In what will be a bellwether for the mobile gaming industry after Zynga’s deal to buy OMGPOP, Funzio is looking to raise $50 million at a $350 million pre-money valuation, according to sources familiar with the talks. The company declined to comment.
Funzio is the maker of Crime City and Modern War, both graphical RPGs that have held top ranks on the grossing charts on iOS. Their vision is to offer true cross-platform games that work across the web and mobile devices.
So here are pluses: Funzio has a hungry and experienced team. The company’s chief executive Ken Chiu previously sold a startup to Zynga and served as a general manager for a little under a year there. Both he and Anil Dharni were behind Storm8, another mobile gaming company with several top-grossing Android games under its belt, before they split with the other co-founders and started Funzio. The company’s roadmap and traction were compelling enough that they were able to poach Jamil Moledina, an executive who spearheaded third-party publishing efforts for Electronic Arts.
Funzio has a proven ability to launch games on Facebook and mobile platforms. At its peak, Crime City has 7.3 million monthly active users on Facebook, according to AppData. (It now has 1.6 million monthly active users.) The company’s two iOS games have managed to keep grossing rankings in the Top 50 in the U.S. since the beginning of the year. (See the charts below from rankings tracker App Annie.)
A $400 million post-money valuation is not unreasonable when benchmarked against publicly-traded mobile gaming companies. This isn’t a perfect comparison since every gaming company has a slightly different model and target market, but Glu Mobile, a publicly-traded company that has some decently ranked titles but is also saddled with a declining featurephone business, has a market capitalization of $281.8 million. Gameloft, a French mobile gaming company that as a similar target demographic as Funzio, has a market capitalization of 365.5 million euros ($477.6 million).
However, there are also broader industry dynamics that are working against Funzio: User acquisition costs have risen dramatically over the past year. Apple has cracked down on cheaper and arguably more unscrupulous forms of user acquisition like download bots, which has forced marketing costs higher across the board for every game developer.
Why does this matter? Well, roughly speaking: freemium gaming companies earn the spread or difference between their lifetime earnings per user and the cost to acquire a new user. When marketing costs go up, that profit margin narrows. While both iOS and Android have larger reach than they did a year ago, the profit per user is likely lower because of increased user acquisition costs.
It’s also hard to see the iOS or Android platforms lending themselves to a single dominant gaming company in the way that Facebook gave rise to Zynga. Mobile gaming has been far more heterogeneous than Facebook has been. There is more diversity in gameplay. On the iPhone, you can see everything from immersive, console-quality titles like Infinity Blade to platformers like Temple Run to casual, freemium titles like Dragonvale.
Distribution is also fundamentally different. Because users discover games through their friends on Facebook instead of on a top downloaded list, the network effects are far more powerful and lend themselves to more of a winner-take-all effect on Facebook. This hasn’t been the case so far on Android or iOS.
Lastly, while I said earlier that $400 million post-money isn’t crazy compared to publicly-traded companies, investors are obviously going to want a return. So investing at that valuation is essentially a bet that Funzio can either go public or be bought by an existing gaming company at a decent multiple. EA already fired many of its bullets with last year’s deal to buy PopCap Games for up to $1.3 billion. Zynga is open to a deal in the $1 billion range. But you’d really have to have the momentum (or something special in terms of execution) to force their hand in the way that the rapid rise of OMGPOP’s Draw Something cannibalized the player base of Zynga’s hit Words With Friends.
If Funzio does go out at a $350 million pre-money valuation, it’s worth comparing that against valuations in the mobile gaming space from 6 months and a year ago. Around the same time last year, Rovio closed a $42 million round of funding that gave it a post-money valuation of around $200 million. That’s when iOS gaming was more profitable per user because Apple still allowed incentivized downloads and offer walls.
So it looks like valuations may have corrected a bit since late last year. Other smaller deals have gone though though. Another mobile gaming company, Addmired, recently renamed itself Machine Zone and picked up $8 million in a round led by Menlo Ventures.