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Yes, we’re in a bubble

By on March 28, 2011
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A couple of months ago, I wrote a piece in the Wall Street Journal arguing that valuations in the social games space were “frothy”, but we weren’t in a bubble yet.

I’ve changed my mind (and written another post in the WSJ about it).

It’s not just me. The recent announcement that Color, Inc, a company who make an app for sharing photos with everyone within 100 feet of you, as well as with your social graph, raised $41 million before they had a product in the AppStore, set tongues wagging (or is that eyebrows raising?)

Angry Birds logo

For me, it was the news that Rovio, makers of Angry Birds, had raised $42 million from Accel and Atomico. The company has 2% hit rate, a single franchise and didn’t need the money. It seems like an odd deal to me.

So I think we’re in the bubble. In the Journal, I give the following advice:

  • If you are an investor, look for companies whose success is predicated on building long-term relationships with paying customers, not hoping for a lucky break. Separately, look for companies who will benefit from rising customer acquisition costs, not suffer from them.
  • If you are an entrepreneur, get in there. Accept that customer acquisition costs are rising and focus on retaining your customers and offering them great value from your games. Focus on ensuring that your users can play your games for free, can easily spend £1 and can possibly spend £100.  If you are going to have to buy users (and you will) make sure that they are profitable for you.

The rules have just changed. Time to take advantage of them. And as I said in the post:

Now excuse me, I’m off to raise some money for my database of games-making freelancers.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
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  • I agree that it is hard to see their sustainable competitive advantage. I personally think the advertising model is hard. You need massive volume (which Rovio has got), CPMs to stay high in the face of increasing competition (harder) and great relationships with brands (fine until the next big thing comes along).

    Accel and Atomico were smart investors, so I’m going to keep looking in case for whatever it is that I’m missing.

    But I’m currently missing it.

  • If Rovio is using the 42 million to develop new franchises then good luck to them. I find it hard to see what their sustainable competitive advantage is.

    Have you seen Rovio’s presentation at CasConEurope? The focus was almost entirely on in game advertising and building brands that could support high engagement advertising and sponsorship. Perhaps this is their secret sauce and what makes investment worthwhile.

  • It wasn’t from publishers, it was investors. Accel, Felicis and Atomico paid $42 million to invest in the company.

    Rumour has it that some of the money was secondary (meaning it went to buy out existing shareholders, and perhaps allow the founders of Rovio to take some money of the table). The rest will have been “primary”, new money that has been raised to invest in the growth of the company.

  • Jaque

    Can you explain for us laypersons why Rovio (who reported sold 50 million downloads of Angry Birds at $2) has gotten funding from publishers worth $42 million? I can’t imagine why they would become indebted to a publisher when they’re swimming in profit.