The latest buzz comes by way of the Bitcoin Boost Fund, a new Silicon Valley fund that announced on Tuesday that it will hand out $50,000 to seven or so Bitcoin startups.

All of the startups will be graduates of Boost VC, an accelerator program that seeks to mentor would-be Bitcoin barons. The accelerator, created earlier this year, is run by Adam Draper, who describes himself as a “fourth generation VC” and who is hosting a hackathon at the “Bitcoin: Future of payments” conference in San Jose this weekend.

News of the fund, which will total around $400,000, comes less than a week after Fred Wilson’s Union Square Ventures announced it would put $5 million into Coinbase, a service that lets people store and convert Bitcoin online. (See here for all the other Bitcoin buzz last week.)

So what sort of start-ups will the new Bitcoin fund support? Jeremy Liew of Lightspeed Venture Partners, another investor, offered some broad strokes:

“The way to regard any tech disruption — from cloud to big data to flash storage — is that the first generation of companies are always infracture companies, the second generation are application companies. We’re right at the cusp of moving from infrastructure to applications … Maybe international money transmissions.”

Liew added that Bitcoin is most appealing to merchants who want to impose the 3% transaction cost for payments often imposed  in the traditional financial system.

If you’re curious about Bitcoin, come join us at GigaOM’s meet-up this Thursday in San Jose — we’ll have CEOs who work in Bitcoin and engineers from Facebook and Google to discuss speculation, security and more. The event, which is filling up fast, is free thanks to our friends at Ribbit Capital, and takes place from 6 to 9 — it will include time for chat and cocktails.

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Nabeel Hyatt, a venture partner with Spark Capital, is in a unique position to understand game design as a VC, because he began his career as a developer himself. Founder of Conduit Labs, a game studio acquired by Zynga in 2010, Hyatt then became a General Manager at the social game giant, where he led development of Adventure World.

Create games with great retention—and understand why they’re succeeding

Hyatt’s number one metric for games that interest him as investment prospects: Day-one retention, i.e. whether new users come back the next day to play. This is an especially important way for Hyatt to evaluate games he might not personally “get” himself. His rule of thumb: Anything below 13 percent day-one retention is bad, while a great target is toward the 60-percent range. (If a game remains below 13 percent after a couple months despite attempts to grow retention, it may be time to kill it.)

Hyatt also looks for teams to invest in who understand why their game is succeeding—for instance, why players are rating the game highly, why day-one retention is strong, or even something as simple as why people smile while playing the game. “That tells me a lot about their thought process,” Hyatt says. “The games companies in this new ecosystem that are doing better and better are the ones asking why.” It used to be that games would evolve every few years with the launch of a new console; now, however, game evolution cycles are happening on a near quarterly cycle. For that reason, Hyatt says, “It doesn’t matter how analytical you are or how cutthroat you are; it comes down to measuring those results to figure out how to get better.”

Pitch games that give players long-term aspirations

Hyatt puts a lot of stock in the long-term goals a game creates for a player: “What’s the aspiration of a player? What’s the thing they’re trying to build in the future? How would they imagine themselves playing the game in a year? What’s the moment-to-moment experience in order to meet the aspiration?” This isn’t just a high-minded design goal, but good business sense. After all his firm invests in games as a recurring service, not games enjoyed for a day or two then discarded.

For the company pitching Hyatt, they need to answer two key questions: Why now? Why you? “We invest in areas where there might be an opportunity for explosive growth,” he says. Most companies aren’t likely to realize such growth, so the developer must explain to him why they’re the exception.

Name your strengths as a startup—and your weaknesses

“What I want to see is an entrepreneur who understands their biggest strength and their biggest weakness and be able to talk about both honestly,” says Hyatt. Understandably, some developers in search of funding may hope to obscure their shortcomings, but Hyatt insists he would prefer if they instead face them head on, saying something like: “If yo’’re not going to invest, this is the number one reason you’re not going to invest.” Not only does this demonstrate that the developer truly understands his or her business, it also opens up an opportunity for the VC to offer suggestions and help the start-up.

There’s a corollary to this advice: The developer should know what they’re best at, and be able to explain why and how. “A small company can’t be good at one hundred things,” Hyatt says. “They can only afford to be number one in one area.”

* * *

A managing director with Lightspeed Venture Partners,  Jeremy Liew has invested in a number of successful gaming companies, including Playdom (acquired by Disney), Serious Business (bought by Zynga), and KIXEYE.

Have a plan that demonstrates repeatability and discoverability

As Liew puts it: “How do you build a hit factory?” While not every game will be a hit, a startup should have some kind of native advantage which makes their games more likely to be a hit. That could be due to a built-in audience created by a series of sequels, or a hit niche game genre with real complexity and a passionate playerbase. As an example of that, he cites KIXEYE, which focuses on core gamers who are under-served by Facebook games.

For discoverability, Liew describes the current playing field this way: Whereas in the past, game distribution used to be the bottleneck (i.e., selling games in boxes on shelves), now most games are available online, so distribution is free and easy and democratic, and development on the larger platforms is relatively inexpensive. However, this very fact makes discoverability quite crucial. “In a world where there’s tons and tons of games, how do you get to be the one people try and our talking about?” Liew says. As he notes, it’s just simply not enough to create a great game, unfortunately. “There are [already] so many great games that are sitting out there, languishing,” he notes.

Don’t just talk about how good your game is—prove it with user data

Liew says this is a common mistake, with developers insisting in the face of his skeptical questions, “Yeah, but the game is going to be awesome… that’s why it’s definitely going to work.” The hard user data shows that prediction, however, is almost always wrong. Instead, show Liew the data. He adds an adage that may be hard for developers to swallow: “Game design is not predictive… user engagement is predictive.

Wagner James Au is a game-development consultant and writes the gaming/virtual culture blog New World Notes. Follow him on Twitter @SLHamlet.

Excerpted with permission from the publisher (Wiley) from “Game Design Secrets” by Wagner James Au, copyright © 2012.  Now available in paperback and e-book (use code “GDS12″ for a 40 percent discount at checkout).

Photo courtesy of Shutterstock.

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But premise and adoption numbers aside, such a long list of investors putting money into a jumbo-seed round so early on is not uncommon these days. Don’t blame it on too few investments driving up demand, however; on the contrary, there are many young companies taking lots of money from lots of investors. We find ourselves reporting on another early-stage funding round for an Internet or mobile startup every day. Whereas a year ago…nada.

CB Insights shows growth of 33 percent from Q1 '09 to Q1 '10. It uses an index instead of raw deal count numbers because angel investing is so opaque.

There isn’t much in the way of comprehensive statistics on angel investing, but the numbers that are available back this trend. U.S. angel investment deal flow was up 33 percent year-over-year in the first quarter of 2010, according to CB Insights. And angel investors themselves cite a return to frothiness. I interviewed a passel of them about when it started, why — and what it means for the future of today’s crop of companies.

‘Trigger-happy, But Not Irrational’

“I haven’t seen this level of startup activity (and angel investing) in SV since ’98,” PayPal and Slide founder Max Levchin tweeted back in March, an observation he reiterated during a recent discussion. “I’ve probably made more investments in the last month than in the previous year,” he told me. “I’m suddenly trigger-happy. And I am not irrational.”

Early-stage investors agree that things started picking up in the fourth quarter of 2009, and were going full steam ahead by the first quarter of 2010. Levchin’s PayPal and Slide compatriot Keith Rabois reports having invested in five companies this January, compared to none in the fourth quarter of ’09. The first Google employee to go angel, Ayden Senkut, told me he’s made double the amount of investments this quarter as he did during the previous three-month period. And there are no signs of a slowdown.

Slide CEO Max Levchin thinks today's startups are poised to disrupt incumbents due to fundamental shifts in the technology environment.

All of which has had an impact on valuations. From a price perspective, “There are no longer deals to be had,” said Jeremy Liew, managing director at Lightspeed Venture Partners and an investor in companies such as Flixster and RockYou. Indeed, multiple angels said that entrepreneurs now open angel rounds at $750,000, whereas 18 months ago it was unusual to see anything above $500,000.

Investor Posse(s)

The larger rounds are often provided by a larger number of investors. And there do seem to be more total investors in the angel market. Jessica Livingston of Y Combinator, the pioneering three-month intensive startup program, said that investor attendance at its latest Demo Day in March was up 50 percent from the previous session, held in August 2009.

Jessica Livingston of Y Combinator said 50 percent more investors showed up to the program's latest Demo Day.

The startups presenting at Demo Day were swarmed — but in fact there was so much advance interest that a quarter of them already had money in the bank before the day even kicked off, according to Livingston. Whether it be former Googlers, former PayPal peeps, or just folks with some money who’d like to be tapped into what’s hot, there are a lot of people these days willing to cut checks for tens of thousands of dollars.

“When I first started doing this I was the only ex-Google angel, and today there are anywhere between 20 and 40, and that’s just Google,” said Senkut, whose Felicis Ventures has about 50 active investments. There’s even one angel team, Mixin Capital, that was started by the Y Combinator alums who sold Zenter to Google and invests almost exclusively in Y Combinator startups.

So many investors on the hunt lead to what Rabois called a “dogs and cats round, with everyone piling on.” Formspring’s round of 10 named investors is just one example. Though Rabois, who serves as EVP of strategy for Slide, said he was “dubious” as to whether that was a good thing. “When there’s lots of people involved, nobody’s accountable,” he noted, never mind how many patrons an entrepreneur then has to please.

There’s also increasing collaboration between angels, through organizations like AngelList and the Angel Forum as well as Y Combinator and the many startup camp copycats it’s inspired. (Increased knowledge sharing might also be partly to blame for the mini-swarms of me-too companies we see these days. There’s a reason they call it groupthink.)

And new incubators and seed funds are popping up all over the place. For instance, the video embedded above is from a tour I took of Kicklabs, a soon-to-open space in San Francisco’s SOMA neighborhood set up by Transmedia Capital in partnership with the building owner. They’re planning to give startups free rent and access to advisers and resources (and a pretty sweet in-office slide) in exchange for the equivalent of a $25,000 share of each company.

Shortest. Recession. Ever.

So why now? Why are there so many companies deemed worthy of receiving money and so many investors willing to give it to them? The simplest reason is that the overall economy, after cratering in the fall of ’08, is showing signs of recovery. Even if the market isn’t righted again, investors’ public company stocks are moving in the right direction.

Call it the shortest recession ever, as I discuss in the video embedded below with SoftTech VC‘s Jeff Clavier, who himself has made 75 consumer Internet investments in the last six years, 48 of them in the last two and a half. He had four exits in 2009: Mint to Intuit, Mixer Labs to Twitter, Ohloh to SourceForge and DanceJam to Grind Networks.

Clavier came by our office studio to talk about the state of angel investing. “There was a handful of us six years ago and now there’s a legion,” he said. One of the factors that prompted Clavier to start investing was how much cheaper it had become to start companies, given web infrastructure and monetization tools. And that’s only more true today.

Another factor is that starting a company has a cool factor — especially these days. “You see people from Wharton coming out to Silicon Valley now” is how Rabois put it, whereas a few years ago, “a lot of those people would have been at investment banks.”

The Race to Get in Early

To be fair, the economy is not out of trouble yet, and neither are later-stage Internet companies. VC funding numbers are still depressed, with first-quarter stats for Internet-specific U.S. investments showing a 14 percent quarter-on-quarter decrease in dollars and a 19 percent decrease in the number of deals, according to PricewaterhouseCoopers and the NVCA.

Keith Rabois, EVP of strategy for Slide, invested in five companies in January, compared to zero in the fourth quarter of '09.

Still, there are some notable larger and highly sought-after venture funding rounds — like the yet-to-be-closed but widely reported bidding war for Foursquare, and competitive deals closed by former Facebook employees’ companies Asana and Quora.

Asana and Quora are both pre-launch — aka, the kind of companies that would normally be getting angel funding. “Because of the excitement around microcap and seed investing, venture capital firms are being more active in the space as well,” said Senkut. “The valuations are going up too fast. They feel like they may need to have a better grasp on the seed stage.”

And after a long IPO drought, there appear to be some viable exits approaching IPO-style valuations available to startup shareholders. Google, after not buying a single company for nearly a year, has acquired nearly 15 since last August. And there’s an active secondary market for employee and early investor shares, led by Russia’s Digital Sky Technologies, which has made deals to buy common stock in Facebook, Zynga and Groupon. Those companies are part of a small pack that see active secondary market trading, both privately and facilitated by sites like SecondMarket and SharesPost.

Nature or Nurture?

Are today’s web and mobile startups any different or better than those of the past? Investors contend that they are, for a few reasons. First of all, there’s a working theory that companies borne out of the hardship of a bust cycle are better grounded, if only because they’re not swept up in the hype of a boom. Secondly, many of today’s early startups actually have revenue before they seek funding, whether from commerce, subscriptions or coupons. Or, like Formspring, they have incredibly viral and mainstream adoption that seems to promise long-term value.

Aydin Senkut of Felicis Ventures has 50 active angel investments.

And thirdly, as Max Levchin put it, “Every decade or so you see enough of a buildup in technology capabilities to enable things that change the world in fundamental enough ways that incumbents can’t take advantage of and startups can.” That’s why he invested in the social payments startup WePay, which he hopes will take on PayPal. The behaviors the company is trying to address are fundamentally different than those of 10 years ago because broadband Internet has become a much more significant part of our life since then.

But there are downsides to so much money being spread around. More funding buys an entrepreneur a bigger runway, but also increased oversight and higher expectations. The result will be that many similar companies will have trouble co-existing, and the most crowded segments will see consolidation. There’s no way all these companies will succeed.

Lastly, increased excitement around early-stage companies is also responsible for an imbalance in the tech job market. “I do not have a single company that is not hiring, and I do not have a single company that is not finding it difficult,” said Senkut. “Anyone worth being hired as an employee is starting their own company.”

For some, this kind of frenzied, frothy atmosphere will be all-too-reminiscent of the dot-com bubble 10 years ago. At this accelerated pace, it’s possible that the shortest recession ever could be followed by the shortest boom.

Crashing wave image courtesy Flickr user jenny downing.

Liew recently stopped by GigaOM HQ for a quick chat about the explosive growth of that market and where it’s headed. Liew believes:

• There is still a lot of growth left in the virtual goods space as mechanisms come online that allow people to trade time for money (for more on this, see Om’s interview with CrowdFlower’s CEO).

• The iPad won’t be a game-changer in the virtual goods space at first, but could be, depending on adoption of the device.

• Buying virtual goods in games is not cheating, but rather is akin to a golfer purchasing a better putter.

• Companies looking to his firm for funding should realize that games are a hits-driven business. Creating one really expensive game is less appealing than the ability to affordably take “multiple shots on goal.”

For more in-depth analysis on MMOs, check out the report Virtual Worlds: Trends and Opportunities at our subscription research service, GigaOM Pro.

Here’s the short version: We’ll see a lot more games that are free or funded with other models besides subscription and retail, and a top-to-bottom transformation of how games are deployed, developed and played. At least one of the VCs, however, anticipates an imminent backlash against the overheated casual gaming business. Get the full scoop from Benchmark Capital’s Mitch Lasky, Lightspeed Venture Partners’ Jeremy Liew, and Susan Wu, formerly of Charles River Ventures, below the fold.

After The Casual Backlash, Look At Platform Companies

“I’m sensing that we are on the verge of a casual games backlash,” Mitch Lasky, general partner at Benchmark Capital, told me in an email. (Benchmark is invested in noted interactive entertainment companies/ products such as Second Life, Gaia Online, Red 5, Vivox, Riot Games and JAMDAT.) “The space is so ridiculously over-funded, the barriers to entry are so low, and the media models require such high traffic to generate meaningful revenue, that I think there has to be a shake-out. I think the sites with traffic, like MiniClip, will benefit, because everybody is going to be buying referrals from them.”

Lasky also says he sees a wave of new non-casual games coming to market, but the top beneficiary may be middleware. “I read a recent analyst report that showed almost 90 MMO’s, virtual worlds and online game services scheduled to come to market in the next 18 months,” he said. All that activity is “going to benefit the platform companies — we’ve been seeing tremendous customer growth at Vivox, for example, which provides high quality voice services to online games.”

Instead of casual games, he added, “I’m increasingly interested in more gamer-oriented online games, not based on subscription billing models. Our investment in Riot Games grew out of this thinking. We’ve seen strong evidence that this combination works in the Chinese and Korean markets, but it’s been slow to take off here. It is going to take the right game to unlock this market, but it could be huge.”

The Rise Of Free-To-Play– And Companies To Serve That Model

Jeremy Liew, a managing director at Lightspeed Venture Partners, concurs that the U.S. will shift away from the subscription model, a transformation that has already taken place in Asia. (Liew recently led funding for Serious Business, creator of the Friends for Sale social game.)

“Free-to-play gaming and virtual worlds (monetized through up-sold virtual goods and subscriptions) are gaining increasing traction in the West,” he said in an email. “Companies like K2, Nexon, Gaia, Habbo, Neopets, Runescape/Jagex, Gameforge, Eve/CCP and Bigpoint all doing revenues now in the tens and even hundreds of millions of dollars. But gaming, like media, is not a winner-take-all business, and there are many up and coming companies building free to play experiences and growing fast.”

Because of this, Liew noted that companies who can help with player acquisition, billing, fraud, and player management/game mastering are poised to profit from the industry’s rapid growth —a point echoed by Susan Wu, formerly a VC at Charles River Ventures. “[W]ith the death of retail and the greater accessibility of games in the hands of an order of magnitude larger audience,” she told me, “free to play with some premium components becomes the most logical conclusion. Then of course with alternate billing models comes alternate payment systems.”

Games Become Social Bonding, Which Means Even More Venture Opportunities

Wu is now a part-time startup advisor and full-time CEO for what she calls “a groundbreaking, stealthy new online gaming company.” She cites Susan Choe’s Outspark, Acclaim, and Nabeel Hyatt’s Conduit Labs (developers of Loud Crowd) as companies she’s following most closely in what she sees as a Net-wide transformation.

“We are still at the cusp of a sea change in the gaming space that rivals that of Web 1.0 in scope,” she told me. While she notes that the industry is moving in the same direction as it has been over the last few years, she says she’s been surprised by the pace of change, “in part due to the rapid adoption of social networks as an entertainment platform.”

It’s also attributable to innovations in technology and game development capability; Flash is now a viable deployment platform for games, as is the iPhone, while even a hardcore title like World of Warcraft has demonstrated how popular a well-executed can be, despite less flashy graphics. With these innovations come changes in user behavior among players, with “social relationships as primary catalysts for game playing; we’re moving back to the playground where games reinforce and create social bonds.” She points as well to innovative games and genres that reshape our expectations, from Portal and Braid, to Alernate Reality Games, to indie iPhone game Tap Tap Revolution.

“So as you can see,” Wu concluded, “this is an industry that is in the midst of great, inevitable transformation. Some of the larger companies will be able to adapt slowly, and in piecemeal — but the bottom line is that there is extraordinary opportunity for entrepreneurs.”

Update, 8/26: Liew, by the way, frequently writes about the business of games on Lightspeed’s blog.

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