Dafaxetentcy: Companies Making Money

Le Web 10 host Loic Le Meur just finished his on-stage interview with Alexander Tamas, Partner at one of the most watched technology investment firms on the planet, DST / Mail.ru Group.

That’s quite a presence you have: Groupon, Zynga, Facebook and … Twitter?

Not Twitter (smiles).

What is DST?

The firm originated in Russia, grew out of social networking company called Mail.ru, and at some point we started making international investments. Facebook was our first one.

How big is your stake in Facebook now?

It’s hard to say, we’ve made some straightforward investments and then we bought as many shares from early employees and investors as possible. We’ve definitely invested more than $500 million in total though.

So Facebook was your first investment – how did that come about?

Well, we owned and ran a social network in Russia, but the dynamics there were different, we were actually ahead of most social sites. Every single one of our countries became really big. So, we knew there was money in it, and we realized quickly that it was only a matter of time for Facebook to become really large worldwide.

Did you lead the Mail.ru Group IPO as well?

Yes, that was last month.

Is it the biggest tech IPO in Europe to date?

In the past few years, yes. The initial market valuation was about $6 billion, we’re now at roughly $8 billion.

So when’s the Facebook IPO planned?

I don’t have any comments on that (smiles).

Do you sit on the Facebook board?

No we actually don’t, but we obviously have good relationships with management and other board members. our perspective is that it’s entirely possible to be a major investor in a company without being on the board, as long as you have an open dialogue with the people in charge.

You got in late, what was Facebook’s valuation at the time?

We got in at a $6.5 billion valuation. It’s difficult to say what the valuation is now – although I can tell you the secondary market ones are based on limited information and generally not super accurate.

We haven’t purchased Facebook shares in quite some time though.

The Zynga investment came after Facebook?

Yes.

Why haven’t they been acquired yet?

If you’re a founder of company like Zynga, with fast growth and massive revenues, it only makes you wealthy on paper, right. So you used to have two choices: sell or take it public. Now, companies can get liquidity early on, so it takes the pressure of.

We invested $150 million in Zynga, but we didn’t disclose at what valuation.

So Groupon was almost sold …

I can’t comment on the rumors, but I can tell you that they’re going for it. They realize they have something special and there’s a lot of potential for Groupon to become a generation-defining company. They’re shooting for the stars.

By the way, I’m always amazed when people discuss valuations of private companies without actually knowing the financials. The truth is most people can’t say whether investments come cheap or expensive, as commentators. It all depends on how you measure growth, and most people tend to think linearly.

When we invested in Groupon, they sold 4 million groupons, a month later it was 25% more. The potential was obvious. They’ll hit 20 million groupons sold next week.

How does a startup get an investment deal out of DST? Is Twitter big enough, as an example?

It’s definitely an interesting company, but there are more. What we look at is that you have to be on a path to become a clear leader in your segment, companies that could theoretically go public today. We want to know all companies, but we focus our investments on those with long-term sustainability.

You know, we’re not an early-stage investor. We’re really small, with no people on the ground. So we can’t really help companies when they’re just getting started, apart from writing a check, and that’s not what we want. There are many more capable firms for that.

So startups should give you a call when they hit a $1 billion valuation?

Not really, we’ll also talk to you if you’re clearly on a path to becoming a $1 billion company down the line.

What about Foursquare?

There are lots of opportunities for them, they’re seeing good growth, so it could become a really interesting company for sure.

You’re (sort of) a European fund – why don’t you invest more here?

Groupon, Zynga and Facebook really just happened to be US companies, we look all over the world for companies. We tick boxes, and we can do that anywhere.

Many of the startups in Europe for some reason want to sell out early. That’s not what we’re looking for. There aren’t enough role models here, so less confidence.

Do you look at Asia, more specifically India, China and Japan?

It’s definitely a geography we’re looking at. We know a lot of the companies there already.

What’s your advice for young entrepreneurs?

Not many people have the opportunity to really change the world. If you have an urge to build something that could, don’t focus on the money, but the legacy you’ll leave behind.

It’s a once-in-a-lifetime opportunity to build a generation-defining company, so I applaud people for shooting for the stars. It’s a much more rewarding thing than doing it for the money.

I mean, look at Le Web, it’s not just about the money right, it’s also the community, helping out startups throughout Europe.

Loic: yes, we actually got a few offers, but we’re not looking at that right now.

Pocket Gems has raised $5 million in funding from Sequoia Capital and other Silicon Valley luminaries as it competes in the crowded iPhone game market.

The small San Francisco company has had five major hits on the iPhone, even though its founders were still in university when they launched their first game a year ago. The funding from venerable venture capital firm Sequoia is a testament to the rapid growth of the iPhone as a viable platform for making money with games. The funding also included Michael Dearing, an eBay veteran and associate professor at the Stanford University Institute of Design, Jeff Fluhr, co-founder and former chief executives of StubHub, and Omar Hamoui, founder of AdMob. Sequoia partner Jim Goetz will join Pocket Gems’ board.

That’s rarified company for an independent maker of iPhone games with only 11 employees. But Pocket Gems has seen all five of its games hit the top 10 list on the iPhone and have been downloaded more than 15 million times. Daniel Terry, chief executive, and Harlan Crystal, chief technology officer, founded Pocket Gems in 2009 while Terry was still an MBA student at Stanford University. Their first game was Tap Farm for the iPhone, and they’ve followed it up with Tap Store, Tap Jungle, Tap Zoo and Tap Zoo Christmas.

In an interview, Terry said they were in the right place at the right time to take advantage of the emerging virtual goods business model on the iPhone. Just a year ago, Apple launched its in-app purchases, which allowed gamers to buy virtual goods within a game. That turned out to be a much more lucrative business opportunity for many game makers, including Ngmoco, which was acquired for $403 million by Japan’s DeNA. All of Pocket Gems games are free-to-play, where users play for free and pay real money for virtual goods via the in-app purchases.

Goetz said in an interview that Sequoia — which has funded lots of blockbusters from Apple to Electronic Arts — was interested in Pocket Gems because the team was so skillful at building hit games and the technology to go with them. Many game developers outsource the social networking in their games to companies such as OpenFeint. But Terry said that Pocket Gems uses Facebook Connect and has built its own platform for encouraging gamers to share games with their friends.

In the past, venture capital firms focused on Facebook game companies rather than iPhone game companies. But Facebook is now the domain of big companies such as Zynga, CrowdStar, EA Playfish, Disney-Playdom and others. With the Ngmoco purchase, mobile gaming is getting a lot more attention. Smartphones are gaining traction and the overall mobile gaming market could almost double from $6 billion in 2009 to $11 billion in 2015, according to Juniper Research. Much of the increase could come from virtual goods sales.

Terry said the company was profitable within weeks after its founding and remains so today. He also said that revenues are now above a million dollars a month, though he declined to be more specific. The company’s games are available on iOS (iPhone, iPod Touch, iPad) devices and will expand to Android soon. Terry said the company will hire new developers to increase its pace of development.

“The App Store ecosystem has democratized mobile game development,” said Terry, who got his MBA four months ago.”If you have a good game, you can get it in front of tens of millions of players.”

Next Story: How to protect your company in a WikiLeaks world Previous Story: Bing exec explains how social can win the search race

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Dafaxetentcy

Thursday, December 23, 2010

Companies Making Money

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