Interview: A VC Boom Heading for Gaming?

[Gamasutra business editor Colin Campbell speaks with Clearstone Venture Partners' William Quigley, who believes gaming is the new darling of investors looking for innovation, rapid international growth, and valuable IPOs.] 'A Venture Capital Revival is Upon Us', is the title of a report by the splendidly named William Quigley, managing director at Clearstone Venture Partners, with a special interest in online communications and entertainment. His report states, "Money flows to where people spend their time," and indicates that a VC boom is coming, particularly at the intersection between social networking and online games. After all, social networks now take up 23 percent of time online, with online games taking 10 percent (Nielsen), the two biggest shares. He says, "We're just at the dawn of mobile and social gaming as a worldwide phenomenon. When people get together, they play games. That doesn't change, but the nature of the platform is changing." He says the $50-game console platform is not interesting to a VC seeking fast growth and innovation. "That model is in jeopardy. More and more users will find experiences that are good enough, online for free. Time and money spent on packaged goods is being eroded and for those companies in that business, they are finding out that the hardest thing in the world to change is a business model." He adds, "There are many sectors where, if you're successful, you create value. But it's not substantial value, certainly not in comparison to what's possible in the online and social gaming space, if you're successful here, the rewards are massive. Far, far greater than what we've seen in any other technology cycle." His predictions for a new VC dawn may sound like the wolf forecasting perfect weather for a stroll through a creepy forest. But he has stats. To begin with VC fundraising has been in the doldrums for a long period, in the perverse world of big finance, a sure sign of change. At the beginning of the the last decade, VC fund-raising stood at $83 billion. In 2009, it was down to $13 billion. In the rip-roaring 1990s, 58 percent of VC exits were IPOs, with less valuable M&As taking up 42 percent. In the last 10 years, the super-sexy IPO has been restricted to a measly 12 percent. Quigley says the U.S. economy has grown almost 50 percent since 2000 (DowJones VentureSource), and yet there is less venture capital under management today than ten years ago. VC fundraising as a percentage of GDP has fallen from 0.9- 0.1 percent in that period. But Venture-backed IPOs are on the increase, up from six in 2008, to an estimated 80 this year, almost as high as pre-financial crisis levels. VCs cannot ignore certain lip-smacking factoids, he says. Tech companies are raising much higher values compared to revenues than in the "golden days" when the likes of EA and Microsoft went public. You may argue about whether or not this is a good thing, but it works a treat for the VC people. Why? The Internet allows companies to get bigger, faster. There are way more technology specialists working for the money companies, and start-ups tend to go global earlier in their life-cycle. Groupon, for example, has 35 international offices. The online coupons company launched in November, 2008. The key to VC funding is wild, crazy growth. Nothing else will do for these guys, not even profitability. Quigley says, "A company that has 100,000 users and is profitable but growing slowly is worth far less than a company losing a lot of money but with 10 million customers and growing quickly." He says this is a change from the post dot-com crash focus on sensible growth rates and sustained profitability. "We have seen a dramatic shift in the public markets from extreme conservatism towards optimism. Right now we're not in either end of the extremes but the bias is towards growth." So, apart from obvious, fast-growing companies, which outfits are likely to attract the sort of VC funding that can accelerate or even kick-start growth? For one thing, Quigley dismisses the popular game industry prejudice that VC people don't understand games. "Venture capitalists are becoming more and more educated about the right recipe to create a successful business in the social gaming space. As a gaming company you can present particular revenue and customer acquisition models and the investor will be familiar with the approach and the assumptions you're making, and will be operating on the basis of execution. We are rapidly approaching that point, where you can start to get venture capital prior to having built a great following." He laughs off my suggestion that VCs will be turned off by the game industry's notoriously hit-driven nature, and the high levels of risk involved in bank-rolling video game dreams. "I was CFO of Disney's merchandise licensing division so I know about hit driven businesses. When I came here, people told me how different the venture capital model would be. But the freaking venture capital business is a hit driven business." He adds, "We invest in a tiny fraction of the companies that we look at. The great gaming businesses are rare, just like the great mobile companies are rare and the great enterprise computing companies are rare. I don't think risk and the rarity of success are unique to the gaming businesses." "What makes gaming a more attractive sector than many others is how rapidly you can build a base of users and how little the education is needed to compel people to want to do something to engage with what you built. There are lots of companies that spend much of their venture capital educating their customers about why something is important. That's not something you have to do in the gaming space. The consumer gets it." [Full Disclosure: As well as being business editor for Gamasutra, Colin Campbell works for a marketing agency that provides content and blogs to brands. You can follow him on Twitter @brandnarrative.]