A panel gathered yesterday evening at Pillsbury’s office to discuss the legal issues surrounding social games among other issues. Pillsbury is a full-service law firm with one of its specializations being virtual worlds and currencies. The panel was comprised of Jeremey Liew of Lightspeed Venture Partners, Jim gate from Pillsbury, Keith McCurdy, and Phil Sanderson, Managing Director, IDG Ventures SF. It was an interesting discussion of patents, legal issues, and more. Read more after the jump.
Social gaming start-ups and entrepreneurs can only hope for success in a climate dominated by the revered Zynga. On a bare-bones budget, a great concept may prove to be insufficient as the gaming industry, including social gaming, is a hit driven business. Despite a radically tarnished viral environment, entrepreneurs are bullish on Facebook’s social gaming ecosystem but the funding criteria could be disparaging to some.
Jeremey Liew, the esteemed Managing Director from Light Speed Venture Partners, was one of the panelists. His experience in the social gaming industry stems from a yearly investment in the space since 2006. The panel fluctuated in discussions with topics ranging from IP and venture financing all the way to history of the gaming industry and its evolution into start-up domains.
One of the notable parts of the panel was the discussion of the funding criteria that VC’s look for in a social gaming start-up. Jeremey Liew commented, “I’d want to see a company on a trajectory to getting $1 million a month. That’s the minimum level of scale that one needs to be at. Entrepreneur needs to present a reasonable set of assumptions that shows how they will be getting to $1 million a month.” Jeremy also discussed the importance of scalable customer acquisition channels based on early cohort analysis of LTV (lifetime value).
The crowd shrieked and cringed, perplexed at the veracity of the statement. That’s not to say that Jeremey Liew was speaking for the entire VC community but his own set of criteria. Phil Sanderson said that they look for ancillary business models around social gaming, not limited to companies about just gaming. But how does one reach the scale that someone like Jeremy Liew would look at?
Let’s look at the numbers. $1 million a month equals roughly $33,000 a day. Let’s assume an ARPU of $40 and a conversion rate of 2%. In order to hit that million dollar mark, you would need .02(x)(40) = 1 million. That means, you need roughly 1,000,000/.8 = 1,250,000 MAUs (basing earnings strictly on virtual goods, not taking into account pre-roll video ads, banner ads or product placements etc.) With the viral coefficients (k) falling below 0.6, we can assume almost no apps are truly viral. Customer acquisition costs of around $0.5 could mean a rather large investment. The panelists alluded to the multi-million dollar marketing budgets of the past, contrasting them with the few millions needed now to launch a game, a number still significantly higher than most of the audience’s reach.
Game quality is increasing but graphics and creation of ‘better’ farm games won’t help social gaming start-ups succeed. It’s about quickly iterating and developing an audience advertisers will be interested in reaching. Facebook is still a relatively unstable platform, which has its pros and cons. The pros are that there is still room for growth and innovative ideas to take advantage of Facebook’s latest offerings and randomness of life. The cons are that as the Platform reaches stability, it will become more difficult for start-ups and the big guys will prevail.
As time elapses, consolidation will occur. In my humble opinion, VC investors and corporate investors alike are after the user base and will look to funnel them into deeper engaging games, especially as the methodologies in segmenting users by engagement and monetization behaviors proliferate. We can already see games being shut down, such as Playdom shutting down Lil Green Patch after acquiring David King’s company. Regardless, we hope to see entrepreneurs innovate and strive in an increasingly difficult industry.
