Funware Development sold

February 5, 2012

Funware Development is a small startup I started a year and a half ago to develop games for social networks. A few weeks ago I pulled the plug and sold it to a company from Moscow.

Funware Development was a really lean startup. So lean that the max number of employees working for it (myself excluded because I didn’t get salary) was 3. Nevertheless, we delivered over 10 games and applications to Odnoklassniki, Moi Mir and VKontakte social networks. The total number of installations of these apps is just under 14 millions. Several months ago we were among the top 20 companies (for Russian social networks) based on these numbers. Despite the large number of users, the monetization didn’t go well, and eventually it became clear that the thing just wasn’t worth the trouble. If you are interested in numbers, the total revenue (including the sale of the company) was about $26K with all the costs totaling in about $26K. That’s right, the total profit over the startup’s life is about zero. It’s not as bad as it sounds, because most startups don’t even recover the money that were spent on them.

We surely made many mistakes along the way, and it is clear that we could really make it work. The hindsight is always 20/20 though. I’ve learned so many new things that no amount of reading other people’s blogs could deliver. Lessons learned, moving on.

The picture above is an actual screenshot from the site before I took it down.

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Social games company i-Jet is close to bankruptcy

September 25, 2011

i-Jet, a social games development and publishing company is on a verge of a bankruptcy. Its CEO Alexey Kostarev said in an interview that they are selling a number of their game development studios, but “he is not worried, because they are profitable and can stand on their own”. He also admitted that the company hasn’t paid salaries to its employes for several months. These words coming from the CEO speak for themselves.

i-Jet used to be a famous company, a typical success story, widely covered in the press including Forbes (published in Russia) and Vedomosti – the leading Russian business newspaper created by the Financial Times and The Wall Street Journal. One of their first games “Happy Farmer” brought them over $20 millions in the first year ($10 million after the social network cut).

The company was said to be estimated at $100 million at its peak, but apparently the owners never sold for different reasons.

Alexey Kostarev blames the saturated market: there are just too many games. The average time a user plays a game reduced from 2 months to 2 weeks. That hurt both DAU and ARPU. The marketing costs skyrocketed. The costs of development of a game increased tenfold. This sounds like a helluva market. Zynga, what are you waiting for?


Zynga the super bubble 2

July 3, 2011

Zynga filed for IPO and totally revealed its bubbleness two days ago. The figures turned out to be even worse than what was anticipated. The average net income in 2010 turned out to be $7.5m instead of $15m, and Facebook started taking its 30% cut only during the 2nd half of 2010. This year started off even worse: $11.8m of net income for Q1 of 2011.

The most grave news however is a lack of growth in the key metrics: all of them (DAU, MAU, and MUU) are essentially the same when comparing Q1 2010 and Q1 2011. While the revenue is higher, it will stagnate without growing user base. Apparently, Zynga realizes this too, that’s why they are in a rush for IPO. The time is not working in their favor.

UPDATE: here is what Zynga says about the 30% cut: “In July 2010, we began migrating to Facebook Credits as the primary payment method for our games played through Facebook, and by April 2011, we had completed this migration.” So, it is safe to assume that Zynga wasn’t leaving 30% of their revenue to Facebook for the most of 2010. That’s why income in 2011 is down by 50%.


Small social gaming company teardown: meet Drimmy

March 17, 2011

Even though Zynga is definitely a bubble, there are many successful social gaming companies out there. Most of them were pioneers in the area. This success lead to rapid creation of the followers: entrepreneurs and investors rushed to clone the winners. It is therefore interesting to see if these latecomers can be successful. I picked a company named Drimmi, which is a classical case of entering the market after all the land grabbing occurred.

Drimmi was founded by Nikita Sherman in late 2009, who previously was:

– a top manager at Begun (one of the top Russian online ad network);

– a producer of online games in Mail.ru (yes, that Mail.ru, which later merged with DST and became Mail.ru Group that owns chunks of Facebook, Groupon, Zynga);

– a president of Mamba (top Russian online dating system);

– a president of Odnoklassniki.ru.

In other words, this is probably as high as you can get in the Russian online business. No wonder that ABRT Venture Fund and Mangrove Capital Partners easily gave Mr. Sherman $4m to create a social gaming company. Let’s tale a closer look at the result.

Currently, Drimmi employes at least 50 people, roughly half of them residing in Moscow and the other half in other cities. Assuming average expenses of $3500 per person per month ($1700 – salary, about $800 taxes, about $1000 office expenses and overhead) this gives a burn rate of $175k per month.

How profitable is Drimmi? Their most successful games are:

– Fishing place

– Poker quest

Estimated DAU of these games is about 300,000. A typical DAU/MAU ratio is 20%. It is higher for newer games and it falls down as the game grows older. Thus it is reasonable to estimate Drimmi’s MAU at 1,500,000.

A typical conversion rate to paying users is 1.5% with average monthly spend at $5.5. These figures are known for US social gaming market, therefore they must be lower for Russian market. However, let’s take these as I don’t have any better. A simple calculation gives $123,650 per month of gross sales. This is before social networks take their cut, and they are not shy: 50% for VKontakte and Odnoklassniki, and 30% for Moi Mir. Drimmi has fewer than 10% of their MAU in Moi Mir, so we can safely enough use 50% as the number. This gives roughly $64k as monthly revenue of Drimmi.

The real figures may differ, e.g. the conversion rate can be higher, and average monthly spend is likely to be lower, but the final number seems to be accurate. This lands the company into negative cash flow of $110k per month. However, the revenue will grow eventually, while the expenses can be controlled to stay the same. The current growth rate of Drimmi’s MAU is about 10% per month. This is a good growth. If it can be sustained, it will move the company from negative territory in about a year. Overall, it will take the company 2 years to break even (one year has passed and another is ahead). This is considered to be a great achievement among venture capitalists.

Disclaimer: I have no any relation to Drimmi and haven’t received any inside information from anyone in the company. If you want to provide more accurate details, you are welcome to do so. I will update this post accordingly.

 


Zynga the super bubble

March 7, 2011

ZyngaThe biggest social-gaming company Zynga recently reached private capitalization of over $7 billion. To put that into perspective, that’s more than total cost of Electronic Arts, which produces and publishes bestselling games like Mass Effect, The Sims (oh), Dead Space (my favorite). The conventional wisdom should go like “EA is a nice big company, so it’s outright silly that Zynga costs more”. The truth is that EA is not doing well. EA has been losing money for last 3 years for a total of $2.2 billion.

Now I could compare Zynga to other gaming companies, like Activision Blizzard (they are doing very well) or Take Two (they are doing nice too), but that’s boring and isn’t really relevant. EA, Activision and Take Two are publicly traded companies. They have been around for some time (read: they are not growing like crazy). Zynga is assessed by investors by its money making power and most importantly its growth factor. Let’s review these in more details.

1. Zynga money making power

Zynga’s rumored revenue for 2010 is $850m. Let’s divide that by 12 and round up a little, because the revenue was likely to be growing month by month. Zynga has roughly 1500 employees. Their main expense is Facebook’s cut of 30% off revenue. Add infrastructure costs, advertising, and some overhead and we land with this table:

Estimated revenue $75,000k 100%
Number of employees 1500
Full employee cost $10k
Total employee expenses $15,000k 20%
Facebook fees $22,000k 30%
Advertising spend $10,000k 13%
Estimated infrastructure $10,000k 13%
Estimated overhead $3,000k 4%
Total expenses $60,000k 80%
Monthly net margin $15,000k 20%

$15m of profit per month is great, but no one would pay $7b for this. So it must be Zynga’s growth that makes it so highly priced.

2. Zynga growth

Here is the dynamic of DAU (Daily Active Users( and MAU (Monthly Active Users) of top social gaming companies on Facebook:

MAU 12/09 DAU 12/09 MAU 2/10 DAU 2/10 MAU 2/11 DAU 2/11
Zynga

219m

64m

234m

66m

295m

61m

Playfish/EA

59m

12m

48m

10m

37m

6m

CrowdStar

38m

11m

68m

12m

44m

4m

Playdom

23m

3m

25m

4m

28m

3m

Whenever a number decreased comparing to the previous value, I highlighted it by red. As you see, beginning of 2011 is red for everyone. This means that the number of people playing Zynga games is decreasing on Facebook. And just when I was writing, the latest MAU and DAU numbers were published, showing that Zynga’s MAU on Facebook shrank by roughly 30m during last month. Since Facebook is the biggest network and is responsible for the lion’s share of Zynga revenue, it is safe to assume that Zynga’s revenue is plunging, not growing.

How is that for a hot shot company? The social-gaming industry is over-invested, with too many games fighting for attention of the limited pool of people. The MAU and DAU of all major companies saw their fastest growth in 2009 and in the first half of 2010. These days are long gone. There is still a chance for small companies to make a breakthrough (and get acquired by Zynga). In the next post I will review one small company trying to make it despite bad odds.

 


The best thing Facebook ever did

May 16, 2010

What will let Facebook own the internet advertisement? How will Facebook displace Google from being the top advertising platform?

Well, that’s obvious now. With the help of their Like button placed all over the whole darn internet. OK, maybe it’s not that obvious, but there are only three pieces to this puzzle:

First, Facebook is the company that finally owns our online identity. Microsoft couldn’t do it with its HailStorm and Passport. Google couldn’t do it with Gmail/Google account. Facebook, with all the sites that use Facebook Connect is the 800-pound gorilla in the online identity market.

Second, web search is quickly becoming a commodity. It’s not hard for a large company to build a search engine or license someone else’s search engine. Its search quality won’t be as good as that of Google, but see the next point.

Surprise! The search quality as it has been understood by Google is not important to the consumers anymore. That’s why there are new players in the field, who innovate by delivering different search experience: Bing, Wolfram Alpha, and others. While Google does a good job of counting incoming links and clearing search results off spam, 99.99% of those search results are still irrelevant for me and you. But imagine what would happen if Google sorted the search results by bringing the posts “liked” by your friends to the top? Now, this would be like by thousand times more relevant! The only problem is that Google doesn’t know who my friends are, leave alone what pages they “liked”.

The mathematical approach of Google to the web search fails miserably when compared to the social approach. People always want to know what movies their friends watch, what music they listen to, where they go to dine, get excited. There will always be hardcore users who will use Google for search, but the rest of the population and advertisement dollars will go to Facebook.

P.S. Just when I was about to finish, I found this fresh post: Will Facebook Be Tomorrow’s Google, and Google Tomorrow’s Microsoft? , expressing similar ideas. It’s fun to read it too, especially since it comes from a former Google Group Product Manager.


Startupers beware: your mothership will eat you for breakfast

April 14, 2010

The recent news and rollouts by major companies are going to have a huge impact on the startup surface, and sink a lot of them as well. Here are some I want to mention:

  • Microsoft’s roll-out of web-based and free Office is going to damage web office suites developers, like Zoho;
  • Microsoft’s new Outlook 2010 is going to include social network features. Bye-bye Xobni (which is a social Outlook plug-in);
  • Twitter buys one of the iPhone clients – Tweetie. It means all other iPhone twitter clients are screwed;
  • Facebook, in addition to their Credits system, is rolling out an offers system – a very popular way of monetization. Wait till they make their Credits the only way to take money from the users, and numerous startups will kiss good-bye.

However, the top prize for screwing its ecosystem and partner network goes to Apple:

  • Their are introducing their ad platform iAd. No doubt it will be the exclusive way for advertising on iPhones and iPads;
  • Their new SDK licence agreement clearly prohibits use of any development platforms except for Objective C. This is a major blow to Adobe with their new Flash CS5, which includes tools to easily port Flash apps to iPhone OS. It also potentially makes Unity – a new platform for 3D  game design outlawed.

The lesson we all can learn: when your application totally depends on some company’s product for monetization or value for users, the company can evaporate your business in a blink. Our MobileNoter also falls into this category. People like our product, but if Microsoft decides to port its OneNote to MacOS and iPhone OS, we’ll have to have a much better product than theirs in order to win the customers.