things work don’t want to take capital — look at Mojang who make Minecraft. What the market changes imply to me is a much more relentless focus from game companies on growing cash rather than users. Two years ago it was a land grab. That’s no longer the case. I think one of mistakes that companies are making is thinking that assuming previous monetization models will work now. For example, arcade games don’t work with free-to-play. I think the future will be about running games as a service, where you’re running a back-end to help players connect.
Foley: One of the biggest challenge I face is far too many people come to me and say “look at my app.” When you’re building a business, you need more than an app. For me its about the team and the capabilities, not what you have today.
Goldberg: What are you looking for in particular and what’s the hardest thing to find?
Foley: The hardest things to find is a developer who can build a high quality free to play game on mobile who doesn’t want $100 million dollars. For example, our top grossing app The Simpsons: Tapped Out is a huge hit. Both the company that developed the game and the company that powers the back end of the game were very small acquisitions that have already recouped their cost because of how successful the game has been.
Goldberg: Which skills matter the most if you don’t already have Angry Birds or Farmville?
Tilenius: It’s hard to make a successful business. You need to have the game and the back end to enable it. Supercell has done it beautifully — both the game and the back end that powers the social and competitive elements are beautiful. I typically worry the least about distribution, since there are so many services out there to solve that problem. The important thing is seeing a gem of a game. Word of mouth is one of the most important factors. There is a caveat though — there’s a tremendous problem of discoverability. It’s not enough to say “we have a good game, people will find it.”
Goldberg: Rick, you’ve invested in discoverability companies. What do you look for?
Thompson: It’s a part of the ecosystem and its still under development. If you are willing to pay the price someone will help you with distribution.
Bagga: If you’re talking about games as a service, you’re essentially adding another layer to the game. You need to have a great game, to know how to get users and have a finely tuned system to make the most of their customers. You can always rent features like analytics.
Tilenius: Being able to calculate the LTV of a user is very important. Buying a mobile user costs between $2 and $3 dollars now. If your LTV per player is $0.35, you’ll only be able to grow virally or by word of mouth. When I worked at Zynga, we used to joke Zynga Poker was our first VC. My advice is to find your poker early.
Goldberg: We’re seeing a shift here. Previously if a person bought your game, you had earned your money. Now you need to get people to play your game and then you need to get them to pay for it. In opposition to that we have Kickstarter, where customers are pre-paying for games and financing their games that way. What are your thoughts on that method of financing.
Tilenius: I think it’s a tough slog unless you’ve got some name brand recognition.
Foley: I’ve never seen so many headlines about something that won’t affect the industry that much. These are games and products that are already popular, but not quite popular enough to have publishers.
Goldberg: Can you talk about being a publisher Mike?
Foley: Ultimately we see a vision where all of our content is connected in the back end. it’s extremely difficult to do, and I think that’s now the barrier to entry in this business. We’re in the investment stage on that right now. Companies like EA have a competitive advantage there.
Goldberg: Mike, if someone comes to you with a great iPad game but its not connected, do you just take the game from them then and apply your back-end expertise?
Foley: We work with them.
Thompson: Publishers bring advice as well as cash.
Tilenius: This is my personal opinion, as someone who used to work at Zynga and pushed us towards publishing, perhaps before we were ready, I can see the model has changed. Earlier, we couldn’t buy studios fast enough. Now many don’t make the cut.
Goldberg: What point do you need to think about getting money by hook or by crook? What are the sure signs you need capital?
Bagga: Many two person teams can make a great game in their garage and make $100,000 and have a great life and career making that game. But you have to think, is it scaleable?
Thompson: Those few companies that are able to operate at scale also need to know how to invest that money — it’s hard. You have to know what to green light and what to spend. I think the future will be many smaller studios that can use the tools already available in order to maximize their resources.