Social game leader CrowdStar raises $23M

Social game leader CrowdStar has raised $23 million in a first round of funding led by Intel Capital and Time Warner Investments. The company plans to use the money to double its headcount and expand on a global scale.

The deal shows that social gaming has attracted some very big investors and continues to have be a magnet for attention, but CrowdStar’s own journey shows how tough it is to compete in the market for social games on Facebook.

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“We want to be a global social and mobile gaming company, not just a Facebook game company,” said Peter Relan (pictured right), chairman of incubator YouWeb and chief executive of CrowdStar in Burlingame, Calif. “As we do so, it becomes difficult to fund all of that investment through our Facebook growth alone.”

Chinese game operator The9 and NVInvestments also participated in the round. Those are pretty well-heeled global investors for a company that wasn’t on the map until the fall of 2009, when CrowdStar launched its first hit social game on Facebook.

Back in early 2010, CrowdStar had just 20 people. It was riding high on the success of Happy Aquarium, which rocketed the company from nothing to the No. 3 company on Facebook, with more than 50 million monthly active users. Now the company has more than 100 employees.

But what Facebook giveth, it also taketh away. After Facebook cracked down on spam-like viral marketing in early 2010, CrowdStar’s growth in users stalled. And as rival Zynga came up with hits such as CityVille and FarmVille, CrowdStar’s audience started to look small by comparison. CrowdStar still has hits like It Girl, but it has slipped to 29 million monthly active users, according to AppData.

Relan said that one big reason the user count dropped was because CrowdStar retired its Quiz Planet app, which had around 17 million monthly active users. That app was getting old and didn’t monetize that well. Relan said that CrowdStar’s core gaming audience is still stable and that the company has been making money.

While CrowdStar had been funding its own expansion from its profits, the competitive pressures are bigger now. So it’s not surprising to see the company turn to venture funding. Still, the company says it had its highest quarterly revenue ever in the first quarter. The company has expanded beyond Facebook into the mobile game market in Japan.

Crowdstar was founded by Suren Markosian in the summer of 2008 with funding from YouWeb, the incubator run by entrepreneur and angel investor Relan, who will be speaking at our GamesBeat 2011 mobile games conference. Markosian (pictured with Relan, below right) was an internet entrepreneur. Jeffrey Tseng (pictured at bottom), a video game industry veteran, joined them a couple of months later.

For a while, the company’s games were duds. Around them, rivals such as Zynga, SGN, RockYou, Slide, Playfish and Serious Business started to generate lots of users and real revenue growth. But each CrowdStar game was a kind of experiment that tested what was possible on the growing Facebook platform.

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Some of the games tested virality and some tested monetization. They also tested how to write code that could scale to millions of users. Many of the games focused on user-generated content. But nothing really stuck. Still, the company used the early start to learn valuable lessons about how to operate as a social gaming company. That meant the company operated its games as a service, launching them fast and updating them continuously in response to feedback. The company found a gold mine with Happy Aquarium and then rode the path to success on a very small amount of capital raised.

Former AdMob executive Niren Hiro joined as CEO in May, 2010, to head the expansion, but he resigned in January. At that point, Relan took over as chief executive. CrowdStar had to scale back on the size of its staff for a time. But with the new round of funding, CrowdStar plans to add about a hundred employees, including game developers, server developers, artists, producers, business analysts and content managers.

Relan said the company needed to raise money to capitalize on geographic expansions in places such as Japan, China, Eastern Europe and Brazil. In those markets, Facebook isn’t the dominant social game platform.

Each investor is strategic in its own way. Time Warner can lend its brands to CrowdStar, while Intel could ultimately be helpful in smartphone and tablet gaming.

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Intel also previously invested in OpenFeint, another YouWeb-spawned company, which was acquired by Japan’s Gree for $104 million. The9, which also invested in OpenFeint, will help CrowdStar enter the hot Chinese social game market. Rivals include Zynga, EA-Playfish, and Disney-Playdom.

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