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Venture capital and online games @ Virtual Worlds Forum


Last week we managed to catch the Venture Capital panel at the Virtual Worlds Forum, an event set inside a nightclub situated within a rather eerie warehouse district behind Kings Cross train station. Plenty of black leather sofas with bloggers and attendees basked in purple lights, a glitter ball, and three bars provide an odd backdrop for discussions about monetizing the latest WoW wannabe. The overall atmosphere of this panel was very businesslike -- £995 a head means most attendees were on their respective company's ticket -- so if you want to continue believing that video games are solely a creative medium designed to further society through creation of fun, look away now.

If you're interested in this subject, make sure to check out ex-Joystiq editor Vlad Cole's newly relaunched blog on video game venture capital. Now keep reading.

This was the crowd well before the panel started, honest.

The first of the last two seminars was on the topic of venture capital investment's relationship to virtual worlds, and featured several prominent representatives from VC firms with heavy stakes in online companies: Ben Holmes from Index Ventures -- invested in Skype, -- Nic Brisbourne from Espirit Capital Partners -- investors in Doppelganger and other online offerings -- and finally Sean Seaton-Rogers who works at Balderton Capital -- invested in Second Life several years ago, and also have stakes in Bebo (big in the UK), Codemasters, Habo Hotel, and WeeWorld.

The quick and dirty? They're all jealous of Blizzard and their World of Warcraft franchise -- "WoW is the category definite in terms of revenue" -- they're all jealous of Facebook and Microsoft's investment clout, and yet they all give off the vibe of being cautiously optimistic about the prospects for making money using "always online" games, despite their experience in the space. Significantly, one question from an audience member asked why VC firms were in favor of small investment opportunities: doesn't this limit the potential innovation in the online worlds space? More specifically, "are a bunch of guys with chinos in a room the best way to innovate?"

The question was provoked by comments from the panelists that companies "don't need $40 million anymore" due to tools like open source software and outsourcing of programmers. The ethics of using these tools -- open source wasn't designed to help companies make more money, and outsourcing arguably sacrifices quality -- were not discussed. Beyond this, the question wasn't adequately answered: if an idea is big enough and is sound, and the investor needs a large amount of capital, then why not give them a bigger chunk? Other excuses included the smaller funds in the EU vs. the US -- "it needs to pick up to get to 1999-2000 levels, but don't go too far though" -- an admission that smaller companies may not need VC money (Boo!), and the fact that for every "online worlds" idea, there are "4, 5, 6, 7 similar businesses in the same area."

The panel didn't consider VC money as the "spark" in creating new companies. Rather, it's the "fuel" to get there. Apparently, only if an entrepreneur has done a bit of work for free in investigating their idea -- market research was the only tip here -- will these VCs then think about jumping in with an investment. There is evidence for the "fuel" perspective: models for investment in online worlds are far different from traditional entertainment investments like movies. Nic brought up the point that big games "may look like films, but film revenues tail off." That's not the model of the average online game, which needs work to improve: "big hits don't fail or succeed very quickly. It's a different style of making money."

Questions about the lack of real revenue from online games seems not to worry this bunch, however: a simile thrown up was that radio evolved without any thought of revenue. "Money eventually makes itself" when it comes to this area -- or, as the case may be, bigger, more established companies just end up buying the smaller guys out for ridiculously inflated prices. Talking of big companies, the panel pretended not to be scared of Google's interest in online applications: but only because the mega-corp is so willing to open their checkbook to lock down talent. The prospect of getting bought is obviously enough to offset the likelihood of revenue for these VCs...

Another area of discussion included the Asian market, with comments including the statement that online games "prevent piracy, because they have to be connected," which is a big issue in this market. The inability to sell packaged games means the only way to make money there is to charge subscriptions.

Final questions:
  • "Will big companies come to dominate the scene?" Not likely. Ben expects "big companies to be here, but big entertainment franchises always tend to come and go."
  • "Have you ever had a business meeting in an online world?" None of them had: too much of a learning curve to get new "players" onto the game, they're invariably not tied to business context, although they do use business collaboration tools like WebEx to work together. Sounds to us like it's something to work on. If you can't do business in a world because it's too hard to operate / not serious enough, how can you consider it as encompassing "the world?"
  • "Realistically, what returns, over what timescale, do you expect? Whats the minimum investment? What are your public guidelines?" Sean stated that their smallest investment was around €750,000, and their biggest was $50 million. So there's no investment framework based on amounts. As for timescales, "as little as possible!" Although their ultimate thesis is to make ten times their money. That may take 10+ years, which in some cases, it has. Nic says if you're not aiming for 10x, you're not going to get a significant enough pay-off for the risk. He looks at the US where 10x is the norm, and sees $300-500 million sellout averages in Europe. The EU is much more risk averse -- and we'll add, the taxes are waaay higher here.
And that's it. Has your soul escaped yet?

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