Zynga downturn causes start-up evaluation to lower, say analysts

Zynga's volatile and rapidly declining fortunes have led companies investing in start-ups to become wary, and has resulted in new gaming start-ups being valued lower than they might have been in previous years. It's not a problem exclusive to gaming, but people are now being more cautious in how highly they price-up new acquisitions.

VentureBeat reports on a panel discussion held at the recent YetiZen game accelerator event, in which several key investors discussed Zynga's impact on the start-up market.

Chris Gottschalk, vice president at Blumberg Capital was asked for his opinion on Zynga's stock collapse, and to gauge its impact on the way investors value new gaming start-ups. There certainly has been a dip, he said.

"I can tell you a few things from our early-stage perspective. Clearly Zynga had an impact on the later-stage investments. We see it not only in gaming but in all sectors. The public markets are going to affect what’s happening in some of the later-stage deals.

"On the early side, I definitely think there has been a little bit of a pullback in terms what expectations are. A couple of years back, you had people expecting uncapped notes or $20-million-plus capped notes.

"There were a lot of these big party rounds where people weren’t even meeting the entrepreneur and putting money behind it. Now, you’re seeing a lot less of that. You’re probably not seeing any of that.

"You’re seeing the caps come back down. You’re seeing people build prototypes and have some engaged user base or at least understand what their target market is. I don’t know that Zynga as a single point has done that. You’ve just seen a lot of that frothiness go away that we were talking about earlier."

It's interesting that Gottschalk suggests that investors increasingly ask to see prototypes before investing in companies, suggesting that such practice didn't necessarily happen before, and that gaming start-ups were being bought without real consideration for their longevity or products.

Jeff Karras, managing director of investments at Sing Tel Innov8 added, "I agree. It’s a more sober environment around valuation. Valuations get a little bit more skimpy. Still, the top games and the top companies are able to command good valuations. Maybe they’re a little frothy on occasion, but the majority — especially the ones that are less proven — are definitely more sober in terms of turns and valuation."

It seems that gaming start-ups will have more to prove if they are to secure investment capital, given how volatile the market has become in recent years. However, Chris Petrovic, general manager of GameStop Digital Ventures suggested that we may never see the days of big dollar, knee-jerk acquisitions return, such as DeNA's $403 million acquisition of ngmoco, and GREE's purchase of mobile social platform Open Feint for $104 million, which it recently closed.

"I don’t see us seeing Ngmoco- or OpenFeint-type deals happening again. Even from those companies that continue to be active here. I mean, both of those acquisitions were for all intents and purposes written down, if not totally off.

"OpenFeint is closing. The Ngmoco platform that was bought has morphed into something completely different today. They’re hiding that a little bit, but in any case, I don’t think we’re going to see those kinds of things again.

Gottschalk added, "I think that was a unique time and a unique environment. We definitely won’t be seeing that become as much of a strategy as it was. You had Japanese companies throwing around a ton of cash who had a huge currency advantage at the time. Those acquisitions were almost nothing to them."

However all parties agreed that this isn't a problem exclusive to the games industry, and that start-up investment is cooling in many markets, and that the situation will level off a little once investor confidence returns.

What's your take on the supposed gold rush of gaming start-ups? Did you ever look at price tags for some companies and do a double take? Let us know below.

Thanks Gamesindustry International.