Institutional Venture Partners explains why it bet big on game studio Supercell

Institutional Venture Partners saw so much potential in game developer Supercell that it had no qualms investing at a valuation of $770 million, according to an interview with IVP partner Sandy Miller.

Above: Sandy Miller is a board advisor

Image Credit: IVP

Finland’s Supercell, the maker of the popular Clash of Clans [above] and Hay Day mobile games, confirmed today it raised $130 million from IVP, Index Ventures, and Atomico. That’s one of the biggest fundings for a game startup, and this shows that the gaming landscape is changing quickly.

Just a year ago, Rovio Entertainment was the darling of mobile gaming, and it was talking about going public on the strength of its Angry Birds franchise.

Rovio reported 2012 revenues of nearly $195 million, up 101 percent from $97 million in 2011. But this year, Rovio games have fallen in the top rankings of the most popular games. Angry Birds has had more than a billion downloads, but the question dogging Rovio, as it has for every game company throughout history, is, “What have you done lately?”

Supercell is close to eclipsing Rovio’s 2012 revenues — in a single quarter. Miller said that he wasn’t concerned that Supercell is a “one-trick pony” because it has two hits in two very different categories. Clash of Clans is monetizing well among young males, while the FarmVille-like Hay Day is doing well among women.

On top of that, Miller said that Supercell functions in a different way, just like its name sounds. The founders, Ilkka Paananen and Mikko Kodisoja, are industry veterans who spent six years at another game developer, Digital Chocolate. They let the company’s teams operate in small cells. They work on projects for a long time and approve a game only when it turns out to have big potential.

So far, that has worked. Supercell grossed $100 million in 2012 and $179 million in the first quarter of 2013, Forbes said. Net income, after expenses and Apple’s 30 percent cut, was $104 million in Q1. Daily revenue is now at $2.4 million and is on a revenue run-rate — if the games stay as hot as they are — of $800 million for 2013. Supercell gets 8.5 million daily players who play an average of 10 times a day.

But the question is: How long it will last?

There’s a risk in investing in a mobile game company that has to compete against hundreds of thousands of rivals. But Miller said that mobile game companies are the most interesting category for investments because it is a category where the number of new players is still exploding.

“In the other segments, it’s all about stealing market share from somebody else,” Miller said. “We like to invest where the growth is. In mobile, it is a much more open playing field. You can have other companies being successful without impacting Supercell’s success. We are late-stage investors and look for companies where they have most of their growth ahead of them.”

Mobile and tablet games accounted for 80 percent of the investments in games in the first quarter, according to investment bank Digi-Capital. That compares to just 30 percent a year ago and 5 percent the year before that. Founded in 2011, Supercell had the foresight to focus on tablet gaming.

IVP, a late-stage venture capital investor, hasn’t invested in many other game deals. But it has chosen wisely. The firm was an early investor in both Zynga and Ngmoco. Zynga went public, and Ngmoco was acquired by DeNA for up to $400 million.

This deal gave liquidity to the founders, and it was also equitably spread out across the whole employee base, Miller said. He said he regarded it as a fair valuation, considering how fast the company is growing.

“We saw the trends, and we got the deal done quickly,” Miller said. “They had their choice of investors.”

Miller also believes that a lot more hits are coming in mobile gaming. He believes Supercell itself has a strong pipeline of upcoming titles.

“The usage of games on smartphones is increasing,” he said. “Games are the biggest category by far, and it is increasing its share. That really bodes well. Supercell will have more hits, but others will have attractive games, too.”

Sandy Miller image credit/IVP