Game players score big exits for Massive, XFire: Sale of XFire improves my personal track record, says Stewart Alsop

VCs are notching wins with gaming startups following the announced sales last week of online game platform XFire to Viacom (NYSE: VIA) and Microsoft’s (Nasdaq: MSFT) purchase of in-game advertiser Massive.

XFire, which wraps ads around its communications platform and enables marketers to target their ads to the predominantly young male video game players, raised $12.5 million over four rounds from Draper Fisher Jurvetson, New Enterprise Associates and Granite Global Ventures. Viacom purchased the VC-backed company for $102 million, and will use XFire’s online gaming technology to enhance its MTV Networks.

Massive allows advertisers to tap directly into the game play, posting ads within the video games. It raised nearly $18 million in three rounds from DFJ Gotham, Tobat Capital, Newlight Capital, RRE Ventures and NeoCarta Ventures. The purchase price was undisclosed, though an investor in XFire pegged the acquisition at about $150 million. (The Wall Street Journal reported Microsoft paid between $250 million and $400 million.)

No matter how they’re sliced, the deals are good news for VCs, who jumped into gaming in recent years, after largely ignoring the space. Among those betting on the space are Kleiner Perkins Caufield & Byers and Sequoia Capital (backers of Digital Chocolate); BA Venture Partners, Globespan Capital Partners and Sienna Ventures (along with NEA, backers of Sorrent, which was re-branded as Glu Mobile); and Bessemer Venture Partners and General Catalyst Partners (investors in Mforma Group Inc., now called Hands-On Mobile).

Heidi Roizen, a managing director of Mobius Venture Capital, an investor in multiplayer game developer Perpetual Entertainment, says the XFire and Massive acquisitions are evidence of an unsupportive public exit market. “Those are companies that would have been on the IPO track a couple of years ago,” she says.

She would not say what the exit plans are for Perpetual, but the company has raised only $7 million over three rounds from Mobius and other investors.

Meanwhile, some investors worry the two recent gaming exits will drive up valuations and make the gaming space less attractive to VCs in future deals.

“I just want to get the amateurs out of the way,” says Hany Nada, a managing director of Granite Global Ventures. “Then maybe we can get some good valuations and do some new investments.”

Nada says the firm is set to announce soon a couple more gaming deals, at least one of which is located in China.

Warren Packard, a managing director of DFJ, invests in a variety of technologies, and only became involved in seeding XFire as a bet on founder and CEO Mike Cassidy. Nevertheless, Packard says he is apt to invest in the gaming market again, especially after seeing all the frothiness that XFire stirred up from potential buyers. Media, gaming and Internet portal companies tendered offers for the startup, thanks to its ability to target ads at young men.

“This is an ideal demographic that a lot of people are trying to get at,” Packard says.

Still, the XFire deal is an important proof point for board member Stewart Alsop, the former NEA investor who is trying to raise an emerging fund with Gilman Louie, former head of In-Q-Tel.

Alsop had few hits during his 10 or so years at NEA. His most notable exit was Connectify, a business software company that raised $1.7 million from NEA and $2.3 million from Crosspoint Venture Partners in 1998. That company was then sold to Kana Communications in 1999 for more than $260 million.

With XFire, Aslop led NEA’s $4 million investment in the company’s third round in 1998. And Alsop will likely tout the XFire exit during his fund-raising for Alsop Louie Partners, which is in the midst of marketing its first fund of an undisclosed amount. The XFire exit will also allow Alsop to save some face before NEA’s next annual meeting later this month.

“It definitely improves my personal track record at NEA,” he says.