VCs Playing with Social Gaming

The rise of social gaming almost defies belief. A new game pops up online and—wham!—before a user has drawn breath, it has 6 million users, each spending hours a day performing seemingly meaningless tasks and paying for the pleasure of a virtual sheep.

Others can spend hours absorbed in the task of launching a bird to shoot a monkey out of a tree, oblivious to the real world, but intent on winning another star.

There is an addictive quality to online social gaming. People talk about “needing” to log on to their FarmVille site.

And for a new generation of users, social gaming is providing them with an opportunity to spend virtual time with friends, acquaintances and strangers in a way that is unavailable elsewhere.

“In Turkey, North Africa and the Middle East, some people don’t have the liberties that other people have,” says Rina Onur, co-founder and chief strategy officer at Peak Games, an Istanbul, Turkey-based social gaming company. “So they use this medium to interact and meet people.”

Women are big users of Peak’s games, many into their 30s.

Peak was formed in 2010 and is already in the top six global social gaming companies, according to one of its investors, Berlin-based VC firm Earlybird Venture Capital. Concentrating on Turkey, the Middle East and North Africa, the company has raised $19 million in total funding—including a recent $11.5 million round from Earlybird and Hummingbird Ventures—to help it expand and acquire game studios, marketing its mix of card-based games, such as Okey, fashion games, like TrendKiz, and social strategy games, such as Umaykut. All of the Peak Games are played on via the Facebook platform.

Turkey has an astonishingly high Facebook penetration, with 87% of the online population (more than 30 million people) registered on the social networking site. Across all of Middle East and North Africa, Facebook users are estimated to reach 250 million by 2015.

Social gaming has proved a big hit on Facebook globally, but with even more than average stickability in Turkey. Users of Peak Games’ products spend longer online than the average social gamer in Western Europe or the United States. They also have a longer active lifetime on the games (almost six months rather than three months) and they spend more money.

Earlybird General Partner Jason Whitmire cites average revenue per user at between $10 and $20 per month. Peak Games claims to have 8.9 million monthly active users and 2.4 million daily active users.

“We were very impressed by the monetization,” Whitmire says. “We were looking for a company with non-linear growth, with low user acquisition costs, and to support them as they expand.”

Peak Games plans to target South America for the next stage of its expansion, particularly Mexico and Brazil, which also have high Facebook user populations.

For Earlybird, Peak Games is the latest in a series of social gaming bets. The firm previously invested in Scoreloop, which was sold to Research in Motion, maker of the BlackBerry, and in Crowdpark, whose technology allows users to make virtual bets on Facebook on a range of subjects.

Betting for real money is forbidden on Facebook, so users compete for status, or collaborate through helping one another build farms or cities. They can also play virtual versions of games that exist in the real world.

For Whitmire, the key to attracting users is cultural relevance. He argues that the large U.S. social gaming companies, such as Zynga (maker of FarmVille), and Electronic Arts (which acquired Playfish for $275 million in 2009), have instead tried to foist “one size fits all” products on their customers.

There are cost advantages of developing social gaming products in emerging countries.

“The cost of acquiring a customer is about 10 cents in Turkey, compared with $1 to $3 in Western markets,” Whitmire says. “Labor costs are far lower. In Cairo, a programmer costs 1/13 of the cost of someone in California. But there’s no difference in their skills.”

When we first invested [in Wooga] in 2009, there were five employees and half a game out there. … some VCs wouldn’t take that risk.

Roberto BonanzingaPartnerBalderton Capital

Berlin-based Wooga has a team of 100 employees. Earlier this year it completed a second round of venture financing, attracting investment from Highland Capital Partners and Tenaya Capital, in addition to existing investors HV Holtzbrink Ventures and Balderton Capital, bringing its total fundraising to $31.5 million.

“When we first invested in 2009, there were five employees and half a game out there,” says Roberto Bonanzinga, a partner at Balderton.

Bonanzinga says that “some VCs wouldn’t take that risk,” but he notes that Berlin is a creative place.

“It’s a world capital for electronic music, for contemporary art,” he says. “Berlin is a fantastic ecosystem for a company like Wooga, which is a combination of art and science. They have attracted some extremely talented people, with more than 20 nationalities in the office, and have turned it into a creative hub.”

Meanwhile, a booming industry of advisors, analysts and consultants is emerging.

YetiZen, a San Francisco-based startup incubator, specializes in social gaming companies and launched the San Francisco Game Developer’s Workshop in 2010. CEO Sana Choudary co-founded the incubator and believes that the conditions for a great social gaming startup have to be just right.

“They need to have the right mix of intuition and analytics-based thinking about game players and their market as they develop, launch and optimize the game for customer acquisition, engagement and monetization,” she says.

Most people who start such companies lack the right kind of experience and find it hard to contact the right advisors. So YetiZen fills that gap and vets companies, to help make introductions. As in Europe and elsewhere, Choudary has seen the gaming sector shift towards mobile devices, as they’ve become more sophisticated, powerful and with higher quality graphics. Startups worldwide are welcome to apply to YetiZen for the program, although they must be prepared to relocate to San Francisco for the three-month incubation period.

The rise of micropayment technology has allowed companies such as Peak, EA, Zynga and Wooga to harvest hundreds of millions of dollars from their users, with the prospect of more to come. Peter Relan, chairman of social gaming incubator YouWeb in San Francisco, is looking forward to the first social gaming product to notch a billion users.

“We want to create the game that reaches a billion people,” Relan says. “We will have the ability as app developers to build apps that, with a push of a button, could update the user experience of a billion people.”

So far, Zynga, with 265 million active users, leads the field. But from its Turkish experience, a company like Peak, if it could crack the Indian or Chinese markets with their potential billion-plus users, could one day challenge them.

And as devices become more interoperable and accepting of each others’ technology, this prospect grows closer.

“There are really game-changing things that will happen when you can play games across all of your screens,” says Josh Elman, principal at venture firm Greylock Partners. “We are looking at companies that can take massive advantage of these platforms and build something that is unique and defensible.”

Just as games technologies have multiplied, so, too, he cost of access has plummeted.

“The cost of game creation has come down by a factor of 100 in some cases,” says Jeremy Liew, managing director of Lightspeed Venture Partners, which has invested in several gaming companies, including Playdom. “That applies to social or mobile, or iPhone or Android, or other platforms. And that means startups can actually play. It’s not this intimidating, massive project. And that is exciting.”

The games themselves may be pointless and infantalizing, squeezing money for nothing out of zombified users, addicted as much to their games as a gambler at a slot machine in Las Vegas, but the prospects for the VC firms that have placed their bets wisely are bright.

David Nicholson is a London-based contributor. He can be reached at dn@davidnicholson.com.