Kabam raises $85M for hardcore social gaming business

Here’s a “kaboom” for all those social game skeptics out there. Kabam has raised $85 million in a fourth round of funding to fuel its business making hardcore games for social networks such as Facebook. The backers include Google Ventures, Pinnacle Ventures, Performance Equity and SK Telecom Ventures, as well as earlier backers.

It’s as good a sign of disruption in games as any. Based on the funding from such heavy-duty backers, Kabam is now one of the most valuable independent companies making games on Facebook. In terms of users, it is far outgunned by market leader Zynga (poised for a possible initial public offering), which has 247 million monthly active users on Facebook. Kabam has just 7.2 million monthly active users. Zynga has raised hundreds of millions of dollars, but Kabam is holding its own, raising $125 million to date.

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People will shake their heads at the amount of money here and what it says about the likely valuation. But as we noted in a review of Kabam’s games, the investors here aren’t crazy. Kabam clearly has users who are far more valuable than the standard social game player, because Kabam’s users are willing to pay Kabam a lot of money for a hardcore game experience on Facebook. Kabam’s four active games include Dragons of Atlantis, Kingdoms of Camelot, Glory of Rome and Global Warfare (below).

They’re all hardcore role-playing games where users play for four hours at a session, compared to maybe 10 minutes for a Zynga game. About 90 percent of Kabam’s players log into their games six or seven times a week. That’s what Kevin Chou, chief executive of Kabam, calls engagement. Those gamers are running the game in the background while they’re multitasking. That allows them to have lots of time to play all day long, even as they do other work. Such gamers would never have a four-hour stretch to play a console game.

Chou says that about 80 percent of the company’s players say they play hardcore games on the consoles or the PC. And now they are spending less time with those games and more time with Kabam games. This had to happen. With nearly 700 million users, Facebook has become a mirror of society. And society includes a lot of hardcore games. Kabam is one of the few companies to realize this and to target those gamers, who are accustomed to spending a lot of money on games. Kabam blends the immersive game play of massively multiplayer online games with the social satisfaction of social networking games.

Kabam was founded in 2007 as Watercooler and funded by Betfair and Canaan Partners. It had around 20 employees for quite a while as it experimented on Facebook, making sports fan pages and sports games. It had a big hit with its first major role-playing game, Kingdoms of Camelot, which quickly pulled in millions of users. The game still has 1.5 million monthly active users 19 months after its launch. Kabam also acquired WonderHill, a San Francisco game company that developed Dragons of Atlantis, which has become Kabam’s most successful game to date.

Kabam’s games are free-to-play, where users play for free and pay real money for virtual goods such as more Centurions for the Imperial Roman Army in Glory of Rome. While many users play for free. There is a sizable percentage of users who pay money for the time-saving aspects of the game. And the funny thing about hardcore gamers is that they’re willing to pay more than $60 to get their fix. Whenever Microsoft launches a new $60 version of Halo, it often creates a $125 “legendary” version for the biggest fans.

Ken Pelowski, managing director of Pinnacle Ventures, said Kabam’s typical user numbers are similar to the number of hardcore fans for each console game hit.

“Those console fans are migrating online to free-to-play games, and that is what Kabam is seeing,” Pelowski said. “But here, you don’t have to pay $250 for a box and $50 for each game. Here, you could play the game for free. You could pay hundreds of dollars. You could pay thousands of dollars. The high growth and high value of the user base justifies a higher valuation for the company.”

Kabam’s users are as dedicated as console gamers. They’re willing to spend more than $60 sometimes, just to get a much-needed advantage that will make them look good in front of their fellow alliance members (as many as 100 players can band together in alliances). Chou has said that Kabam isn’t really going after Zynga. It’s the anti-Zynga. It’s going after Activision Blizzard and Electronic Arts instead, with the aim of disrupting their traditional business, Chou said.

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This is the place in the story where traditional game company executives cackle at the audaciousness of Chou. But there are a lot of former game industry veterans working for him.

Kabam doesn’t disclose its financial results. But the tea leaves are there. With just four games and $125 million in funding, Kabam has been able to grow from 25 employees to more than 400 in the past 16 months. Chou said the team will be shipping more impressive games, including five later this year.

Console gamers may laugh at the low interactivity of Kabam’s games now, but Chou says there’s a full pipeline of games coming, and each one will reflect learnings from Kabam’s direct observation of millions of gamers. Traditional video game executives would kill to get that kind of feedback. Global Warfare, Kabam’s newest game, has minimalist, cinematic-style cut scenes (as much as Facebook can handle) and it takes the game play from Glory of Rome to a higher level. The game forces players in an alliance to be more social by requiring them to coordinate assaults on strategic resources in the game. I’ve been playing it since it debuted on May 3, and I’ve spent most of that time getting ready to do real battle. That might bore other players, but I consider it to be a fun investment of my time.

There is some precedent for Kabam’s funding. The game industry took notice of the Kabam-style model of getting more dollars out of hardcore gamers when China’s Tencent bought the majority of Riot Games for nearly $400 million in February. Riot Games had only 1 million users playing one game, but those dedicated gamers spent a lot of money. In January, Kabam raised eyebrows and fears of a “bubble” in social gaming when it raised $30 million.

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EA, for its part, has its own online role-playing game Lord of Ultima online on Bigpoint.com. But there’s an opening for Kabam to get big in this niche because many of the big traditional game publishers have left the PC game market to focus on the consoles. And the traditional game publishers who have entered the Facebook market are focusing on competing with Zynga for the new demographic of casual gamers on Facebook. No one is really competing directly with Kabam, except other startups such as Kixeye.

But Kabam has to walk a delicate balance with its users. It can get the games to monetize better by making ordinary tasks take longer and longer to do, like sending scouts on a recon mission. The users may get fed up and pay Kabam some money so that it can eliminate the wait. But if the users feel like Kabam is holding them up at every turn and deliberately trying to frustrate them, then they will move on to another free-to-play game that doesn’t treat them that way.

There are some risks for Kabam. The company can stage some massive battles where users send reinforcements to stop attackers from looting a city. But it takes a lot of computing power to make sure that the game doesn’t crash or make the wrong calculation in this kind of scenario. And overall, Kabam needs more servers because its users are online so much. Kabam has to make sure that it doesn’t hit a wall with Facebook’s infrastructure, which wasn’t really built for real-time engagement.

Over time, the social network platform will become better at running online games. And then Kabam will likely try to create games that include the animations and 3D graphics that hardcore gamers want. Chou says the company will also expand into new markets such as Asia, where there is a lot of potential among hardcore gamers. Pelowski acknowledges that there is still a gap where the best console games have a higher quality bar, but Kabam is starting to close that gap. And in the meantime, the company is still monetizing its current games very well.

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All of that adds up to a lot of  value, says Pelowski. As to whether Kabam is part of a giant social gaming and social networking bubble, Pelowski says the underlying metrics of the business justify the investment.

Existing investors Intel Capital, Redpoint Ventures, and Canaan Partners also participated in the deal.

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