Giving Gamers Best of Both Worlds

Seth Priebatsch started his first company, a comparison shopping engine called Giftopedia, when he was 12. It failed, but not before he had outsourced work to 12 engineers in India and Israel.

Priebatsch’s second effort, PostcardTech, a multimedia postcard company that he started when he was 16, is still plugging along.

His third startup, a mobile gaming company called SCVNGR Inc., is looking even more promising. So far, the Boston-based startup has 19 employees, over $1 million in revenue, and its software is being used by over 400 companies and other organizations in 44 states and two countries, Priebatsch says. Those numbers were enough to convince Highland Capital Partners and six other undisclosed investors to put $825,000 into the company last December.

The 20-year-old Priebatsch designed SVNGR as a freshman at Princeton University for a school business plan competition and ended up leaving school to run it. Before he received venture backing, Priebatsch ran SVNGR out of his bedroom, which wasn’t optimal, since his server (located under his bed) went down every time somebody turned on the vacuum cleaner, he jokes.

Peter Bell, a general partner with Highland, got to experience a SCVNGR hunt first hand in Boston in early October. He and about 400 other people deciphered clues on their mobile phones that led them on a citywide scavenger hunt called “the Quest for Innovation.”

“I felt like a kid,” Bell says. “I hadn’t done anything like that in 30 years.”

I felt like a kid [playing SCVNGR]. I hadn’t done anything like that in 30 years.”

Peter Bell

More and more people are playing games like SCVNGR’s, games that free them from the confines of a desk and require them to go outside and move through a series of tasks as if they were pieces on a giant game board, often using their mobile devices as guides. They are referred to as “location-based mobile games,” “pervasive games,” and sometimes as “hybrid offline-online games.” Whatever you call them, the one thing they have in common is connecting players to other players face to face—not just through a computer or mobile phone.

Players may go sightseeing, as they do in New York with “New York: The Game,” which was developed by Stray Boots. They may race through a series of obstacles hoping not to get caught, as they did on Halloween night in San Francisco for SFZero’s “Journey to the End of the Night.”

“The players will have to decide whether Halloween costumes help or hurt them,” Ian Kizu-Blair, one of the game’s creators, said a few days before the event. “You can’t just outrun the chasers, and you want to blend into the cityscape.”

Increasingly, people are participating in a high-tech treasure hunting game called Geocaching run by Groundspeak. Users get GPS coordinates from the Groundspeak website, plug them into a handheld GPS, and then go in search of objects concealed in Tupperware containers or ammunition boxes hidden outside.

If you think these game have niche appeal, think again. Between 2 million and 3 million people participate in Geocaching, and at press time over 933,000 “geocaches” were hidden around the world. (Plug your zip code into the Google Map at www.geocaching.com if you want to see how many caches are hidden near your office or house.)

How many of these particular games and their developers will be attractive to venture investors is unclear. What is clear is that mobile gaming in general is exploding. People are expected to spend $5.1 billion on mobile gaming worldwide this year, according to Gartner, and as much as $6.3 billion in 2011. Around half of that spending is in Asia. Gartner predicts a compound annual growth rate for mobile game spending of 10.2 percent.

These kinds of things can be fun, but it’s hard to see how they become a big, broad, pervasive opportunity.”

Sharon Wienbar

“These kinds of things can be fun, but it’s hard to see how they become a big, broad, pervasive opportunity,” says Sharon Wienbar, a managing director at Scale Venture Partners, whose investments include Glu Mobile and PlayPhone. “What’s really been attractive about mobile is that it’s always in your pocket and you can pull out your phone when you have time. Something that requires you to be at a specific space-time coordinate is a smaller opportunity—not less fun, but a smaller opportunity.”

Wienbar says Foursquare—which has raised a little over $1 million from Union Square Ventures and others—is one company that gets around this problem. Foursquare has a mobile application that lets you go to a place and tell your social network that you were there, but it doesn’t make you go at a specific time.

One of the largest investments in this emerging space is the $29 million VCs put into Smith & Tinker, which created a splat-filled game for battling digital monsters. Called “Nanover,” the game is especially appealing to 7- to 12-year-old boys. Each player needs a nanoscope, a $49 handheld device that’s sold at Target, ToysRUs and Best Buy. Players can network their nanoscopes—attaching them to each other with magnets—or play the game by themselves.

There’s an entire online universe that goes with “Nanover,” including regular new episodes that can be downloaded from YouTube, says Ryan McIntyre, a managing director with the Foundry Group who sits on Smith & Tinker’s board. Foundry invested in the Bellevue, Wash.-based company in July alongside Alsop Louie Partners, DCM, Leo Capital Holdings and Vulcan Capital, according to Thomson Reuters (publisher of VCJ).

Smith & Tinker is a good example of a company that exploits “the evolving nature of human/computer interaction,” a category that the Foundry Group targets. But it’s also an unusual play, McIntyre says. Rather than relying on generic mobile phones, the company sells a proprietary device through the toy aisles of mass market retailers that’s aimed at a very specific audience—boys who are too young to have credit cards and can’t be reached through online marketing.

McIntyre says the holiday season will be an important test for Smith & Tinker, because it will show how successful the company is at reaching a mass audience, which is McIntyre’s requirement for any game company.

The trick for any of these games and applications is how you reach the audience, and your distribution strategy to get to a critical mass of players.”

Ryan McIntyre

“Clearly there’s a lot of interest in mobile gaming—social interaction enabled by geo-aware mobile devices—and there’s interesting potential for augmented reality applications as well,” he says. “But the trick for any of these games and applications is how you reach the audience, and your distribution strategy to get to a critical mass of players. Inherent with scavenger hunts is the need to get enough players to make them interesting.”

(UPDATE: Tech blog VentureBeat reported on Dec. 1 that Smith & Tinker has laid off “about 30 percent of its staff, which may be about 15 of its 50 or so employees.” The company then reportedly issued the following statement: “Smith & Tinker can confirm that unfortunately company layoffs were conducted this week. As many startups do, we staffed aggressively early on to meet deadlines for launching our product online and at retail this year. These layoffs are needed to bring our organization to a healthy operational size for the remainder of this year and 2010. Nanovor has been recognized by FunFare and Dr. Toy as a hot toy for 2009 and has seen strong consumer adoption to date; the company continues to receive solid support from our board. Employees leaving the company will receive severance packages.”)

A key challenge for the newer game companies is how they will make money. They are trying various strategies. Groundspeak sells premium memberships to serious Geocachers; SFZero has earned money designing games for the Smithsonian and the Corporation for Public Broadcasting; and the GoGame sells its game as a team building exercise for corporations (its business is down because of the recession).

As for Priebatsch, who holds two patents on SCVNGR’s software, he is pursuing a traditional software licensing model—selling monthly and per-event licenses to event producers, museums, game developers and others—while keeping the service free to players.

Priebatsch hopes to expand to Europe, Japan and Korea within the next six months. “There are hundred-million-dollar market verticals we haven’t touched yet, like shopping malls,” he says. SCVNGR’s software is designed so anyone can use it to build a game, and if someone tries, “they could bring a great product to an exciting market and make a ton of money,” he gushes.

Highland’s Bell sees Priebatsch as a visionary along the lines of Michael Dell or Bill Gates. “It’s around [Priebatsch’s] age that a lot of these folks are starting out,” Bell says. “Their boundaries aren’t set, their vision is boundary-less and their deep understanding of technology is incredible.”

There are hundred-million-dollar market verticals we haven’t touched yet, like shopping malls.”

Seth Priebatsch

Some of these new game companies are the result of a vision, literally. Go Game’s Ian Fraser says he co-founded the San Francisco-based company in 2001 after he dreamt he was “on a wild adventure, romping through a city, following clues that I was getting on a headset. It’s the kind of dream that wakes you up at 3 in the morning, and I started writing it down. It was a powerful dream.”

SFZero’s games were inspired by the alternate reality games that first appeared in 2001, when Microsoft released “The Beast” as a promotion for Steven Spielberg’s movie “AI: Artificial Intelligence,” according to Kizu-Blair. He says he wanted to create a game based on the daredevil “alley cat races” he used to ride in when he worked as a bike messenger in Chicago.

Stray Boots founder Avi Millman got the idea for his New York game not in the Big Apple, but when he was sightseeing in Europe. Millman says looking through a guidebook was boring. “I thought it would be more fun if it was interactive,” he says. Players in the New York game can buy tickets for as many as eight “game zones,” or neighborhoods, which are each designed to be played in about 2.5 hours.

Groundspeak was created in 2000 after the Clinton administration decided to modernize the Global Positioning System for commercial use and stopped degrading the quality of GPS signals available to the public.

Within weeks, people were geocaching, including Groundspeak co-founder Jeremy Irish. He put up the geocaching.com website in August 2000, three months after Clinton’s order, and he and his partners kept their day jobs for three more years while they built the company.

Irish isn’t looking for outside funding, he says, noting that Groundspeak is profitable and growing. Now in his late thirties, with a wife and two children, Irish says working in startup mode is not as appealing as it was when he started the company at age 28.

“There’s enough sweat equity in the business by now that if you go with venture capital, you’re going to have to either go big or go home,” he says. “You’re probably better off trying to reinvest in your business or come up with some good ideas.”

For his part, Millman, who graduated from Princeton in 2005, is looking for venture funding for Stray Boots, whose New York game runs on SCVNGR’s software. “We’d like to do more with the concept,” he says. “We’ve had a lot of interest in the game.”

Whether venture capitalists are involved or not, these games promise to continue to combine technology and reality in new and interesting ways.