Outlook ’04: GAMING –

Taking risk is part and parcel of being a venture capitalist, but there is one business that VCs have thought of as too risky: video games. “Historically, video games don’t make for great venture investing, says Bill Gurley, a partner at Benchmark Capital. “It’s a hit business, not unlike the movie industry. You produce a few different games, or movies, and only one or two become hits and make it big.”

Why is it, then, that Benchmark is among a growing number of venture firms investing in games? Simple, says, Gurley. Cell phones are creating a huge new market. That assessment is echoed by Scott Yen, vice president of Capstone Partners, a Menlo Park, Calif.-based research firm that covers entertainment. “It’s a large, untapped market opportunity that is going to continue to take off with wireless,” he says.

Games developed for wireless devices have the added advantage of earning a monthly subscription fee on top of a one-time sale. Users interested in participating in multi-player games subscribe to the online service for about $15 a month, on average. The wireless games, which are easily downloadable on newer model cell phones, cost between $3 and $6 a pop.

Bowling for Dollars

For example, wireless entertainment provider Jamdat Mobile, recently released its latest version of a wireless bowling game, which features networked play, so users can flip open their cell phones and compete against other gamers for a subscription fee of $2.50 a month via Verizon Wireless. The original Jamdat bowling game boasts more than 2 million downloads.

Those kinds of numbers have caught the attention of previously reticent VCs. In late 2003, Los Angeles-based Jamdat secured $11 million in Series D financing from new investor Benchmark and previous investors Sun, Apax Partners, Qualcomm Ventures and Intel Capital.

Jamdat, which recently produced a game based on the hit movie “Lord of the Rings,” has secured other license agreements recently and is looking to expand worldwide.

Goin’ Mainstream

“You’re going to see more and more mainstream investors go after video game companies,” says Chris Melissinos, chief gaming officer for Sun Microsystems. “The market is too big to ignore.” Consumers spend about $16 billion annually on gaming software, about twice as much as they spend on movies. With the push into mobile gaming, sales from the video games industry will grow to about $20 billion this year, predicts NPD Group Inc., a New York-based market research firm.

It should come as no surprise, then, that more VCs are wading into the unfamiliar waters of gaming. In 2001, 11 gaming startups pulled in $64 million from VCs. In 2002, 12 companies attracted $43 million. Last year, VCs put $85 million into 8 gaming companies.

Among the companies that have raised new funding:

* Turbine Entertainment Software . The provider of multi-player online role-playing games in December secured an $18 million Series A round from Highland Capital Partners and Polaris Venture Partners, with equal investments of about $7 million apiece. The round was a recap, as well. The Westwood, Mass.-based company had more than 100 previous angel investors.

Turbine’s funding will assist the company in the ongoing development of the game “Dungeons & Dragons Online,” which will be published by Atari in 2005. Highland Partner Bob Davis, which funded Turbine, says that the firm is looking to do more online gaming deals in the future and is actively looking for other companies. He says he found Turbine while doing due diligence on another online gaming company that Highland ended up passing on.

* Game Trust . The developer of video game software that manages online tournaments, raised $5.5 million in a Series A roundin December that will help the company license its software worldwide.

New York-based Game Trust raised its round – oversubscribed by $2.5 million – from Silicon Alley Venture Partners, CSK Ventures, Intel Capital and Topspin Partners. The financing also included Elon Musk, co-founder of Paypal and Zip2, and Tim Draper, managing director of Draper Fisher Jurvetson.

* Massive . The New York-based gaming software developer raised $2.1 million in venture backing in September from Newlight Associates and Tobat Capital last fall.

* Mythic Entertainment. The Fairfax, Va.-based developer of games and provider of online gaming services raised over $20 million in a late-stage round in March from TA Associates, in the biggest deal of the year for a gaming company.

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