Starting a Games Company in a Recession

This is a repost of an article I did for Inside Social Games back in June. With the financial system currently imploding it seemed worth reposting.

Warren Buffett says that the economy in a recession. When it comes to the economy, I believe Warren Buffet. Recession is a scary word. But if you’re a social games company (or thinking about starting one), a recession may actually be a good thing.

Obviously macroeconomic factors affect tech startups, and the big and the wise are raising enough money to weather a 2-3 year drought. Most small startups are not in the position to raise 2-3 years of runway money. Instead, we have to tighten our belts or become profitable. Startups in most fields have a very low likelihood of becoming profitable, check out Jeremy Liew’s fantastic analysis on profitability in the consumer interest space.

However, profitability is not a problem in social games. Most, if not all of the top social games companies are already profitable (or would be if not for their rapid expansion plans). Many smaller, quieter players are also seeing excellent revenues, but you’ll have to take my word for it, since no one seems eager to advertise their success.

When it comes to a recession, the common wisdom is that home entertainment surges, because people feeling the pinch opt for staying home rather then the more expensive option of going out. If that holds true during this recession, then online games are certain to benefit. After all, no one is giving up their Internet connection. And if you’re a free online game, then…well, I mean is there any better entertainment deal for a consumer then a free game?

Of course, the problem as always with free services on the internet, is that we rely on advertisers for our revenue stream. Fortunately, the digital goods model removes that dependency, making it even more attractive in the face of an advertising downturn. It’s still an open question whether people will buy virtual goods with a thinner wallet.

This is an aside, but I’d suggest that virtual goods can offer an excellent substitute for purchasing more expensive real goods. The desire to shop does not go away just because a consumer has less money. That desire to buy real items, such as clothes, shoes, and accessories is easily transferred to vanity virtual goods. Goods that come at a fraction of the cost of a real item, and therefore attractive even when you have a thinner wallet.

However, some people believe that that online advertising will actually increase during the downturn, as ad agencies turn their budgets toward the measurable world of online v.s that vast unmeasurable wasteland that is TV and print. If you look at data aggregated by Pubmatic, smaller publishers (around the scale of most social games companies) have seen rising ad rates, even as the rates of larger publishers have fallen.

So to summarize:

Free online games using a virtual goods model with an advertising kicker are one of the safest bets you can make in a recession. So come join the party.

And if you need further convincing, the biggest games company in the world, EA, started in a recession.

How to Spot a Hit Social Game Before It's a Hit: Tips For Acquirers

Frequently, I like to check the app leaderboard over at Adonomics, the Facebook analytics service and see what games are poised to become hits.

It's a pretty straightforward process so I thought I share it with you.

First sort the leaderboard by active users rather than the useless default of total installs.

Then go to the 4th page of rankings to view apps that have 50,000 users or less. Smaller apps are where the best acquisition opportunities are.

Look for apps that have double digit active user percentages. For instance Elven Blood has a 47% active users. With total installs of 76,000 and a DAU of 36,000.

Clicking on the name (Elven Blood) reveals the DAU graph for the last 30 days. In this case, the DAU for Elven Blood has doubled in the last week. Clearly, it's got some juice.



So it might be worth acquiring. Looking at the game, it's a clone of Mob Wars reskinned with a medieval fantasy theme. Nothing innovative here, but with Mob Wars being the 5th most popular app on Facebook, its growth prospects are good. As far as I can tell the only comparable games are Zynga's Dragon Wars, and Might of Many, both Mob Wars clone with medieval fantasy reskinning. Neither are as popular.

Looking at the reviews, the users are enthusiastic, not many fake reviews as far as I can tell. There was a torrent of anger over a data loss that brought all the players back to level 1. Sounds like database scaling issues, unsurprising at this rate of growth for an indie team. Not worrying.

Then I'd ask how Elven Blood is acquiring its users, organically, or deviously? Perusing the games, nothing looks devious. No incentizived invites. Nothing spammy. They use a good call to action, " Invite friends who would be most likely to enjoy playing Elven Blood, and remember to invite daily". And it's clear that the incentive for players to invite their friends, so they can advance faster through the game by sharing the spoils of victory is compelling on its own. Good stuff.

On the monetization front, it's running google ads and social media, but more importantly it has a virtual currency tied into a CPA offer program ($uper Reward$), so they are probably making decent cash, probably over $25,000 a month based on current DAU.

Hmm, that means I'd have to offer a pretty impressive figure to bring them in, unless the scaling problem is so bad that they exhausted and desperate (doubtful).

So kids, how much would you offer for Elven Blood based on this analysis? And why, if you're ambition. Let us know in the comments.