As kids, parents and gaming enthusiasts of all ages plunk down billions of dollars this holiday season for the latest video game software and hardware, VCs have also gotten in the mood to play.
A pair of Series A deals announced last week netted two gaming companies more than $23 million.
The growing industry of multi-player online role-playing games got a boost when Turbine Entertainment Software announced it secured an $18 million Series A round of venture funding.
Highland Capital Partners and Polaris Venture Partners became Turbine’s only two institutional investors with equal investments of about $7 million apiece. The round was a recap, as well. The Westwood, Mass.-based company had over 100 previous angel investors.
Meanwhile, Game Trust Inc., a developer of video game software that manages online tournaments, raised $5.5 million in a Series A round that will help the company license its software worldwide.
New York-based Game Trust raised its round, which was oversubscribed by $2.5 million, from Silicon Alley Venture Partners, CSK Ventures, Intel Capital and Topspin Partners. The financing also included Elon Musk, co-founder of Paypal and Zip2, and Timothy Draper, managing director of Draper Fisher Jurvetson. Tri-State PIN and NYNMA angels also participated.
“A couple of years ago online technology and gaming wasn’t so popular with investors,” says Turbine CEO Jeffrey Anderson. “But we spent time educating people and were able to get term sheets from a number of different groups.”
With the advent of high-speed computer graphics, the growth in online play, aggressive marketing campaigns, movie tie-ins and an array of action, sports and fantasy titles to choose from, the video game industry now pulls in more dollars than Hollywood.
Gaming hardware and software made $9.4 billion domestically in 2001, while U.S. movie box office sales totaled $8.5 billion, according to the market research firm NPD Group Inc.
In 2002, worldwide sales of video games reached a record $16 billion, compared to about $5 billion in the mid-1990s.
NPD and other analysts expect that sales will grow to $18.5 billion by the close of 2003.
Anderson says that he ultimately wanted Highland and Polaris as his lead investors due to their “impressive pedigree” in the sector.
Highland, for instance, was an investor in Gamesville, which raised $14.4 million before being acquired by Lycos in late 1999 for $207 million.
Highland Partner Bob Davis says that the firm is looking to do more online gaming deals in the future and is actively looking for other companies. He says he found Turbine while doing due diligence on another online gaming company that Highland ended up take a pass on.
Other venture investors have also been active in seeking out online gaming companies recently. Online gaming software developer Massive raised $2.1 million in venture backing from Newlight Associates and Tobat Capital earlier this fall.
“The online entertainment segment of the video gaming industry is exploding and Turbine is the best company positioned to meet that demand,” says Davis, who’s the former CEO of Terra Lycos. “Turbine is doing everything right with its business by transitioning from a developer into service publisher with its newest franchises.”
Turbine’s funding is obviously a boost to the company in general. But the good news for gamers is that it will assist the company in the ongoing development of Dungeons & Dragons Online, which will be published by Atari in 2005. The company also plans to release a game based on J.R.R. Tolkien’s Lord of the Rings novels next year.
Davis expects Turbine to be cash flow positive some time in 2004. The company currently has a staff of more than 120 and plans to add a “significant” though unspecified number of new employees, according to Anderson. He says that most of the new employees will be working on customer service.
Davis – who joined Turbine’s board along with Steve Arnold, co-founder and managing general partner of Polaris – notes the industry has particular traction in Asia, where some online games can garner more than 1 million subscribers. Turbine hopes to announce a major partnership agreement with an Asian company sometime next year.
Online Publishers Association and ComScore reported that consumer spending on online content in the United States totaled $1.3 billion in 2002, compared to about $670 million the year before, an increase of 95 percent.
Meanwhile, the research firm Nielsen-Netratings found that 5.9 million Europeans visited online gaming sites in January of this year, more than double the 2.8 million users who logged onto online gaming Web sites in January 2002.
“The enormity of the games business is a surprise to many,” Davis says. “You can build in a very predictable and sustainable revenue stream. The segment is growing enormously.”
Tony Gikas, an entertainment analyst with U.S. Bancorp Piper Jaffray, expects 2003 will be the peak year for unit sales of current generation video game hardware, which includes online functionality.
He’s forecasting that 22.3 million hardware units – gaming consoles such as the Sony PlayStation – will be sold in North America in 2003, a modest increase from the 21 million units in 2002.
Gikas anticipates a small decline in 2004 to sales of just over 20 million units, as the installed base of video game hardware becomes saturated. But because both PCs and consoles are Internet-enabled, Gikas and other analysts note that online gaming should continue to grow.
Likewise, Game Trust is betting that its financing, coupled with recent software licenses with MiniClip.com and StarMedia, will position the company for strong growth in 2004.
Game Trust’s software boasts that it adds player features, such as ranking, chat, buddy lists and game functionality to any game on any device in any language, allowing players to compete in online tournaments for cash and prizes, or just prestige.
CEO Adeo Ressi says the company plans to embark on an aggressive expansion “to help transform the video game industry by adding exciting new revenue streams to an already fast growing market.”
As part of Game Trust’s financing deal, Steve Brotman of Silicon Alley Venture Partners, Frank Giuliano of Topspin and Makoto Kaneshiro of CSK Ventures will join Game Trust co-founders Ressi and Lee Nolan on the board.
Matthew Sheahan contributed to this story.