redfivestudioslogo.bmpRed 5 Studios, a new start-up formed by the team that built popular online game World of Warcraft (WoW), has raised $18.5 million in venture capital to create online games that integrate more social networking aspects from the outset.

The funding comes from Benchmark and Sierra Ventures. Red 5 Studios is based in Aliso Viejo (southern California), not far from the team’s former employer, World of Warcraft’s parent Blizzard. The new company is led by Mark Kern, team leader on developing WoW, and two other Wow creators. The investment is significant because it comes at a time when gaming has become popular and investors hope to leverage the power provided by social networking on the Web. Last week, we reported that Shawn Fanning is forming Rupture, to form Web communities around games.

The investment is the latest move by Benchmark partner Bill Gurley to invest in interactive entertainment (he is an investor in Jamdat, acquired for $650 million last year, and Second Life, which has become hyped lately). Benchmark Europe is also an investor in Sulake, maker of the popular interactive game Habbo Hotel. Gurley told VentureBeat his interest in the sector began during his travels to China several years ago, when he visted gaming companies Shanda and TenCent, but was unable to invest. He scoured the sector back in the U.S. and became interestng interested in Blizzard’s team, seeing a drive and focus he hadn’t seen in other companies.

Red 5 wants to become the leading studio for popular MMO games (MMO stands for Massivey Multiplayer Online games), where thousands of players play at one time.

Historically, Gurley says, the winners in the gaming space have been publishers, rather than independent studios. Gurley says he thinks Red 5 will change that. Red 5 Studios’ first title is under development; it is financed and will be distributed globally by Webzen, which has given a large sum of money — totaling more than Benchmark’s investment — but it is not an equity investment.

MMOs have so far been a niche sub-sector of the games industry, accounting for less than ten percent of the industry’s developers. But WoW has grabbed the industry’s imagination, Kern said. The Red 5 team will focused on the PC, not the console.

Benchmark’s cash will help pay for an extensive back-end infrastructure, including server, database and networking needs. In fact, $18.5 million is not much, Kern says. Movie budgets are getting to the $60 to $100 million range, he noted. “Games aren’t there yet, but they’re expensive to create.”

The team has been together since January, and has been self-funded. Kern said staying at WoW was not an option. He and his team hankered to create something new — namely blend games with Web 2.0 social networking.

So how does he plan to make money, if the game is opened up to the wider Web community, and not controlled like WoW? Kern says continues to think through this question, and has ideas on paper, but asserts that the development process will take years. “It’s really early,” he said.

Moreover, while Napster’s Fanning is creating a company, Rupture, to create social networks around existing games, Kern believes Fanning will get only so far without tight integration with games and help from developers. “They’re too closely guarded, and worried about their value leaking out,” Kern said of publishers.

A total of nine people have joined Red 5 from Blizzard. Gurley calls the new company “the Pixar of online games.”

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