Playfish acquired by EA

Congratulations to Kristian, Sami, Shukri, Seb and the entire Playfish team. It was simply wonderful to be involved with Playfish even if only for a short time.

ACCEL PARTNERS AND INDEX VENTURES ANNOUNCE EXIT OF PORTFOLIO COMPANY PLAYFISH TO ELECTRONIC ARTS

LONDON, ENGLAND – November 9, 2009 : Index Ventures and Accel Partners, two leading global venture capital firms, today announce the sale of portfolio company Playfish Inc. to Electronic Arts (NASDAQ: ERTS).  Playfish was acquired for a consideration of up to $400 million including an earnout of up to $100 million and excluding cash balances.

Kevin Comolli, board member from Accel Partners stated, “As the original institutional seed investor in Playfish it has been a pleasure to work with the founders and management team and to see them achieve such extraordinary growth.  Playfish has been recognized in the industry for its innovation and creativity and continues to change the way people play games by creating more social and connected experiences. We are sure they will continue to thrive under the ownership of Electronic Arts.”

Ben Holmes, board member from Index Ventures said, “We want to congratulate Kristian Segerstråle, the other founders and the entire Playfish team for what they have achieved in such a short time.  We are delighted to have been one of the investors in such a forward-thinking company and we wish them every success in the future.”

Kristian Segerstråle, Playfish CEO, commented, “I want to thank Accel Partners and Index Ventures who bought into our vision for a new type of games company and have supported us from the start and through our sale to Electronic Arts.”

The social media investment conundrum

Social media has been the investment sector which has created many of the biggest companies within the tech industry over the last decade. By social media, I’m using a broad definition of businesses which either rely heavily on user generated content as the underpinning of the service and / or user to user (viral) communication as the principal means of propagating and marketing the service. Successful exits in this space include Youtube, Skype, Last.fm, Bebo and MySpace and big private companies include Facebook, Linkedin, Yelp, Zynga and Playfish.

The appeal of this sector to venture investors are clear

• Rapidity of value creation. The ability to create multi-hundred and billion $ value companies in the space of a 1-3 years is almost exclusive to social media. Try doing that in software, semiconductors, ecommerce or cleantech. All typically require 5-10yrs to grow to this scale
• Reasonable cost / capex requirements. Limited capital is required to launch and test a product. Often the successful social media companies breakeven or at least have the ability to breakeven quickly. Hence capital at risk is lower and multiples on successful exits can be higher than in many other sectors
• Defensibility. Once at scale, network effects give these businesses a competitive advantage and robustness which acquirors value. Over the next 12-18 months, we will probably get to see how public markets value some of the key players in this space also.

So lots of good reasons to invest and a few exciting businesses which already validate the investment thesis. So far so good, now for the challenges…

The chart above shows the various stages which a social media business may go through and what the usage, revenue and valuation metrics might typically be at each stage. Also my perception of the probability of the business ultimately generating a great return which not only justifies VC investment but can contribute a substantial return.

This evidences some of the real challenges with investing in this sector

• Volume of investment opportunities in social media sector can be overwhelming. Particularly at early stages we see twenty business plans / investment opportunities for social media businesses for every one we see across the whole spectrum of other investment sectors (software, life science, hardware, semi, cleantech, etc). This means the chance of ultimate success for investments at pre-launch and early stages (1-2)  is vanishingly small and even the low valuations don’t typically reflect the risk inherent at these stages
• Late stage valuations (5-6) are very high and often leave limited upside for investors.
• Pinpoint timing is required. In my experience the best time to invest for a venture capital firm is post launch when the business has 100,000’s or low millions in Monthly uniques (stages 3-4). Here the metrics and to an extent the business model may be proven and the valuation still gives room for venture returns. However businesses can often pass through this stage  in a matter of a few months, so unless you are already very close to an investment opportunity as it moves from stage 2 into stages 3 and 4 you will likely miss the opportunity
• Early metrics are useful, but often don’t differentiate between future leaders and losers. The red and blue lines show the trajectories of 2 social networks (can you guess which?). These are essentially the same until a specific breakout point for one of them.

So while social media can offer the big and quick rewards for venture investors, it can also be a minefield and is particularly challenging and unpredictable for those tasked with making early stage investments.

The Three T’s

Here is a presentation I put together last year that looks at a few topics.

• Whether to seek VC money and what to think of before you embark on the process;
• What a Venture Capitalist looks for and how to get fund-raising off on the right foot;
• A brief explanation of some of the typical terms you might find in a termsheet; and
• Recommendations on how to prioritise which VC to work with when you have multiple offers.

One of the topics introduced is the “Three Ts” (Team, Technology, Traction) which is my crude framework for prioritising investments. I typically don’t agonise about finding good reasons and robust intellectual arguments for not doing a deal. Generally we just look at these three factors for a Company and hope to find something exceptional in at least one of them. Obviously team is important but occasionally, particularly in the internet area we come across phenomena which have gained amazing traction, even though the team may not on the face of it have enormous experience. These situations can be just as exciting. As I outline in the presentation, it is more interesting to have an A* against one of the “Three Ts” rather than having an unexceptional B+ across the board.

There are a few other points covered in the presentation which I may return to future posts. Thanks to Ryan Carson for letting me present this at his event.

Blogging vs. Micro-blogging

In the last year with the rapid growth in twitter and other “real time” information sharing platforms, many people have found that part of the rationale for blogging disappears. The new micro-blog alternatives simply offer a much better method for quickly disseminating  images, web pages, location data, quick comments and other snippets of information. My plan is to use all the micro-blogging tools for these high-frequency and short-form transmissions but keep this blog focused on sporadic (e.g. once or twice a month) but original postings where I either have some analysis to share or ideas I want to stress test on a specific topic. I don’t plan to spend much time re-blogging what I see as smart or stupid that is being written elsewhere. Instead the posts will hopefully achieve the following aims:

1. Demystifying the VC process

Just as a VC tries to understand the businesses he invests in, I think there is great value in entrepreneurs understanding the venture capital business. If they are better informed, they will know whether it makes sense for them and how to get the best out of a partnership with a VC. So I’ll try to cover what we look for in a business;  how we find, filter and evaluate investment opportunities;  what type of deal structures can make sense in what situations and more generally how we bring all these strands together to (hopefully) make a return for our investors.  Taking VC money is a big decision and many entrepreneurs and businesses can be better off without it. I’ll be as open and honest as I can about when it does and doesn’t make sense.

2. Getting feedback and testing  hypotheses on specific sectors

Dealflow is generally sourced from one of three broad channels:

1. Spontaneous inbound;
2. Referrals from portfolio companies, other VCs or advisors ;
3. Leads generated by specific sector research we conduct internally;

Often the most interesting leads come from the 3rd category. Approximately each quarter, we sit down as a firm and present and discuss themes which we think will influence the technology landscape over the coming year. Once the target themes are agreed we do more research to identify interesting companies or entrepreneurs who might be persuaded to take investment from us. Should our target themes be a closely-guarded commercial secret? In my experience there’s typically quite a lot overlap with what other investors might be looking at. So I will certainly discuss our ideas on some of these trends, but probably keep a few ideas up my sleeve…

3. Sharing thoughts on the tactics and strategies adopted in early stage companies.

As I mentioned in the prior post, boasting about what is going right with specific portfolio companies or lamenting certain failures or shortcomings would not be smart move. However there are a set of broader issues, challenges and learnings which are common to many early-stage companies where I might have the occasional idea or want some ideas.

That’s it for now.