Silicon Valley’s Search The Next Big Thing

Venture capitalists and angel investors so hot on social media just months ago have largely turned their backs on the space, investors say. Even for the most promising social startups, they won’t pay nearly as high a price to get into deals as they would have a year ago.

That’s true in part because the markets have shown that public investors won’t dumbly buy in at the inflated prices set by private exchanges and late-stage rounds. But it’s also true because some investors who scored a piece of those hot companies in the last funding rounds before the initial public offerings ended up in the red themselves, sometimes deeply. The markets deflated the hype and valuation of those firms faster than they could unload shares.

The investors who bought into Zynga and Facebook at high prices, they look stupid, it looks terrible,” said Promod Haque, managing partner at Norwest Venture Partners. “Once you see people get burned, the discipline returns.”

That renewed discipline includes avoiding riskier deals, paying less for the promising ones (particularly in the late stages) and holding off on IPOs until growth prospects are clear.

Next big thing?

Still, even with the pricking of the social media bubble, hope springs eternal in Silicon Valley.

Total deal making has barely taken a breather. The activity is just shifting into new categories. Opportunities still abound in mobile, cloud, digital media, security and other categories, particularly for companies focused on the business market, investors say.

When asked if we’re still in a tech boom, each venture capitalist interviewed for this story responded with a resounding yes.

“There’s so much exciting stuff going on,” Carolan said. “Video is taking off; mobile is taking off. I think we’re just getting started.”

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Zynga’s CityVille

Zynga’s CityVille has become the fastest-growing game in history. And based on an interview with a key Zynga executive, that isn’t an accident. The company has all but figured out how to turn its game launches into a science, and that helps them spread to increasingly large audiences on Facebook.

The city simulation game has drawn in more than 26 million users since it debuted on Dec. 2. In just 12 days, the Facebook game has broken all previous records, adding 4.5 million users on Tuesday alone. In the past seven days, the game has added 24.9 million users, according to market researcher AppData. For Zynga, that’s important because the San Francisco company often sees big fluctuations in its player base as fickle gamers move on from one game to the next. CityVille has surpassed the initial growth wave that FarmVille, Zynga’s biggest game, saw in 2009.

“This feels fun,” said Mark Skaggs, the Zynga vice president in charge of CityVille. “It’s like reliving the fun and excitement of the FarmVille launch. We are buzzing with energy about how to keep it going.”

CityVille comes at an important time for Zynga, which is trying to show that it can keep churning out hit after hit, by following a recipe that focuses on watching its gamers closely and tweaking games so that there are no barriers for adoption. If Zynga can keep turning out the hits, it can replace lost gamers and keep a commanding lead in social games industry. According to AppData, Zynga has more than 222 million monthly active users (those who play in a month). Just a couple of weeks ago, Zynga had only 198 million users, which is far below its peak from the spring, when it had more than 260 million users. Zynga lost a lot of users because Facebook shut down some of the most popular game communications (which were viewed by non-gamers as spam).

Founded in 2007, Zynga has become one of the largest gaming companies in the world, with more than 1,300 employees. Legendary investor John Doerr of Kleiner Perkins Caufield & Byers said Zynga was easily the best investment that his firm has ever made. The social networking game maker is already the largest app developer on Facebook. And some recent valuations show that Zynga is actually valued above $5 billion. (Via VentureBeat)

Related $5 bil Valuation for Zynga Stirs Debate

Women, Elderly Reigns Free-to-Play

Via Reuters. The video game industry has weathered the economic slowdown better than most industries, but there could be a reason — free games with new figures showing up to a third of gamers don’t pay to play.

More people are getting into gaming through free titles like Zynga’s “Treasure Isle” played online through social networking sites like Facebook, downloading free games like ngmoco’s “Godfinger” on mobile devices like iPhone and iPad, or sitting on a friend’s couch to play multiplayer maps with titles like Activision Blizzard’s “Call of Duty: Modern Warfare 2.”

New research from video game tracking firm Newzoo found every existing video game platform from mobile to console has an audience of at least 30 percent of non-paying players.

The U.S. currently leads the world in online business revenues, but Warman believes the EU and other territories will continue to grow gaming revenue in this arena moving forward.

“These free options are definitely broadening the appeal of video games among older and female demographics, and a lot of these consumers don’t actually consider themselves gamers at all,” Michael Cai, vice president of video game research, Interpret.

$5 bil Valuation for Zynga Stirs Debate

Via VentureBeat. Zynga is the darling of social games, but it’s hard to believe that the maker of Facebook apps and websites is worth $5 billion, as estimated by That research firm, run by a group of former equity analysts, estimates the value of private companies and what they would be worth if they were actually public.

While Zynga has no near-term plans to go public, the analysts say they can surmise its value based on a variety of measures, such as the price that employees and investors are getting by selling shares on the secondary market. There is a lot of black art to this kind of evaluation, and the high value for Zynga is likely to stir a lot of debate.

Ed. According to the report itself, the relevant public comparables are all Chinese– the Tencent gaming company in particular. So Caveat emptor.

Tencent is the dominant gaming company in China, with ~400 million MAU’s, and revenue almost triple the 2nd largest Chinese gaming company. Tencent’s games are played on Tencent’s own platform, and the money used to buy virtual goods is Tencent’s currency (QQ Coins).  Due to its size, and its ownership of its platform, we believe Tencent trades at a premium to where Zynga would trade at if it were public.

The authors of the original report are all fans of social media– like Zynga games– two have experience in equity research but that’s about it. Zynga is just like Blizzard and the company will naturally go after hits like Farmville and Mafia Wars– and they’re very addictive. But the company at $5 bil?! Too, too risky to even play the guessing game

Related Article: Zynga Valuation by NeXt Up