Virtual Economy and Social Networking Currencies Bring In Real Cash

VC’s funnel money into virtual currencies: A signal of M&A potential?

Social networking’s explosive growth is driving interest in opportunities to monetize with sale of virtual goods and services. This is recently evidenced by Electronic Arts’ $300 million acquisition of Playfish, a U.K. social game developer focused on selling to Facebook members. A recent study estimated that the virtual goods and currency market will reach $1.8 billion this year, with a startling 12% of Americans having bought a virtual item at some point in the last 12 months. All that spending is helping social networks and games bring in real-world revenue. As an example, teen social network MyYearbook reached profitability earlier this year after launching its virtual currency LunchMoney, which now accounts for nearly one-third of the company’s $1 million in monthly revenues.

Though M&A activity in the sector has only just begun, there remains ample opportunity for game developers and social networks (such as PayPal, Facebook and MySpace) to gain a new source of revenue through acquisitions of established and even start-up virtual currency providers. In August, Live Gamer purchased virtual economy data platform provider Twofish and, back in April, Playspan announced it would acquire Spare Change Payments, a start-up focusing on micro-transactions for social networking applications (deal values not disclosed).

Not surprisingly, venture capital firms are funneling real funds into virtual products and currency opportunities. PlaySpan raised $16.8 million in 2008 from Easton Capital Group, Menlo Ventures, Novel TMT Ventures, and STIC, while Offerpal Media secured $15 million from D. E. Shaw Ventures in February. Jambool, a virtual currency startup, announced it raised $5 million in August from Madrona Venture Group and Bay Partners. gWallet, a San Francisco-based provider of virtual currency, announced at the end of September that it was also looking to raise about $10 million and social gaming company Zynga most recently brought in $15 million in a new round of VC investments.

While some social gaming developers, such as Zynga, have caught a bad rap in the news recently (many games make their money off of trading in-game virtual currency for advertising offers — some of which are more beneficial to consumers than others), there is no doubt that social networkers are paying big bucks for virtual cash and the trend is likely to continue. As the economy continues to rebound and consumers loosen their purse strings, we expect there will be even more virtual cash flowing, leading to more spending by VCs and a spark for more M&A in the social networking realm.

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