Arkadium is the scrappiest of game startups, starting 12 years ago as a couple-run business and growing into one of the largest providers for people who appreciate parlor games and other casual titles. But to keep up with huge rivals, the studio is announcing today that it has raised $5 million in funding from Edison Ventures.

The New York-based company, known for titles like Microsoft Solitaire Collection and Mahjongg Dimensions Blast, is one of the few that has made a major bet on Microsoft’s Windows 8 operating system with games that are targeted specifically at the cross-platform Windows environment. Arkadium has four games on Windows 8 now, two more scheduled, and more in the works. It is the only company of its kind with such an extensive strategic alliance with Microsoft.

“We are doubling down on Windows 8 and that ecosystem,” said Kenny Rosenblatt (pictured, left), the chief executive of Arkadium, in an exclusive interview with GamesBeat. “It is showing strong signs of success. We’ll also make Facebook games, roll out more mobile games, and expand our own distribution channel. This is going to accelerate our growth and give us more flexibility.”

Arkadium’s own channel includes distributing casual games to websites such as those run by the Washington Post, MSN, CNN, and the Los Angeles Times. The studio’s games have been played billions of times. More than 10 million people play its 300-plus games each month.

Jessica Rovello (pictured, right), the president and co-founder, said in an interview, “We haven’t needed the funding before. But it is difficult to compete in this space with companies that have raised hundreds of millions of dollars. Working against those war chests isn’t easy.”

Rosenblatt said Arkadium is profitable, and it has had to be for 12 years because it was bootstrapped. The additional money will give the developer more flexibility and the growth capital to increase the number of games it has in development. It will expand its proprietary online distribution network and double its staff of 150 over the next three years. Rivals include other casual-game makers like Zynga, Halfbrick, PopCap Games, Big Fish Games, King.com, and Wooga.

“It’s rare to find a high-growth technology company that’s been able to achieve the success Arkadium has without the benefit of ever raising capital,” said Ryan Ziegler, Edison Ventures interactive marketing and digital media practice leader. “Arkadium’s cross-platform capabilities and unified infrastructure enable the efficient production of best in class gaming content. We are excited to partner with an emerging market leader.  The demand and market opportunities for innovative content and enhanced user experiences are endless.”

Microsoft launched a new app store with Windows 8, and Arkadium launched its “easy-to-play, hard-to-quit” games Taptiles, Sparks, Trizzle, and Mahjongg Dimensions for it.

Rovello and Rosenblatt started the company in 2001. On a date, they challenged each other to see who was the better Ms. Pac-Man player. They couldn’t find a place to play the game online and so decided to start a company together.

Arkadium’s older web games provide a way for the company to cross-promote its titles. That is an edge, Rovello said, over rivals who only have games on iOS or Facebook.

“We face the same challenge of discoverability” in an age of hundreds of thousands of apps, Rovello said. “Are we going to pay a king’s ransom to get users? The distribution network is our competitive advantage.”

Windows 8 has been a polarizing operating system since its debut a quarter ago. But Rosenblatt is still enthusiastic about it and said, “We have had millions of downloads on Windows 8. We signed a deal with Microsoft, and we made it for the long term. They already have 60 million licenses sold. There is already an economy there. It may be several years before it is the dominant OS, but that will occur.”

But while the company is betting on Windows 8, it acknowledges that the “users are all over the place,” Rosenblatt said. “We go wherever they are on mobile, tablets, computers.”

Rosenblatt said the company could have raised $25 million, but it wanted to maintain control of the business and take only as much as it needed.

“This is the exact amount we need to do what we do,” Rovello said. “It may not seem like a lot, but we grew up stretching every dollar.”

The company has offices in New York, Toronto, and Ukraine. Its leaders have no desire to move out west.

“We are deeply rooted in the East Coast mentality,” Rosenblatt said. “We don’t liken ourselves to the entrepreneurs of the west. They may take money and hope to find a business model.”

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Asian online game publisher Nexon said today that it has invested in the independent video game developer Robotoki, which was started last year by former Call of Duty creative strategist Robert Bowling.

Robotoki previously said it was creating a title exclusively for Ouya, the $99 Android-based console that should debut and June and some see as an alternative living room gaming device in June.

Bowling, president of the Los Angeles firm, previously said his team was working on The Human Element, an episodic prequel that will introduce players to a zombie apocalypse game.

Nexon, which pioneered free-to-play online games and now operates big titles such as MapleStory and Dungeon Fighter Online, said it made a strategic investment in the studio. Terms were not disclosed.

The Tokyo-based Nexon said the investment is a step toward the development of Robotoki’s multiscreen, cross-platform game play.

“We are thrilled to partner with Robotoki to develop cutting-edge, multiplatform, cross-genre games,” said Seungwoo Choi, the chief executive of Nexon. “Robert Bowlin’s creativity and talent is evidenced by his track record of success, and we look forward to collaborating with the entire Robotoki team to deliver inventive, multidimensional gaming experiences to consumers in North America and around the world.”

Bowling started Robotoki in April, 2012, to make first-person shooter games such as Human Element, which will combine action, strategy and resource management to offer players multiple human survival scenarios. Human Element is expected to be released in the fourth quarter of 2015 on next-generation consoles, PC, and mobile devices, including iOS and Android.

“Partnering with a games giant such as Nexon will allow us invaluable access to their expertise and world-class resources,” Bowling said in a statement. “Nexon shares our focus on team and talent, as well as our commitment to revitalizing and enhancing the game-play experience, and we are thrilled to work together.”

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Playnomics, which is making a science out of figuring out which players are the most valuable to a game company, has raised $5 million in a second round of funding from Vanedge Capital.

That’s a vote of confidence in the company’s PlayRM service, which predicts which monetization or retention schemes work best with online and social-game players. Last week, San Francisco-based Playnomics extended that service to mobile platforms.

Existing investors FirstMark Capital and XSeed Capital also participated in the round. That should help Playnomics on its mission of democratizing the use of scientific analytics for the larger game development community.

With Playnomics’ technology, mobile, social, and online game makers can target consumers with special offers at the moment when they are most likely to stop playing a game. The method resembles how enterprises manage their customers via customer relationship management software. In short, it’s tool that can help game makers design their apps and promotions so that companies can retain users and make more money.

Playnomics has profiled more than 100 million unique players across dozens of online games and brands.

“Playnomics has always been focused on determining why and how audiences play and enabling game developers and brands to measurably increase player retention, engagement, and monetization using our PlayRM platform,” said Chethan Ramachandran, chief executive of Playnomics. “With this new round of funding, we’ll be able to further expand the features and capabilities of the platform to meet the growing needs of our partners worldwide. Developers can expect several new product releases this year that leverage our predictive scoring and segmentation engine.”

In an interview with GamesBeat last week, Ian Atkinson, the vice president of business development at Playnomics, said that early results from beta partners on the mobile product show a 150 percent increase in player retention during the first week of using the platform.

With the service, customers can segment their audiences by different game behaviors and then target those players with custom in-game messages on an individual basis. Developers can also re-target people to bring back valuable players who have stopped playing. They can also cross-promote games to prequalified players. While other analytics packages help explain why someone left the platform, Playnomics wants to help companies predict which players are toying with quitting a game.

Playnomics was founded in 2009 and was the winner of VentureBeat’s Who’s Got Game contest at GamesBeat 2010. Playnomics is used in more than 100 games with more than 30 million monthly active players. Playnomics processes more than 5 billion in-game events a month. Other prior investors include Accelerator Ventures, Metamorphic Ventures, and TriplePoint Capital.

Vanedge Capital, which focuses on investments in interactive entertainment and digital media, was founded by former Electronic Arts veterans Paul Lee and Glenn Entis.

Tony Lam, principal at Vanedge Capital, will join the Playnomics board.

“As veterans in interactive entertainment and video game technology, we recognize that access to big data science, improved analytics, and advanced marketing software are absolute requirements for successful games,” said Lam.

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[For a view on gaming investing myths, read this guest post from YetiZen CEO Sana Choudary. -Ed.]

In 2012, investors were excited about the game market’s march toward billions of new users with the rise of smartphones and tablets. But that excitement fizzled as Zynga’s fortunes wavered, and it reported weak earnings starting in August. Consequently, game investments rose dramatically for a while, and then they tapered off.

The data for this story comes from GamesBeat’s own original research into fundings during the year, with contributions from Sana Choudary of YetiZen, Tim Merel of Digi-Capital, Internet Deal Book, Signia Venture Partners, and Electronic Arts.

The upshot is that game investors have been spooked and they aren’t making as many deals as they once were. That means that higher-quality startups will receive funding, but copycat ideas aren’t necessarily going to. And as weak as the year was in investments, nobody is changing any forecasts about the march of gaming into the stratosphere in revenues and player numbers over time. So the industry is facing a confidence contradiction. Game companies are growing, but the money they’re raising isn’t.

The number of game investments rose to 188 deals, compared to 145 a year ago. But the value of the announced deals was $901.3 million, compared with $1.540 billion in 2011. That represents a 29 percent increase in the number of deals, but a 42 percent decline in dollars invested.

By comparison, the value of game acquisitions rose 23 percent in 2012 to $3.47 billion, compared to $2.87 billion a year earlier. The number of game acquisitions fell from 77 in 2011 to 58 in 2012. According to Avista Partners, the value of publicly traded video game companies is about $153 billion, but 78 percent of the value is in the top 10 companies, with China’s Tencent leading the list.

A big gap exists in investor thinking, according to analyst Peter Warman of Newzoo in a recent interview with GamesBeat. Fear kept investors from pouring money into a sector that was actually producing much better results in terms of cashing out through acquisitions. Since 1997, Avista Partners says that games have produced $44 billion in value for venture capitalists and private equity investors since 1997.

Tim Merel, the managing director at Digi-Capital, said that the collapse of social gaming investments in the wake of Zynga’s troubles accounts for almost all of the decline in the game investment deals. Investment capital continued to shift from traditional console games to social, mobile, and online games.

But the clear bright spot for the year was mobile gaming. Merel reported that mobile deals account for as many as 40 percent of the overall game deals. But a mobile game studio with 10 employees can produce a game and get it into the market. It doesn’t need the same kind of capital that earlier game startups required, so it makes sense that the average size of a game deal is getting smaller.

In 2012, the average size was $4.8 million, compared with $10.6 million a year earlier. Zynga’s crash in the stock market (it’s trading at 25 percent of its peak value) also deflated game investment valuations.

Another savior for many game companies was Kickstarter, the crowdfunding platform that raised $83.1 million for video games and board games from 520,000 backers (we’ve included Kickstarter deals in our list). Of that amount, $55 million went to 296 video game companies (we haven’t included most of those on our list). The average amount raised via crowdfunding was $186,000, as most projects raised money for games instead of trying to finance whole companies.

More than anything, Kickstarter changed the dependence of developers on major publishers for funding. Midsized game companies such as Double Fine Productions, which started a Kickstarter mania back in March, could turn directly to their fans for the first time to raise money to make games. The crowdfunding platform became an important place to test disruptive ideas such as the Oculus VR virtual reality goggles and the Ouya Android video game console for televisions.

Certain sectors saw a boom, as hardcore game companies such as Kabam and Kixeye saw huge demand for free-to-play hardcore games. And social casino games debuted by the dozens on Facebook and mobile game platforms. More disruptions are happening as game companies adopt new business models such as free-to-play games, where you play for free and pay small amounts for virtual goods. Gaming also has its own version of the war for talent as big companies acquire smaller ones. Green Throttle Games raised $6 million on the hope that its Android game controller and app could disrupt $60 console games on the television. Such trends serve as grist for the bigger investments.

Signia Ventures (which did eight deals in games in 2012) noted that about 80 percent of investments in 2012 were in North America, with a lot of excitement continuing in mobile gaming, analytics, distribution and the larger consumer mobile ecosystem.

Investors probably shied away from the sector because of the almost total absence of initial public offerings. China’s YY and Zattikka staged a couple of small IPOs, but no one grabbed the attention or the investment dollars like Zynga and Nexon did in 2011, when both companies raised $1 billion each. Zynga raised $515 million in a secondary offering not long before its stock collapsed. And Tencent completed a $598 million fixed income offering. If the IPOs return, you can bet that the investors will as well. But perhaps the only trend to count on is further consolidation with a continued acquisition boom.

Here’s a cautionary note about these numbers. If we knew the value of every deal, the numbers would be much higher this year. We’d love to know how much money Tencent invested in Epic Games, but we don’t. But we have the same problem every year as the majority of the dealmakers keep their values secret.

Here’s a look at the deals of the year below. We’ve organized them by dollar value of the transactions. For those deals where the value is unknown, we have listed them in reverse chronological order. We have linked to our own VentureBeat/GamesBeat stories where we covered them. For deals we didn’t cover, we have linked to other publications or press releases.

Major VC firms such as Accel Partners, Sequoia Capital, DCM,  Kleiner Perkins Caufield & Byers, Andreessen Horowitz, and others all poured money into big game companies this year. Google Ventures continued its role as an active strategic investor. Check out the GamesBeat game investments list in the following pages.

Pages: 1 2 3 4 5

Myth: Common investor refrain–I only invest in picks and shovels, not game studios. Who needs the content risk!

It is common for many a budding entrepreneur to be told by investors I don’t invest in games, too much content risk. I only invest in platforms. When investors are talking about picks and shovels in gaming they are referring to platform plays that help game studios either build, promote, engage, or monetize their games faster, better or cheaper. This includes cross-platform game engines such as Unity, cross promotional networks such as Applifier and for some even android publishers such as MoMinis. However, if you look across overall investments in 2012, game studios fared better than game platforms. Of the 160 gaming investments (not counting Kickstarters or strategic investments in large companies) made in 2012, 82 were game developers and 78 were platform plays. In aggregate dollar value game studios received slightly less funding that platforms, of the $734.77 million invested 45 percent went to game studios.

Truth: There are fewer green pastures opportunities left for gaming studios, a lot more left for platforms as gaming matures

Investors have definitely shown that they believe this through their 2012 investments. In 2011, 74 percent of the investments were made to game studios while the remaining were made to platforms. In 2012, 51 percent of the investments were made to game studios. However in dollar value the game studios in 2011 accounted for 53 percent of the investments versus 45 percent of the investments in 2012. This means that while VCs are making fewer game studio bets and more platform bets in 2012, the game studio bets were larger in dollar size than the year before. The average game studio deal size was $6.79 million in 2011 versus $9.64 million in 2012.

Myth: Games studios always take longer to get funded than game platforms

And its close brother game studios need a lot more traction to get noticed by investors than game platforms do. To investigate if this was true I calculated the number of months between founding of the company and its first venture round for game studios versus game platforms, only using those companies who received their first venture round in 2012. I also eliminated seed and angel rounds.I found that on average the game studios received their first venture financing 28.44 months after inception while game platforms received their first venture financing 33.1 months after inception.But before you go starting a game studio, keep these facts in mind:

• Of the 15 game studios that received their first venture round in 2012–7 were to companies that by the time of funding had achieved breakout user traction and 4 were to companies started by founders who had past exits. The obvious implication for you, if you are founding a game studio and have not had major exits before–focus on getting a large user base and the juiciest unit economics you can as fast as you can.
• If you have had a reputable exit of your startup before even if it was a non-gaming now would be the time to capitalize it for fund raising. While the overall average of time from inception to first venture financing for game studios was 28.5 months, the average for investments where the founders had prior exits was 13.2 months, compared to 34.8 months for the studios who had hits. In venture financing social proof may very well carry more weight than real results, at least in terms of financing earlier in the company life cycle.
• The time from seed to first venture financing is much longer in games than in other comparable industries such as consumer web despite all the complaints about a series A crunch in consumer web. For you that means have a seed cash cushion that lasts you for at least 2 years of lean operations. In that time aim for sustainability and profitability to allow you to have a cash buffer should the core drivers of your business significantly change (example the rising costs of distribution). In the words of a European venture capitalist I met recently–be profit focused not cash-flow focused.

Source: Original research conducted by YetiZen and Raymond James Tech Investment Banking, analysis done by YetiZen. Assumptions and the reasons why some of the numbers above may be different from others you have heard:

• Only deals with numbers disclosed were used for this analysis.
• I did not count Kickstarter or seed deals as our purpose was to indicate the beliefs and investment hypotheses of venture investors. Kickstarter and seed deals are done by individuals and angels, both often fund due to passion for the founder or the product rather than a hypothesis regarding the market.
• Only deals closed in 2011 and 2012 were used, deals closing in 2013 were eliminated.
• I only counted game studios and gaming platforms. Investments in gamification such as CRM, health, and restaurants were not included as I consider these investments outside of the pure gaming ecosystem.
• 2011 numbers do not count Zynga & Nexon IPOs as these are public market not venture investments.

Sana ChoudaryCEO of YetiZenSana Choudary has co-founded and been the CEO of YetiZen, a cornerstone of the social mobile game developer ecosystem. This includes the YetiZen accelerator, the wildly popular games focused accelerator and the YetiZen Innovation Lab, the only game developer community space of its kind for game developer business education and synergy in the new and ever evolving world of social mobile. It has served 6500 game developers in the last 12 months. She is also the chair of TIE SF and TIECON Youth, the world’s largest entrepreneurship conference.Sana often shares her thoughts and ideas on the business of games at @SanaOnGames and http://yetizen.com/blog/.blog/

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Game acquisitions set a new record in 2012, with a total transaction value of $4 billion, up 18 percent from $3.4 billion a year earlier. But investments in new companies fell in transaction value by 57 percent to $853 million from a year earlier, according to game-focused investment bank Digi-Capital.

The data shows that games have become a dynamic industry on a global stage, but investments in new companies are down for a variety of reasons. Those startups have become the fuel for growth at the larger companies, which are adapting to the new age of digital games through strategic acquisitions.

Zynga’s rapid growth in the past few years drew the attention of big companies, including ones in China, South Korea, and Japan. But Zynga’s fall in the stock market, brought on by weak earnings, crushed the value of all game companies, resulting in smaller transactions. On top of that, Tim Merel, the managing director at Digi-Capital, said that venture capitalists almost abandoned their investments in social-game companies. Social-game investments accounted for 94 percent of the decline in overall investment. Merel warned there could be a “games investment gap” in the medium term.

Digi-Capital estimates that the total industry could grow to $83 billion by 2016, with 57 percent of that revenue produced by online and mobile games, compared to 49 percent in 2012.

If you add up the returns of the game business by combining acquisitions and initial public offerings, the numbers from 2005 through 2012 add up to a six-fold return. As for acquisitions, the number of deals were down 27 percent to 83 transactions in 2012. But the overall figure rose because the average transaction size rose 60 percent to $49 million. More and more of the buyers are in Asia, as seven of the top 10 deals involved buyers in South Korea, China, and Japan. Digi-Capital believes China could take 32 percent market share in online and mobile games, compared to 21 percent for Europe.

Massively multiplayer online games accounted for 38 percent of the transaction value in acquisitions, followed by 27 percent for mobile, 18 percent for social and casual, 13 percent for middleware (such as gamemaking tools) and gamification (using game-like tactics to increase engagement in nongame applications), 4 percent for console and PC, and 1 percent for advertising. By volume, mobile was 28 percent of transactions, MMOs were 20 percent, social and casual were 19 percent, middleware and gamification were 19 percent, console and PC were 12 percent, and advertising was 1 percent.

For game investments, the average transaction value was down 57 percent, but transactions were up 9 percent to 165. That might be because more mobile-game studios were funded, but the dollars needed for such studios are much smaller. The average size of an investment was $5 million, down 60 percent.

Middleware and gamification were 35 percent of all game investments in terms of transaction value, compared with 31 percent for mobile, 18 percent for MMOs, 7 percent for social and casual, 7 percent for console and PC, and 1 percent for ads. In terms of transaction volume, mobile was 39 percent, middleware and gamification were 29 percent, social and casual games were 10 percent, console and mobile were 10 percent, MMOs were 9 percent, and ads were 2 percent.

Kickstarter, meanwhile, complemented VC investments. The crowdfunding site account for 6 percent of all investment ($49 million, excluding board games). Kickstarter was 63 percent focused on PC games and 23 percent on hardware. About 87 percent of the value was in just 7 percent of the projects, such as Ouya, which raised $8 million for its Android game console.

Merel said that there was significant volatility across individual game sectors. The potential exists for the “mispricing” of both public and private game market assets in 2013.

Free to play continues to grow as a business model. It is expected to be 55 percent of mobile and tablet app revenue in 2016. It is expected to be 93 percent of mobile and app downloads in 2016. Merel said that gamification is attracting significant early stage investment, but a lot has to happen before the market achieves its potential.

In 2013, Merel said the new generation of consoles could reinvigorate the console market this year. Last year, game sales fell dramatically for home systems.

As the market shifts toward digital games, Merel believes development will switch from a focus on producing one big hit to investments in multiple, low-cost parallel efforts. Companies will abandon failures quickly and move behind hits fast.

On the highest level (see picture at right), Digi-Capital sees games shifting toward high-value titles in the West, particularly in the U.S., along with the rise of subscription MMOs and console games. Meanwhile, Asia will diverge into a high-volume market, with China leading the development of mobile/tablet games, free-to-play titles, and casual online titles.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Digital Development Management is a talent agency for video games and digital entertainment, and it’s teaming up with investment firm Seahorn Capital Group to finance game startups and interactive media. The new joint venture is Seahorn Investments.

Northampton, Mass.-based DDM, headed by founder Jeff Hilbert and DDM president Joe Minton (pictured right), provides the game industry expertise while Marc Jackson (pictured left), head of Seahorn Capital Group, contributes the financing know-how.

“This is the last piece to fall into place so we can have a full-service business,” said Minton in an interview with GamesBeat.

The first client of Seahorn Investments is Tequila Works, the creators of the Xbox Live Arcade game Deadlight (pictured above). Seahorn’s job is to provide every service a video game requires in order to reach launch.

DDM has made its name as a talent agency, matching up game development studios with publishers and other entities that want to publisher games.

Jackson will serve as finance director for Seahorn Investments. He has secured more than $150 million in funding for game companies, financing studios such as Big Red Button Entertainment, Fearless Studios, and Rocksteady Studios. The latter is well known for reviving the Batman video game franchise with Batman: Arkham Asylum and Batman: Arkham City.

Seahorn Investments will provide financial advice and help raise funding for its clients. It will do so by orchestrating private placements, mergers and acquisitions, and complex financing deals. It will also help raise money for clients through angel investor and incubation partner relations.

DDM represents some prestigious independent game developers, including Ninja Theory (Devil May Cry), Yager (Spec Ops: The Line), and Zombie Studios (Blacklight Retribution). DDM represents game studios as an agent. It provides consulting for game companies. And it facilitates game production. A lot of the work has been helping transform game companies to adapt to new platforms.

“In my 20 years in the industry, this is one of the most important deals I have orchestrated,” said Jackson. “Joe and Jeff have done an amazing job reinventing the agency model for game development talent.”

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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When developer Zynga’s stock price crashed earlier this year, it took a toll on the larger game industry. The social-title giant’s stock meltdown meant lower payoffs for game deals, and the valuations of game-startup investments dropped accordingly. The topic came up at the recent investor panel at the YetiZen game accelerator.

Sana Choudary (pictured far right), chief executive of Yetizen, moderated the panel, which consisted of (from left to right) Chris Gottschalk, vice president at Blumberg Capital; Jeff Karras, managing director of investments at Sing Tel Innov8; Chris Petrovic, general manager of GameStop Digital Ventures; and Eric Tilenius, executive-in-residence at Scale Venture Partners. Here’s a portion of the Q&A where we asked a question about valuations.

We’ll post a longer Q&A from the discussion later.

GamesBeat: We’re curious to know where you think game-company valuations are going. Was it really true that Zynga and its stock collapse brought down valuations for all game companies and startups? If so, does that make sense to you? And as investors, what do you think of the industry as a category now?

Chris Gottschalk: I can tell you a few things from our early-stage perspective. Clearly Zynga had an impact on the later-stage investments. We see it not only in gaming but in all sectors. The public markets are going to affect what’s happening in some of the later-stage deals.

On the early side, I definitely think there has been a little bit of a pullback in terms what expectations are. A couple of years back, you had people expecting uncapped notes or $20-million-plus capped notes. There were a lot of these big party rounds where people weren’t even meeting the entrepreneur and putting money behind it. Now, you’re seeing a lot less of that. You’re probably not seeing any of that. You’re seeing the caps come back down. You’re seeing people build prototypes and have some engaged user base or at least understand what their target market is. I don’t know that Zynga as a single point has done that. You’ve just seen a lot of that frothiness go away that we were talking about earlier.

Jeff Karras: I agree. It’s a more sober environment around valuation. Valuations get a little bit more skimpy. Still, the top games and the top companies are able to command good valuations. Maybe they’re a little frothy on occasion, but the majority — especially the ones that are less proven — are definitely more sober in terms of turns and valuation.

Chris Petrovic: It’s a great question. Our analysis continues to be more conservative. On a macro level I think valuations are leveling out. But at the same time, you have these diametrically opposite competing forces. There are the outliers like Zynga, with things like A Bit Lucky, where the dollar amount wasn’t a lot, but I guarantee there was a competitive bidding situation there. Where before there were informal metrics like $750,000 or $1 million dollars per engineer, they took it to $1 million dollars per employee. People start running around with that. “Look at this one example. This is what we should be doing.” Then you have the GREEs and DeNAs of the world buying unprofitable companies in the mobile space at huge multiples because they don’t want to have a competitive bidding situation. They have the cash flow that they’re drawing on back home.

Historically, as an acquirer, we face the conundrum of looking at a number of different metrics when we’re thinking about an acquisition. One is public comps, which is other publicly traded companies in your sector. For the longest time, and even today, those public comps have been pulled from Asia. There are very few pure play current-gen or next-gen game companies that are public in the West. All that we have are the console guys. Thankfully, now that Zynga is bringing down the valuation curve… [Laughter] It’s funny, because they never get listed now for social and mobile companies trying to pin valuations on themselves. Where’s Zynga in all this? Gameloft doesn’t even get brought up much anymore, which is interesting.

For acquirers, there are a lot of these forces of inertia that happen. Some are scientific, some are unscientific. Once an idea gains momentum, it’s hard to get these companies that are in the process of being acquired away from that line of thinking. Ultimately, for yourself and your investors, you want to sell at the highest possible bid. There are some folks out there that, first and foremost, want to get a good culture fit for themselves and their employees. They know that they’ll thrive in the long run. But others have a more mercenary outlook. I don’t blame either side. There’s merit to both. It’s a long-winded way of saying that, in general, valuations are leveling off from where they were in the last 12-18 months.

Gottschalk: We do pay attention to public comps, so the switch in public comps has affected our thinking on valuations. Obviously, if a company is growing fast, you can give it a premium to public multiples, but if you stretch your neck out too far as an investor, ahead of the public multiples, there’s more risk. It’s a factor in the equation. And it’s not just games, by the way. The consumer valuations across the board had gotten a little frothy. They’re starting to cool off and you’ll see them cool off more. That doesn’t mean consumer is a bad space. It’s just that some of the valuations got ahead of what was warranted. Once that breaks, you should be able to see the market resume. One twist on that, which I’ll add to this. Typically we will look at revenue comps. The challenge for Zynga, for example, is: What’s the price/earnings ratio when you’re not making earnings? You could argue that some good game companies would trade for a lot more on a price/earnings basis than on a revenue-multiple basis. It goes back to my argument about how it’s nice to make money. You at least have two ways to evaluate.

Petrovic: I don’t see us seeing Ngmoco- or OpenFeint-type deals happening again. Even from those companies that continue to be active here. I mean, both of those acquisitions were for all intents and purposes written down, if not totally off. OpenFeint is closing. The Ngmoco platform that was bought has morphed into something completely different today. They’re hiding that a little bit, but in any case, I don’t think we’re going to see those kinds of things again.

Gottschalk: I think that was a unique time and a unique environment. We definitely won’t be seeing that become as much of a strategy as it was. You had Japanese companies throwing around a ton of cash who had a huge currency advantage at the time. Those acquisitions were almost nothing to them.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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While game acquisitions are at an all-time high, investments in game startups have slowed dramatically, according to the third-quarter investment report by investment bank Digi-Capital. Blame it on the decline of new investments in social and casual games.

So far this year, investors have put money into 130 game companies at a value of $591 million, with an average value of $4.5 million. That’s pretty far below the $2 billion invested into 152 deals at an average value of $13 million for 2011. Of course, one of the positive trends is the emergence of Kickstarter, where fans can “crowdfund” a company with their own donations. This helps pick up the slack when it comes to investments in independent game developers and publishers.

Transaction volume is up by 14 percent for the year to date through the third quarter, but the transaction value is down by 60 percent. The biggest funding to date was Trion Worlds’ $85 million in January.

“Should this trend persist, games investment for 2012 might return to the still respectable levels of 2010 (the second highest year),” said Tim Merel (pictured above, far right), the managing director of Digi-Capital.

Digi-Capital says that investments in game middleware, mobile, and massively multiplayer online games dominated the transactions. The decrease in investments is the result of a decline in the social/casual game startup sector. In 2011, social/casual accounted for 57 percent of transaction value and 32 percent of transaction volume, but year-to-date through Q3 2012, it accounted for 8 percent of transaction value and only 11 percent of transaction volume.

Games middleware investments generated 39 percent of transaction value and 25 percent of transaction volume, with gamification (particularly the use of game mechanics to increase engagement in nongame applications in education and health), cross-platform mobile technology, game discovery platforms, and games peripherals/hardware emerging as investment trends.

“Given VC market fondness for platform investments, this trend seems highly consistent,” said Merel.

Digi-Capital said that mobile games investment accounted for 22 percent by transaction value and a significant 42 percent by transaction volume. Mobile (mobile-social in particular) games investment could continue through the fourth quarter.

The success of free to play continues to attract investors to MMOs, which account for 22 percent of transaction value and 9 percent of transaction volume. The mobile and tablet game market are still in the midst of raising money and lots of acquisitions. Social-casual is consolidating. MMOs are consolidating through acquisition but generating new investments in the free-to-play sector. Console and PC gamemakers are pivoting into mobile or online games. Games middleware companies are raising funds or being purchased. And game advertising is simply growing organically.

“It could be interesting to see if emerging games investment and merger-and-acquisition trends continue through Q4 2012 and [also] how they play out for what we anticipate could be a fascinating 2013,” said Merel.

The full report is available for purchase here.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Data from the Corum Group, a mergers and acquisitions services company, and Digi-Capital show that this year continues to be a hot one for the game industry, according to a presentation by Jim Perkins and Alina Soltys at the Casual Connect game conference in Seattle.

“Gambling and gaming has become a very important sector,” Perkins said. “Overall, M&A in gaming is a frenzy.”

Two big deals signal the shift that is happening this year toward mobile and cloud gaming. Zynga bought OMGPOP for at least $180 million as it sought to capture the benefits of the fast-growing mobile gaming title Draw Something. And Sony gave a big endorsement to cloud gaming with its $380 million acquisition of Gaikai.

Of  the two big game companies that recently began trading publicly, Zynga saw its stock price drop about 46 percent, while Nexon’s has risen 15 percent. In 2011, Zynga was among the top three  in all of tech in terms of the number of companies acquired — 13. Zynga’s M&A activity was behind a lot of the momentum we saw in 2011, and we’re seeing that trend continue in 2012.

Perkins and Soltys also pointed to some huge activity in Asia this year, where lots of game companies have gone public and are flush with cash. NetEase has the most cash with $2.2 billion in cash. Tencent has $1.25 billion. Shanda Interactive has $1.2 billion. Ren Ren has $1.05 billion. Others with a lot of cash include Sohu, Shanda Gaming, cYou, Perfect World, Giant Interactive, KongZhong, The9, and Taomee.

The overall number of mergers across all of technology has slowed somewhat from the first half of 2011. Aggregate valuations have dropped somewhat to about the same level as the third quarter of 2010. The big rise in gaming M&A deals is all the more impressive against the backdrop of that general slump.

Digi-Capital reported that game M&A deals totaled $3.5 billion in 2011, compared to less than $1.5 billion in 2010. Seven major game companies (Zynga, Gree, WeMade, Tencent, IGT, Rovio, and Nexon) acquired 21 companies in the first half of 2012. As you can see in the chart below, online games were the hottest category for game acquisitions, accounting for 71.5 percent of deals in 2011, compared to just 43.2 percent of deals in 2010.
So far this year, the picture has changed, as you can see from the charts below. Online games now account for just 56.3 percent of deals. The big growth in M&A has been for mobile games, which now account for 29.2 percent of deals in the first half of 2012, compared to just 7.5 percent of deals in all of 2011. Payment-related deals have fallen from 15.5 percent in 2011 to just 5.2 percent in the first half of 2011. The PC and console core game market accounted for only 3.1 percent of deals in the first half of 2012, compared to 4.5 percent for all of 2011.  

Perkins predicts that mobile games would account for the bulk of game-related M&A deals in 2013. Mobile is expected to account for 42 percent of all deals in gaming in 2013, while online will account for 39 percent. Soltys noted that smartphone penetration of the U.S. population is now at 50 percent. Ten percent of U.S. households now have three or more iPads. iPad and overall mobile data usage is up dramatically.

About 41 percent of game deals so far in 2012 have taken place in the U.S., compared to 11 percent in South Korea and 8 percent in Japan.

In terms of investments in game companies, mobile accounted for 34.4 percent in the first half of 2012, compared to 5.1 percent in 2011. Online accounted for 44.8 percent of deals in 2012, compared to 69.8 percent in 2011. As you can see in the chart below, U.S. entities accounted for 48 percent of the fundings in game companies in the first half of 2012. That was followed by 7 percent for China and 6 percent for the U.K.

Perkins said that game mergers and acquisitions are accelerating, though game IPOs are mixed. The core gaming industry is narrowing its focus to blockbuster games like Diablo III. But the real sales growth of the industry is coming from games for smartphones and tablets. The social game industry’s profit growth has slowed, and new frontiers that could get investments include motion-sensing and voice recognition.

The active acquirers in the game world include Gree, Zynga, DeNA/Ngmoco, WeMade, and Neowiz. Overall, Perkins predicted the console market consolidation will continue, Asia game companies will acquire U.S. firms, mobile will be a big driver in 2013, and the possible legalization of online gambling in the U.S. is fueling a speculative boom in social casino games.

“I think social casino games will keep on growing,” Perkins said.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Just six months into the year, games M&A is already at 88 percent of the transaction value for all of 2011, which was the previous record year. In the first six months of the year, Digi-Capital has tracked 51 transactions worth $3 billion in transaction value. The average value of each transaction was $59 million. The firm tracked 113 transactions in 2011 worth $3.4 billion, with an average value of $30 million. That means we’re seeing fewer transactions, but the values are higher.

“More than ever, now looks like the time for strong independent and larger, more established games companies to consider their strategic options,” said Tim Merel, managing director at Digi-Capital and a speaker on the investments panel at our GamesBeat 2012 conference next week in San Francisco.

The categories with the most activity are massively multiplayer online (MMO) games, social and casual, mobile, and middleware.

In the first six months of 2012, there were 73 investments in game companies that generated $481 million in transaction value at an average of $7 million.

In 2011, there were 152 transactions worth $2 billion at an average investment of $13 million. The transaction volume is down by 4 percent, and the transaction value is down 51 percent. If this trend persists, then the game investment level for 2012 might return to the respectable level of 2010, the second-highest year on record.

Mobile, middleware, and MMO investments led the way, while the decline in transaction value was largely due to fewer social and casual deals. That makes sense in that Zynga dominates that category on Facebook and new startups have been steering into mobile instead. In 2011, social and casual constituted 57 percent of the transaction value and 32 percent of transaction volume, but they’ve constituted only 11 percent of the transaction value and 6 percent of the transaction volume so far this year. Merel predicts consolidation to continue in the social and casual space.

Mobile games investment accounted for 31 percent of the game investment transaction value and 49 percent of transaction volume. Mobile will likely continue to drive deals for the rest of the year. Games middleware (and gamification, or the use of game mechanics in non-game applications) were 33 percent of the transaction value and 18 percent of transaction volume. Gamified education and health are growing.

MMOs were 22 percent of the transaction value and 12 percent of transaction volume, largely because of the attraction of the free-to-play model, where users play for free and pay real money for virtual goods. Chinese, Japanese, and South Korean acquisition and investment continues to be a big part of mobile, mobile-social, and free-to-play MMO both domestically and internationally.

GamesBeat 2012 is VentureBeat’s fourth annual conference on disruption in the video game market. This year we’re calling on speakers from the hottest mobile, social, PC, and console companies to debate new ways to stay on pace with changing consumer tastes and platforms. Join 500+ execs, investors, analysts, entrepreneurs, and press as we explore the gaming industry’s latest trends and newest monetization opportunities. The event takes place July 10-11 in San Francisco, and you can get your tickets here.

[Image credits: economic collapse and Digi-Capital]

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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The consolidation of companies in the social game market has begun, according to first-quarter data gathered by game-focused investment bank Digi-Capital. In the first quarter of 2012, 30 merger and acquisition deals generated $1.7 billion in transaction value at an average of $57 million, the report said.

Tim Merel, managing director at Digi-Capital, calls it ConsolidationVille. While social game companies continue to grow revenues and profits, many of them may be looking to be acquired.

“ So 2012 could be shaping up as a bumper year for games M&A. Our comparison of the top 50 Facebook companies indicates that some social game companies continue to do well in terms of revenue, profitability or both,” Merel said. “However, our analysis also indicates that many social games companies might be struggling on one or both measures, which could be the catalyst driving consolidation in the sector.”

Zynga’s $180 million purchase of OMGPOP, the maker of hit mobile game Draw Something, will likely change the investment dynamics in social games. Well-funded competitors will likely try to manufacture a hit in hopes of being acquired at a high value. That could work, but it has its risks. Other players are likely to take a more measured approach of building a strong portfolio of games. Merel said that King.com, Wooga and Peak Interactive show the latter characteristics.

Social gambling (driven by hopes of changes to U.S. laws on online gambling) has emerged as a driving force for social games mergers and acquisitions. IGT paid $500 million for Double Down Interactive, a fast-growing Facebook casino game maker with just 70 employees. Caesars-Harrah’s $90 million purchase of Playtika was another big acquisition in this category.

Last year was a record for M&A in games, with 113 transactions generating $3.4 billion in transaction value, with an average deal value of $30 million. In the first quarter, the average size of the deal is up 90 percent from the average in 2011.

Investments in games in 2011 added up to $2 billion in transaction value across 152 investments at an average investment amount of $13 million. In the first quarter, 38 transactions generated $248 million in transaction value, at an average value of $7 million. That confirms average round values have fallen, but my own interpretation is that it may confirm anecdotal evidence that valuations have fallen for game startups. In the first quarter of 2012, most of the deals were related to mobile and massively multiplayer online games.

In 2011, social and casual games were 57 percent of transaction value and 32 percent of transaction volume. But in the first quarter, it accounted for 3 percent of transaction value and 16 percent of transaction volume.

“So our view that Social Games 1.0 is in consolidation mode could continue to be an ongoing trend through 2012, as the VC market appears to have slowed down its frenetic pace of social games investment from 2011,” Merel said.

Mobile games were 30 percent of transaction value and 39 percent of transaction volume. Mobile could continue to be the driving force for investments in 2012. The success of the free-to-play model, where users play for free and pay real money for virtual goods, seems to be attracting more investors to MMOs, which are 43 percent of the transaction value and 21 percent of transaction volume. The strongest Chinese and South Korean companies are actively looking to acquire and invest in mobile, social-mobile, and free-to-play MMOs. The action is in both the U.S. and abroad.

Tim Merel, managing director of Digi-Capital in London, said that the interesting trends emerging this year show that acquisitions of massively multiplayer online game companies are accelerating. Like it or not, bubble or not, video games appear to be moving faster into a golden age of funding and hype. Merel is one of the speakers at our upcoming GamesBeat conference in San Francisco on July 12-13.

One of the big transactions this year was the $350 million private equity investment in Germany’s Bigpoint, a maker of free-to-play online games with more than 190 million users. That deal valued Bigpoint, which makes titles such as Battlestar Galactica Online (pictured above), at more than $600 million.

Another major deal involved China’s Changyou, which bought a majority stake in Shenzhen 7Road Technology, another Chinese maker of online games, for more than $100 million. And China’s Perfect World bought Cryptic Studios from Atari for $49.8 million.

Merel said that social game investments are also increasing in volume and scale. He noted that Kabam has raised $115 million in two rounds since February. Germany’s Wooga, a Facebook game company, raised $24 million. CrowdStar raised $23 million and Funzio raised $20 million. On the acquisition side, Gree bought OpenFeint for $104 million. PapayaMobile raised $18 million and TinyCo raised $18 million. Rovio, the maker of Angry Birds, raised $42 million.

The leading acquirers are the Chinese, Japanese and South Korean companies. Merel said that his current deal flow leads him to expect these trends to continue through the second half of 2011.

“We remain very bullish on online and mobile games growth and investment,” he said. “Now is a fantastic time. We are seeing significant appetite from Chinese, Japanese and South Korean games companies to acquire and invest in strong Western online and mobile games companies, but as our Chinese operating partner often reminds us building the right relationships remains critical.”

Merel said he believes there will be a “groundswell of games IPO activity” poised to come to the market in the next 12 to 18 months. He said he is bearish on the long-term outlook for the console game market, despite recent and anticipated hardware launches.

We’ll be exploring the most disruptive game technologies and business models at our third annual GamesBeat 2011 conference, on July 12-13 at the Palace Hotel in San Francisco. It will focus on the disruptive trends in the mobile games market. GamesBeat is co-located with our MobileBeat 2011 conference this year. To register, click on this link. Sponsors can message us at sponsors@venturebeat.com. To enter the Who’s Got Game? contest for the best game startup, click here.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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The number of fundings and acquisition deals combined was 210 during last year, up 36 percent from a year earlier, thanks to the disruption in the game business caused by the growth of online and social networking games. Our own count found that game fundings hit $1.05 billion raised across 91 deals in 2010, up 58 percent from $663.1 million across 115 deals a year earlier.

There were 123 fundings and 87 acquisitions during the year, IHS Screen Digest said. There were 20 to 24 acquisitions every quarter, double the rate of the year earlier.

The numbers cover funding and acquisitions activity in all areas of games except mobile. Oddly enough, that’s the most active area of the game business today, and Screen Digest says it tracks that market separately.

“Two key trends fueled the robust pace of funding and acquisitions in gaming during 2010,” said Steve Bailey, games analyst at IHS. “First, it was driven by burgeoning activity in the fast-evolving sphere of online gaming, with particular emphasis on social network gaming. Second, movement in funding and acquisitions also has ramped up between Western markets and entities in Asia, centered likewise on the growth to be found in various aspects of online gaming.”

Companies in all regions are starting to go global, raising the likelihood of international deals. The total declared value of funding deals in social network games alone rose 300 percent in 2010.

The biggest funding event was when Chinese online gaming giant Tencent invested $300 million in Russia’s Digital Sky Technologies, which itself has invested in social game companies such as Zynga. Zynga raised $147 million from Japanese investor Softbank. But we noted the biggest funding of the year was Providence Equity Partners investing $150 million in ZeniMax, which acquired id Software, whose upcoming game Rage is pictured at top.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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