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Feb 20, 2007



I wonder if it's more a content in general issue than a MMO specific problem? In the last three years doing Metroblogging I've had similar conversations with people like you describe above swap out the "MMO" with "content." There seem to be a lot of VCs out there who don't see the value in anything but specific technology, and once you get into what you are doing with that technology, which is often making content, there is a much smaller pool that actually get it. I consider MMOs content in that, the people I know who play them, are going there to take in the content in much the same way they do with blogs or other online "social" forms of media, and not at all like the way they'd play a game on an Xbox.


Cutting off the end of the acronym doesn't change the technology. What is an MMO? Are Facebook and Myspace MMOs? What about Youtube? No, the acronym MMO describes a massive, multi*player* online... something. Something that is played, like a game. It sounds like the investor you talked to dealt with Internet technology, not games, and was probably a bad fit for getting funding for a game.

There's a lot of talk lately about MMOs growing out of the game phase and in to social/content platforms, but to a lot of people this is seen as putting a pig in a dress. If you are truly working on something that is not a game and is built from the ground up to be a social/content platform, I would not refer to it as a game or something that is "played" when pitching it to investors.


I think that is the misconstruction right there, people assume if it's game then it can only be "played" when in fact, with MMO's there is much more going on than simply playing. I know several companies which regularly have corporate meetings inside WoW because the platform works better for their purposes than something like Skype. Additionally, managing a guild of several hundred people and coordinating raids requires more than most "games." Additionally, I know of more than a few companies that recruit execs out of WoW because of the group management involved. Clearly there is much more than "playing" going on in MMOs, the issue is some people haven't figured that out yet. ;)


It's a different kind of playing, sure, but it's still playing. How much time do you spend in warcraft?

I know several companies which regularly have corporate meetings inside WoW because the platform works better for their purposes than something like Skype.

What are their purposes, shooting fireballs? Honestly, is that even true? I assume you at least mean wow+ventrilo or something.

Since when is wikipedia planning on commoditizing their services? Inasmuch as wikipedia is licensed under the GFDL it is already pretty much commodity.

To your questions, 1) I have no evidence they don't "get it".


"1.) Why don't western venture capitalists and investment bankers get the MMO space?"

"get" or "get into" (or both)? Subtle distinction, but perhaps worth clarifying since there are investors who don't "get" something but will "get into" it nonetheless.


I think that typical MMOs are tough from a funding profile perspective for a normal VC fund. They cost a lot of money up front, grow for a bit, then taper off in revenue. You COULD keep coming up with expansions and updates, but at some point you have to rebuild the whole thing. A typical valuation analysis on a consumer Internet company assumes that, to some extent, the revenues keep increasing for a long long time. The silly valuations at the IPO come from the notion of a sustainable and growing business.

MMOs last longer but probably have more of the risk and cashflow profile of a movie where the investment is up front and after a certain number of years, it stops generating revenue. There ARE movie funds and they target investors with a different risk profile and timing.

Maybe it makes sense to think about a fund dedicated to games in general instead of trying to turn on typical VCs.

Having said that, I do think that MMOs are changing and they are turning into things that look a lot like consumer Internet companies. However, it might make more sense to invest in a platform or a company that makes games, if you're trying to invest in something that walks and talks like an Internet company.


Obviously, this topic keenly interests me, as Heatwave is considering taking on some external funding in the near future.

Part of the problem is that MMO Companies aren't great at having a strong business plan that VC's can understand. I think this is widely true of the game industry in general. It's also a hit driven business and unlikely to support as many companies as the forecasted market numbers may indicate at first blush.

To complicate matters, it's really really difficult to find developers that actually have all of the right components put together for a likely successful liquidation event. I can't fathom the number of online games that I evaluated last year that were non-starters within 15 minutes. Wrong idea, wrong staff, wrong business plan, wrong technology...

MMOGs are hard. Perhaps the hardest thing to do in this business. I imagine it's a scary place for traditional VC's and banks to find success. I can only think of one major exit of an MMO company, and that's EA's purchase of Mythic. I'm sure there are others, and yes the industry is young.

In all honesty, I've assumed from the beginning that we'd get our funding from non-traditional sources. Mostly because of the kinds of stories many game developers tell of the difficulties associated with traditional VC's. Control issues and external pressures don't always mesh well with a highly creative, iterative process. So it's possible the problem goes both ways. MMO companies may not want VC funding in the first place.

Well, anyway, there's my perspective. I too bemoan the lack of funding in the game industry, but I also believe that it takes a special kind of backer to understand what it takes to find success in the MMO business. If you know any of those folks, feel free to send 'em my way ;).


VC are investing in MMO's and a few announcements will be made in the near future. MMO's are looking more and more like social networking sites that are very interactive.


>1.) Why don't western venture capitalists and investment bankers get the MMO space?

It threatens their power base in Internet 1.0 and old media. Businesses won't need venture capitalists or bank loans as much when they can harvest masses of niches of micropayments.

>2.) What can/ is the MMO industry doing to change this?

Asians, Eurasians, Latin Americans, they will get it and this will be their moment. They'll have the populations and the governments willing to sustain it, and it won't only be about games, but about business and education.


I'm certainly pretty clueless in this area, but from what little I know I think the business plans of MMOs (especially the less game-oriented) will always pose a challenge to potential investors, even those from the film industry. The reason is because of the way MMOs are built on a fundamentally risky commitment to the product's incompleteness. Depending so utterly on the promise of content you don't control is still very unfamiliar territory.

Of course, maybe for the gamey MMOs they'll start to sound straight out of Hollywood ("It's WoW! Plus Schindler's List! Plus Sex and the City! "). ;)


Also being a venture consultant who's covered this space quite a bit I'd say that US funds, and some in places like Sweden, "get" MMOGs. The problem is more related to capital costs differences, as I understand it. It is very tough to fit a MMOG biz plan model to a US VC fund cycle profile. As MMOG technology becomes more standard and/or core platforms become open sourced, this may change.

However, I doubt VCs are appropriate for most MMOG, or even many computer games. Let me clarify that. Most early-stage VCs are not appropriate. Late stage, especially debt/equity mix funds can and already do participate in funding game projects. Early stage funds like to try to define new market opportunities, not enter established, hyper competitive markets that are seeing declining economic profits.

As for IBs, what the hell do you expect? IB analysts are the last of the financial set you should expect to "get it". They'll finally "get it" when they can skim the M&A cycle long after the early stage VCs have left the building. In my little corner of the world there are more hedge fund types in Larkspur who get MMOGs than there are all the IBs on the West Coast.


MMOs are games. Non-players might view them as board games with bells and whistles.

If you told some VC company that you were going to design and build the next Monopoly, how many would be excited?

So, change the paradigm. Start calling WoW a Worldwide Social Networking Platform or WWSNP for short. Now Facebook, YouTube, MySpace, WoW, SL, EQ2, etc are in the same domain. Investors might feel more comfortable with MMOs cast in that light.


Posts about VCs are always bound to get a lot of replies. :)

Who knows that person meant by "Internet" but my guess is that he was looking at traditional investments, which by and large mean not investing in content/media.

90% of tech VCs do not invest in content plays (that is, businesses where the majority of capital goes into creating content for consumption), gaming or otherwise. Of the 10% that do, they have to sift through the 90% of content plays that do not warrant VC investment (risk/reward, 10x returns, all that).

That said, there certainly *are* VCs investing in MMOs (look at Benchmark, Redpoint, or General Catalyst) in the traditional sense.

And there are even more that are interested in some of the new models that Joi Ito mentioned above, such as the company we are founding right now.


My guess:

Reason 1: Very few VCs seem to want to invent in individual games, period. Reading the annals of someone like Greg Costikyan about game financials might offer some hints as to why. (See: hit mentality, etc)

Reason 2: For every MMO that goes gold, dozens die in the production stages or sooner.


I „get“ MMOs perfectly well, but I’d think very carefully about investing in one, even if their business plan looked perfect. The problem is that “everybody and their little sister IS making an MMO”. I see a point in the near future of too many games chasing too few players, a bursting bubble and the vast majority of MMOs following in the footsteps of Shadowbane and AC2 instead of WoW.


I'm sure everyone knows already, but just as a boring point of reference: A typical 2nd tier VC who'd be likely to fund a Series A round for something in this general area would be looking for around a $38m liquidity after 5 years for $5m invested in year 0. As you add in even small Series B & C rounds, that number blows past $40m just so the lead can keep their stake from diluting their returns. The firm valuation is over $85m in this case, leaving about 40% for founders and 15% for options.

I'm not so sure I'd bet on an MMO pulling that off unless the biz plan was to poach the Blizzard team.

I could speculate about why various Asian capital is more compatible, but I'd be waving my arms about macroeconomic stuff like the fact they have barrels of foreign currency desperate to find some love.

Asians, Eurasians, Latin Americans? Leave the Asian VCs neutral, and I'll take the short end of that bet.


1) Because it's fun and wide open , just the way the internet and cell phones were in 1990. If you talked to people then, they would tell you that email, BBS's and USENET were toys for geeks. They weren't "serious," like a hardware manufacturer or a biotech firm.

Fast forward a few years and the people who got good at playing with "toys for geeks" were the ones making millions at best, or at the very least, pulling in fat six figure salaries.

2) Deliver platforms that are optimized for commerce and investment. Recognize that the economics and political theory also apply in MMO's, even though...or perhaps, particularly because, they are games.


I've run across Susan Wu's blog a few times, and she's had smart things to say about the MMOG space, though she has more recently been focused on Second Life. She's a partner at Charles River Ventures, and she maintains a blog about stuff she's interested in.


Probably because they watched other VCs sink endless funds into Suckat Life with no prospect of a return on the money.


I don't believe that there was any lack of respect intended by the analyst. IB analysts focus on specific markets, and it's rare that IBs place MMOGs under the "Consumer Internet" market rather than the "Videogames" market.

Ultimately, the IBs believe that the "game" aspect is more salient than the "online" aspect, and I have to agree. Who is going to be better positioned to understand WoW--someone who covers eBay, or someone who covers Electronic Arts?

Also, I know plenty of VCs who follow MMOs. One poster mentioned Susan Wu of CRV, who is a gaming industry veteran. Raph Koster recently raised VC financing for Areae as well. It's just that (as other posters have pointed out), VCs will only fund the game-changing projects, not YAWNs (Yet Another WoW Knockoff).


I've talked with many VCs and investment bankers about MMOG investment. There are a lot of people looking at this area, though seemingly only a few actually making investments. Here are some of the issues I encounter regularly:

  • Education: Many potential investors are just becoming familiar with this market. They're trying to cut through the hype and rosy predictions to see if there's really an opportunity here -- or, having recognized that, to adjust their filtering processes to find the optimal opportunities given their profile.

  • Market size: This is a familiar issue, and one I've encountered every year in the past decade: every year folks seem to think that now, finally, the MMOG market has topped out (the most ironic conversation I had in this regard was with a VC who said they didn't think there were more than 500,000 people in the world who would play MMOGs -- and this just a couple of days before WoW released). There is no actual indication of this and every indication against it (even applying appropriate grains of salt, Bruce Woodcock's overall market data is compelling). This is not, as some have suggested, a bubble that will burst; it bears no resemblance to that (though I'm sure there will be poorly conceived games and more failures in the years to come). But, since the market is new and unfamiliar -- and since it involves the word "game" -- the conservative side is to view it as a niche that's tapped out, not that it's a large market in the early stages of true social currency (in that regard it looks to me like the Internet, circa 1990 -- before most people knew it existed).

  • "Hit-driven" market: Following closely on the heels of the market size misconceptions is the carry-over from single-player/retail-box games that MMOGs are hit-driven, and thus that VCs should not be "picking content." MMOGs are not hit-driven, and investments in them are much more an investment in a team than specific content (though the teams have a broader set of requirements than in many other businesses). Less than 10% of all single-player games are signficantly profitable; that's a hit-driven market. OTOH of the first 38 MMOGs released with a major presence in the Americas and Europe (excluding some Asian games with more problematic numbers), up to and and including World of Warcraft, over 60% have been significantly profitable. If you limit this to "professional" efforts, this number jumps to about 75%. And, with due respect to my colleagues and friends at EA, if you drop out their four dismal failures (Majestic, Motor City Online, Earth and Beyond, and The Sims Online), the proportion of MMOGs that have been significantly profitable jumps to over 80%. This is not a hit-driven market.

    The provisos to that data are that this looks at first-generation games, not, for example, new fantasy games trying to eke out a living in the shadow of WoW; and it does not include all the games that never made it to deployment. But if your MMO makes it to deployment and isn't an "also-ran," your opportunity to be highly profitable for many years is significant to say the least.

  • Other issues: There are many other issues that I hear about or that make for mismatches between VCs and MMOGs: business sophistication, as Anthony noted; investment level and timing; the unfortunate but tenacious perception that it costs somewher between $30M and $100M to make one of these games; changing revenue models; and the lack of understanding of their longevity and potential as a service business (a point many in this industry don't understand either).

With production budgets in the $5M-30M range, an exponentially growing market, and a multi-year steady revenue lifespan, MMOGs should be relatively easily fundable. OTOH, there is (currently) a low IPO potential, though acquisition and roll-up exit prospects are excellent. And there are a ton of people trying to make these games, often on an ill-advised foundation of "it's cool" or "I love to play them."

Funding these games -- especially early on, when the funding is most critical -- is difficult. This isn't really common territory for most VCs, and often falls into that nether region between high-end angel, early round VC, and viable publisher funding.


Here are a few other issues and points not raised:

1. Fund allocation process. Unless the fund was created to be a VW-focused fund there are just better investment opportunities (better understood, better risk/reward profile, etc.) out there.

2. Where is the exit in five years? Trade Sale, IPO, something else? Unlike movie or music, software doesn't have a profitable long-tail market. They become abandonware. A movie that failed in the US market, on the other hand, still have extensive secondary channels like TV syndication, DVDs, oversea markets, etc. to profit from. Where's the extensions for VWs and MMOs?

Yeah, UO, Furcadia, and others are still going after 10+ years or so...but the steady state subscription levels are still too low at this moment. If WoW sustain 5m+ subscribers for 3+ years, then the profile may change.

3. What's happening right now that is an encouraging sign is people from corporate media that is looking to extend into VWs as part of their "Blue Ocean" strategy. Their collective investments and ad dollar will boost consumer awareness and interest in this new media space.



What I find interesting is the entire disconnect between funding channels and companies looking for funding. This is an issue that keeps rearing its head throughout the video gaming industry, not just in the MMO arena. Heck, they are even doing a round table at GDC 2007 on this very topic.

One thing that our company, Verse Studios has been dealing with is hunting down investors who are a fit with our company. We are finding time and time again that VC firms seem to be more than a little gun shy of gaming industry investment, and truth be told we are more than a little wary of VCs. For the most part we have been looking at alternative funding avenues.

As to why I think this disconnect exists, I would venture a guess that it has a lot to do with poorly written business plans and incomplete management teams. There is a lot more to running a company than simply having a high degree of technical skill, and management abilities are one area that investors are always seeking.

It also does not help that general perception of the video gaming industry is that it is in a 'block buster' cycle. This perception is not only a VC perception, but one I am seeing over and over again in developers. A lot of this may be due to how the video game media writes, reviews, and examines the industry. A lot of critical commentary is missing from the general gaming press, and I doubt that many VC's hang out reading the Escapist.


I hope that a result of all the buzz on "Second Life" will be that MMO programmers will recover the "Wizzard mode" of the old MUDs: the level allowing you to build your own space in the dungeon.


I'm with Nabeel -- the VCs are out there, and in increasing numbers. I had multiple offers to choose from, and while my background is atypical, there were certainly plenty of funds that were exploring the space. There's VC dinners scheduled to coincide with GDC every year. More and more folks are paying attention -- even for what seem like somewhat more traditional content plays, like Red5 and Trion (don't get me wrong, these are less traditional than cloning WoW, but still more traditional than "Internet Company."


I could be totally off base, but perhaps it's simply understanding the concept. The explanation needs to change.

Consider an MMO not a game, but entertainment. It's no different than Netflix offering streaming video's for a subscription rate than an MMO offering its content online for a subscription rate. But MMO's do one better. They have a built in social pull. Now you've got the activity, or greater activity than myspace with a subscription so you're making profit. As this grows, you gain a loyal fanbase who takes part in your game. Better yet, let them be invested in it. Make it entertainment directly, but expand it to involvement. Add elements that are designed to expand appropriately and make extra profits.

Apart from the explanation, maybe the greatest problem as has been described is the exit potential. With something like an MMO, its structure isn't such that a VC can double their profits or be in and out in 3-5 years. IMO, that's more or less because the asset at stake here isn't the technology, it's the community. The YouTube community sold, Facebook has tried to be purchased, Myspace sold,etc - all communities. There is a business model that potentially exists, though unproven, which could make for a high exit. It just requires a minor evolution of what an MMO entails. The focus at the moment may just be wrong. Then again, that is all just my opinion. Either way, I think the best bet is to engage and remember that an MMO isn't about the game but its community. The entertainment is just a bridge.


Just a few things I want to point out:

First, the raison d’être of VC firms is make truck load of money (or “generate substantial return to limited partners” in industry jargon). It just so happens that a lot of VC funds in Silicon Valley historically choose to achieve this through investing in “technology” due a long list of factors (scalability, margin, capital requirement, etc.) But, this does not have to be the case. For example, Bessemer was among the VCs invested in Sports Authority and Jamba Juice has raised money from Sequoia.

Second, among the many factors that dictate the areas which VC firms spend time on is market size. Given the nature of the VC business, most firms will only invest in companies where they see a significant size, which is inevitable tied to the market size. Data from PwC puts the total spending in the interactive entertainment segment in the US in 2004 at $6 billion. This is much smaller then the $234 billion spending in enterprise software during the same year (Forrester data). So, it is natural to have much fewer VC investing in the video game sector in general.

Another point that you have to pay attention to is funding requirement and milestone. In general, there are VC firms that can investment $30 - 50 million a piece, but they also need to see clear and incremental milestones. The fact that MMOG may take at least $30 million to get its first version out of the door does not work well here. It would be useful if you can develop a more incremental plan.

Having said that, there are quite a few VC-backed game/MMOG companies out there. Both Electronic Arts and 3DO (yes, if you still remember them!) was funded by Kleiner Perkins. In the mobile game space, Jamdat, Glu, Digital Chocolate, Hands-On and i-Play have all raised VC money. In the MMOG space, I would also add Insight (investor in Runscape/Jagex) to Nabeel’s list.


If Raph's right, there isn't a real shortage. The again, he's more apt to get a call than the average developer, so maybe there is a shortage.

I was wondering, though: is there some silver-lining to a shortage of VC capital? It sucks to be underfunded, but take the long view: Isn't it nearly always the case that the really nifty, cutting edge innovations are always from the struggling team of poor programmers eating ramen noodles in their garage shop? Being hungry, figuratively speaking, usually leads to more risk and less mainsteam thinking, which is where the new paradigms come from.


There are emergence of alternative funding channels. It may take a few more years, but some of the channels are:

1. More angel investors (particularly in the tech space)
2. Peer-to-peer model of loan and capital distribution
3. Corporate-led venture-like funding and funding consortiums.


I'm with Nabeel -- the VCs are out there, and in increasing numbers. I had multiple offers to choose from, and while my background is atypical, there were certainly plenty of funds that were exploring the space.

That's not an atypical background. You're Raph Freakin' Koster. You're what they are exploring the space hoping to find.

1.) Why don't western venture capitalists and investment bankers get the MMO space?
I just assumed they did "get the MMO space" and that's why not so much interest in it.

Too much, "Hey! Gimme $30 mil. I have a hunch!"

2.) What can/ is the MMO industry doing to change this?

Erase all memory of how much Sims Online, Matrix Online, Earth & Beyond, etc. gambled on a big launch, massive initial growth, and steady decline.

Then erase all memory of how much other MMO's did also, even if their gamble paid off.

Figure out how to deliver an Eve Online type growth.

...that's my hunch...


You know what would be cool? A co-op.

Not to work for, though. Ugh.


Is it possible that any VC funding shortage in the MMO sphere is just characteric of the low percentage of VC in general? After all, a low percentage of VC applicants receive funding (around 0.2%-0.25%). So it would be nice to see a percentage to accurately aseess whether or not a shortage exists. Anyone have any percentages to throw out here?


Dimitri said: I was wondering, though: is there some silver-lining to a shortage of VC capital?

When I put out DragonSpires in 1994, there wasn't much of anything like it on the Internet. Plus I managed to get it written up in Wired magazine by talking to people on The Well, which was a big hangout for cyberjournalists back then. I got emails from 9 or 10 venture capitalists wanting to talk to me about the possibility of funding us.

After looking into it a while and starting the preparations to go down that path, I decided I just didn't want to do it. I ended up making Furcadia on $50,000 of my own money, supporting two people for a year. The silver lining? A) Nobody else telling me what to do, suggesting what to do, or asking to be kept up to date on what I was doing. That's a very big deal if you're doing creative work, even more so if you're trying to do visionary, genre-creating work. B) We kept 100% of the company, and we get the money from its successes. Actually my partner and I are down to 90%, having given 5% each to the two other partners we brought in. Who are both game makers, not investor types.

Though don't get me wrong, I have a lot of respect for VCs who help guide companies in the right direction to be much more successful, hook them up with valuable contacts, or broker win-win deals with other companies they've also invested in. I might well go with a VC for my next game, now that I have a very satisfying and successful "pet project" (pun intended) that I know I can own and control for the rest of my life. I just wouldn't have wanted to do Furcadia in particular without a guaranteed controlling stake in perpetuity.


The response to this post has been truly phenomenal. The viewpoints expressed have been intriguing and elucidating. I thank you all for your thoughtful responses to my quandary.

A few points:
1.) I know that there are those in the funding community who “get” MMO. (Especially, the ones who emailed me after this posting. Stop flaming me!) This was posted in the spirit of furthering that understanding to a more productive point while simultaneously helping the MMO community better understand the funding process. Clearly, the responses show that the gap between these two groups (if such a gap ever actually existed outside of my own perspective) is rapidly diminishing.
2.) The idea of using World of Warcraft as an online collaborative work environment is truly inspired. LamdaMOO + PlaceWare = WoW? Pavel Curtis, is that you?

Thanks again,

Josh de L-H


If Raph's right, there isn't a real shortage. The again, he's more apt to get a call than the average developer, so maybe there is a shortage.

Areae, Linden Lab, Three Rings, Red 5, Hive 7, Trion, Forterra & Makena, Doppelganger, IMVU... and I am positive I am missing folks.

Funders are definitely there.


Hina Group? What a bunch of crooks and losers (IMHO).


1.) Why don't western venture capitalists and investment bankers get the MMO space?

Because there is no reliable way of measuring the success of an MMOG (ROI).

Why would you expect someone to cough up millions for a crap shoot on a game when the industry (a 26bn one at that) hasnt ever bothered to measure its consumers in a meaningful and ongoing way?

I wont even get into long tail, and disruption in the distrobution models....the supply chain is the most easily measured component (of every other major industry) and the availability of data is almost as bad as the demand side. Meaning nonexistant (Note for any PhD's students looking for a good thesis: Supply chain analysis for the game industry is a slam dunk).

Sure, Koster, Freeman, Zimmerman, Wright make good games, thats because THEY GET IT, and that "it" is engaging the players.

Review almost every one of the comments on this thread, the central tenant is that there is no data, no measurement.

Thats a dangerous thing (and a risky investment) in a changing enviornment.

2.) What can/ is the MMO industry doing to change this?

Find an avid long time gamer, who's a data miner,
with a solid start up, and great partners, thats building a long term benchmark data solution to help both the academic and business side of the industry, (as well as marketing, advertising and investing) and give him a call (especially since he's probably about to go out and look for funding as the end of closed beta nears), or you can just click on my name, get a redirect and email me ;)

We now return to our regularly scheduled TN Program....


I don't agree with the original premise: Having spent much of the past two years evaluating proposals for VCs and other investors, it has been my experience that plenty of VCs get the potential of the MMOs space, it is just too rich for the blood and takes too much time to get to an ROI for most of them.

That doesn't stop plenty of them from putting in a couple million on some truly, monumentally silly projects.


"Why don't western venture capitalists and investment bankers get the MMO space?"

It's hard to "get in the door" for many of them . . . MMOs take time to understand.

I can agree with Jessica's perspective (she's bright, we should listen, she comes highly recommended by those who have worked with her . . . /endasskiss) as well . . . it's EXPENSIVE to fund an MMO. Unless you find a group or individual willing to give you a LONG (often 6+ years) time to develop and become profitable (i.e. launch and clear operating expenses so you actually have money left over that is more than you must have for contingencies) in what is a truly HIGH risk operation, you're in for a rough time. (And even if you do, it's STILL rough . . .)

Most of them are bright enough to run the numbers. They know what a massive ROI is possible with even a moderate success (say 1-2% market share) but the fact is it's expensive and risky . . . considering you typically do not place the majority of your money in a high risk endeavour (bad investment practice, tends to mean you either become fabulously wealthy or exceedingly broke) you need to have a steady ROI from low/moderate risk investments which mitigate the large risk you're taking on an MMO.

Fear is healthy. It's what keeps us alive (and prevents us from losing our shirts) . . .

Look at the MMO offerings which succeed. Most of them needed to get to launch and then they were ok, money helps that sure . . . but the fact remains that even with money enough to make launch you can fail. Only those that get a clean(ish) launch and manage to find their place in the market turn a profit over the long run.

Asian VCs may see a different story because the Asian MARKET is different. The western market is dominated (far more than the eastern) by WoW. A lot of VCs will look at the 50+ million dollars WoW took and realize that even spending 20(ish) there are games barely turning 1% market share. The ROI is decent, but the risk is huge, and if any of you have ever done the math on what 20million will buy you, you know it's not a joke.

But let's raise a collective glass to those who have been kind enough to fund some of those silly projects Jessica spoke of. May the code gods bless their warm little VC hearts. He who does not risk has never lived. :)


I did see one comment above about Investment Bankers.

I'm just warning you that there are Investment Bankers out there in PvP games who will gladly hunt you down and kill you for suggesting that they don't get it.

You have been warned . . .




Were an IB a gamer, I have absolutely no doubt that (s)he'd be a fearsome PVPer. Not the type who'd just gank and run, but the sort who'd carefully choose their prey, analyze their advantages, and then corpse camp the hell out of them until not a drop of blood remained.

Consider my earlier statements withdrawn.



Most the VCs and investment banks I've been around in some capacity or another have some pretty set rules for an online game project:

1. 12-18 months to launch, tops;

2. $1-$3 million investment;

3. 'Lay off paper' when possible (i.e. sell some of that equity to a second or third round investor);

4. Exit in three years or less.

Under these conditions, most of them start out the process thinking/hoping they can get WoW, including a piece of WoW's success. When they start learning what it takes to make the average MMO with an American development team, they pretty quickly realize it isn't the market for them.

And truly, it probably isn't, in most cases. As Mathew noted, the risk-versus-reward factor can be extreme on both sides of that equation.


Randolfe_makes good points about where Investment bankers fit in the financial food chain. I agree with him that an Internet Analyst should not be (professionally) interested in MMOs. They are a very complex topic, and I am increasingly convinced that few people really understand them, even some of the people who have successfully built them don’t fully understand what they built. Nothing wrong with that, Christopher Columbus did not fully understand what he was doing either, but he still did amazing things.

I especially like Mike Sellers comments, I think they are all spot on. The Hit Driven Market point is going to go into my pitch presentation.

I have my own comment about HDM, every industry has their cherished illusions and staying away from hit driven markets is a favorite of the VC industry. All markets are hit driven, games, telecom gear, drugs, software are all driven by hits. No matter how good your business plan if some one else come up with a better version of the technology or service than you do they will have the hit and you won’t. Arguing this with a VC would be a total waste of time but that does not make it any less true. Better to write off the guy who says it and move on to someone with fewer illusions.

The numbers Andy Choi post also put things into perspective. On one hand investing into a rapidly growing $6 billion market is interesting, especially when you see success stories like Blizzard or the numbers that Mike put in his post. On the other hand its only a $6 billion market, there are limits to the number of firms that can specialize there.

My own experience backs up Jessica’s point about looking for the 1-3 year payoff. The project I am working on requires peer review medical studies to be really successful. Those studies take 18 months to run, and they take 6-9 months to grant fund. The VCs I have talked to don’t like that because it means that the investment takes “too long” to pay off.

A very interesting discussion, thanks to everyone who posted.


"Why don't western venture capitalists and investment bankers get the MMO space?"

In spite of the challenges of investing in the MMO space, some VCs (see previous posts) do get it. What you have to understand is that venture capital is about picking winners and managing risks - a tough proposition in any space! With MMOs it's not like investing in something that's bigger, faster, cheaper ...there's no Moore's Law for MMOs. Even if you mitigate some of the risks by backing a great team that has vision, that can attract, manage and retain great producers, level designers, programmers, etc, at the end of the day, it's about the game. How do you pick compelling content? Arguably, publishers know more about the space than anyone else (I said "arguably"), yet EA, NCSoft, etc, continue to publish the gaming equivalent of Oliver Stone's Alexander.

That said, Mike Sellers' previous post re: the "Hit-driven" market misconception is well taken and there's still great potential and some really cool things going on especially with the convergence of MMOs, VR, UGC and social networks (sorry for putting so many buzz words in one sentence - probably should have thrown in cleantech and Chindia for good measure!) :)


The core problem is that VC funding cycles are built around the idea that the investment is either returned tenfold in 5 years, or written off. For a standard MMO, 5 years may not even be long enough to *launch*, never mind pay off the investment. VC's look at WoW's ROI *after* launch and drool, then they find out how long it took to build (and how long it will take to make a credible competitor) and cringe.

Add in the "imponderables" like the fact that experienced teams with budgets on the right scale can come out with WoW-like games and tank (which has happened twice since WoW), and many of them just shake their heads and back away slowly.

Too much technology for entertainment funding models, too much entertainment for technology funding models. Nevertheless, some VC firms are getting interested.

VC focuses on "liduidity events", second and third round VC infusions, acquisitions, and IPO's where they have a chance to get their money out in one lump sum rather than dribs and drabs. MMO's haven't provided a lot of those, so they're shooting in the dark.

--Dave (been doing my homework)


Five years to build an MMO is a non-starter. With its increased expansion, the market has changed dramatically -- the "standard MMO" isn't a standard, it's a way of doing things -- design, gameplay, production, technology -- whose time is past. You can't build WoW (or EQ or UO) again and succeed. Nor can you build Runequest or Club Penguin again and succeed. We have to learn from what's been done and apply these lessons in ways that will attract the market now and five years from now, not from five years ago.

Sean identifies the potential investor's core problem above: how do you maximize the probability that a game you invest in will do well? How do you know it can attract and support multiple hundreds of thousands of players for several years (set "millions" to the side)? How can you reduce the risk as much as possible, with as many chances for correction as possible? Betting on the team is a key part of it; that and, IMO, betting on the process. Get those two right and the gameplay will take care of itself.

As developers, we're faced with a profoundly changed and expanded market (more people play WoW or Runescape alone today than played all MMOs when those projects started) and the necessity of adapting to it. Investors are faced with the same problem from a different angle. I absolutely believe that MMOs can sustain and benefit from VC funding (and yes, I'm biased), but I don't believe we can do that by just doing what's been done. As they say in the military, that's fighting the last war, not the next one.

Actum ne agas.

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