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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About 13 percent of the activity — or 102 deals — was in the mobile sector, marking an all-time high, with 30 percent of those companies involved in photo or video technology.

“Without being too self-congratulatory, the Instagram Effect we speculated about in Q1 2012 seems to have taken shape as the mobile sector saw 102 deals, an all-time high… For skeptics, it may also be indicative of a VC herd mentality. Time will tell.”

Below is a breakdown of investments by dollar amounts in the different subsets of mobile and telecom industry:

Some other highlights from the report include:

• Seed investing also hit an all-time high, with 22 percent of all deals happening at the seed stage this quarter, as compared to 12 percent from the same quarter in 2011.
• The most successful sectors with respect to number of deals were internet companies with 46 percent, healthcare at 17 percent, and mobile and telecommunications at 13 percent. With respect to dollars in funding, the top sectors were internet at 38 percent and healthcare and “other” each at 19 percent.
• 50 percent of deals occurred at either seed funding or Series A rounds, although they made up only 19 percent of funding dollars.
• California took the most number of deals per state at 45 percent of deals, up from 40 percent in Q1. New York remained in second place with 10 percent of deals, and Massachusetts in third place with 9 percent.

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The overall investment of venture capital in the e-commerce field has hastened recently, according to the report. After more than a year of relative weakness, e-commerce began attracting lots of VC money in late 2010. Although the investments declined quarter-over-quarter in the third quarter of 2011, the quantity of deals and total dollars invested was still more than double what it had been during the third quarter of 2010:

Those investment dollars are apparently just following the action: Mergers and acquisitions in the e-commerce space have especially taken off over the past 24 months, the report indicates. Far and away the biggest driver of e-commerce M&A is the daily deals sector, which has accounted for 74 M&A transactions since the beginning of 2008:

:

It’s clear that discount e-commerce sites — particularly those that offer daily deals and flash sales — have grown significantly in recent years. While the amount and number of investments in daily deal companies dipped slightly in the most recent quarter (perhaps due to a fear of “fatigue” about such sites) flash sales companies are attracting more money than ever:

Now, of course, venture capital investment does not always translate into a sector’s full-on success. But it does indicate that there’s optimism that it has lots of room to grow. E-commerce proved to be a bigger factor than ever for shoppers over this year’s Thanksgiving weekend, the time that kicks off the annual holiday shopping season. If these investors are on target, the strength we’re seeing from online shopping now could be just the beginning.

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VC field: white and male, especially at the top

On Monday the National Venture Capital Association (NVCA) and Dow Jones VentureSource released the results of the 2011 Venture Census survey, which polled nearly 600 individuals in the VC industry. Of the respondents, 87 percent were Caucasian, nine percent were Asian, two percent were African American or Latino, and two percent were of “mixed race.”

Although in a press release the NVCA said the survey indicates “increasing ethnic diversity” in the VC industry, the new figures are largely similar to the findings from the 2008 Venture Census survey, in which 88 percent were Caucasian, eight percent were Asian, two percent were Hispanic and one percent were African American.

In addition, the VC field is mostly male, especially at the higher ranks. Of the total survey respondents, 79 percent were male and 21 percent were female, and in investment roles men outweighed women even more significantly. Of those who identified themselves as investors, 89 percent were male and 11 percent were female. (The Venture Census survey also polls people in administrative, operational, marketing and communication roles.) If anything, the field seems to have lost women in the past few years: In 2008, 86 percent of VC investors were male and 14 percent were female.

A more diverse future?

The good news is that the future of the VC field may be slightly more diverse than it was, as Caucasian males don’t seem to dominate the industry’s younger ranks quite as overwhelmingly. Of venture professionals who have been in the industry fewer than five years, 77 percent were Caucasian, 17 percent were Asian, 3 percent were African American or Latino, and 3 percent were of mixed race. And females were much more prevalent in the field’s younger workers: Of survey respondents under 30 years old, 28 percent were women. Of those in their thirties, 27 percent were women; forties and fifties, 22 percent; and over 60 years old, 13 percent.

Too busy to blog

Another interesting tidbit from the study is how often VCs use the social networking websites in which their industry has enthusiastically invested in recent years. Sixty-two percent of VCs polled use Facebook and just 30 percent use Twitter. LinkedIn is the social network of choice for the VC set, with 85 percent of respondents indicating that they are users of the site.

It is also somewhat surprising how much the majority of VCs seems to stay out of the blogosphere — both as readers and writers. Only 33 percent of survey respondents say they read blogs, and just 11 percent write them. To be fair, perhaps they are just too busy to surf the web: Forty-four percent of survey respondents in investment roles said they work more than 60 hours per week.

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Google chairman Eric Schmidt

San Francisco startup Hipmunk has received some $5 million in venture capital funding for its nicely designed travel search engine. But does this really mean that it stands to compete with travel offerings from a company like Google, a search technology leader with a market cap of some $200 billion? Google’s chairman Eric Schmidt thinks so.

For background: Google has come under fire from antitrust authorities for possibly having a too-large competitive advantage because of its dominance in the search engine field. When Eric Schmidt appeared before the Senate’s antitrust subcommittee on September 21 to address the situation, he defended his company’s position, saying that Google is very committed to playing fair and giving its competitors equal treatment in its search results.  Senator Herb Kohl, the chairman of the subcommittee, had some pointed follow-up questions after the hearing, to which Schmidt responded in a written statement released by Google on Friday, November 4.

Startups get press — and sometimes money

One of the more interesting parts of Schmidt’s response had to do with the startup ecosystem. According to Schmidt, the fact that web startups still get funding from VC firms and attention from the press means that industry competition is alive and well. In his statement, he pointed to a handful of startups to illustrate his point:

“There are new entrants in these market segments all the time. A new comparison shopping site, FindTheBest, launched by the co-founder of DoubleClick last year, just raised $6 million in venture funding over the summer. Cheapism is a comparison shopping site that launched in 2009, dedicated to bargain hunters on the Internet and was recognized in the New York Times and on CBS New York… In February of this year, the travel comparison shopping site, Hipmunk, received $4.6 million in venture funding, even as Google continues to expand its own flight search and hotel search functionality.

These are just a few of the many recent entrants in local and comparison shopping that are entering the market even as Google continues to innovate. While they may not all succeed, venture capitalists and entrepreneurs alike continue to believe they can compete with Google, Yelp, Nextag, and other established competitors.”

Actually, Hipmunk raised $4.2 million, and that was in January, not February, of this year. Prior to that, it had taken on an additional $1 million in seed funding — bringing its total backing to about $5.2 million. But Schmidt’s overall point is loud and clear. The question is, does it really hold water?

In M&A, big companies call the shots

It’s true that now is a frothy time in Silicon Valley, with funding rounds and overall enthusiasm for the future of the tech industry running high. But with recent web IPOs meeting mixed amounts of success, the fact is that most venture capital firms are giving startups money with the expectation that they’ll have an M&A exit — that is to say, they will be acquired by a larger tech company like, say, Google. Even though companies like Hipmunk are receiving millions of dollars in funding, companies like Google are still the kings of the industry in many ways.

Still room for new tech royalty?

Despite how rich and powerful big tech companies have become, many smart startups continue to make products that are superior in their own ways. In fact, one of the most annoying things you can ask a web entrepreneur is, “What happens if Google/Microsoft/Amazon decides to get into this space?” That is always a risk, but people start companies because they think their own ideas — and execution — can win out in the end. That big companies often look to capture the magic through M&A is evidence that those entrepreneurs are sometimes right. But is it really proof that newcomers are competing with the big guys on a completely level playing field?

In the end, how the government will eventually weigh in on Google’s specific business practices and how they impact smaller companies in the space remains to be seen. If you have any thoughts about Eric Schmidt’s statements or the ability of startups to compete against the industry’s giants, we’d love to hear them in the comments.

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The Israel-based company, which was until last year known as 6rounds, says it will use the money to expand its service beyond Facebook and onto other social networks. Rounds will also work on a strategy to bring its app to mobile devices, the company says.

As we’ve written before, what Rounds does is pretty cool. The app lets people video chat within Facebook while consuming other media content together, such as watching YouTube videos, looking at photos or playing online games. It’s turned out to be quite popular: The app’s Facebook page says it has 810,000 monthly active users, while the company itself has put its active user base higher, at 1.3 million. Either way, the figures are impressive.

However, it is smart for the company to start building its business beyond Facebook: Earlier this summer, Facebook announced a partnership with Skype to enable its video chat platform within its social network. And of course, it’s always smart for startups to make sure they are not entirely dependent on one larger platform: Most industry leaders and investors say that diversification is key for building a long-lasting user base.

Rounds was founded in 2008 and has now raised a total of $5.5 million in funding to date. The new funding round was led by Verizon Investments, with Rhodium and Tim Draper’s Draper Associates RiskMaster Fund pitching in as well.

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Single sign-on (SSO) solutions like Okta’s have become increasingly attractive to the enterprise as businesses continue to put more data in the cloud and have employees accessing them from multiple devices. Instead of running programs on a single “work” machine, many employees nowadays bring tablets, phones, laptops and other devices into the workplace, or perform work while they are on the go.

Okta’s software enables multiple people within an enterprise to sign in to the company’s web-based applications, whether they’re in the cloud or behind a firewall, while employers control employee access to programs through an app market-style interface. In May 2011, VMWare entered the space with a product called Horizon, which is billed as a  “user-centric management service for accessing cloud applications.”

Okta launched publicly in January 2011, and its customers currently range from Internet radio company Pandora to oil pipeline giant T.D. Williamson. The new funding round brings Okta’s total venture capital investment to approximately $27 million. The company’s investors now include Greylock Partners, Khosla Ventures, Andreessen Horowitz and Floodgate.

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AngelList started in February 2010 as a simple email list to alert wealthy angel investors to the tech industry’s hot and interesting startups. Since then, the tool has grown at warp speed: It is now a full-fledged social networking site that brings together investors of all sizes with a wide variety of companies looking for funding. Earlier this month I sat down with AngelList co-founder Naval Ravikant to get a look at how the site has grown and where it’s going from here.

The facts and figures Ravikant revealed in our conversation were pretty impressive: AngelList now has 2,300 investors and more than 10,000 companies with registered profiles on the site. The network has directly facilitated between 400 and 600 startup fundraises, and is currently helping with an average of one to two fund raises per day.

The AngelList website now has a number of features reminiscent of social networking or online dating sites, to allow both investors and startups to present their best selves — and separate the signal from the noise when looking for new partners. (Click image to enlarge. One more screenshot is included at the bottom of this post):

The size of AngelList’s community is even more impressive when you take into account that not just anybody is allowed in. “Curation is very important. We keep out the bad actors, and we remove people from the site if they get negative reviews, if they’re people who are just kicking tires or running pay to pitch forums,” Ravikant said. “We’ve removed companies if we couldn’t verify the claims they made about who has already invested in them. And there are also a lot of good companies we can’t send out on AngelList at all. We can’t help everybody.”

The site almost became too popular earlier this spring, Ravikant said. AngelList started to dial back its growth purposefully, partially in response to criticism that the site was helping to foster an overly exuberant angel funding environment. “Actually in February our volume was just insane. We were getting 40 to 60 companies trying to join per day. There was definitely a seed stage frenzy, and we felt the quality was slipping,” he said. “We deliberately locked the site down, we raised the bar and lowered the volume.”

AngelList has no near-term plans to start generating revenue through ads or imposing commissions on the deals it helps facilitate. Ravikant has funded the site’s development with personal money from himself and his co-founder Babak Nivi and an investment from the Kauffman Foundation, a non-profit focused on fostering entrepreneurship. Although I could see AngelList emerging as a logical acquisition for a number of social networking sites such as LinkedIn or larger media companies, Ravikant maintains that he’s not focusing on longer-term strategies at the moment. “We’re still figuring it out, and we’re not in any kind of rush,” he said. After all, if they need fresh funding, they probably know where to go to find it.

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The second quarter of 2011 saw the highest total amount of money invested by VCs since the second quarter of 2008, according to the MoneyTree report released this week. Quarterly venture capital investment activity increased 19 percent during Q2 compared to the first quarter of 2011, during which VCs invested $6.3 billion in 814 deals (click on image to expand):

And if you think VCs have been putting a lot more money than usual into web startups, you’re absolutely right. Investments in Internet-specific companies rose to the highest quarterly level since 2001. Venture capital firms pumped $2.3 billion into 275 web-oriented companies during Q2 2011, a 72 percent increase in dollars and a 46 percent increase in such deals from the first quarter of the year:

Growth is normally a good thing for the venture capital ecosystem, but it may be starting to get out of hand. “This quarter’s increased investment levels signals an incredible opportunity for job creation and innovation, but if current dynamics continue, it will not be sustainable,” NVCA president Mark Heesen said in a release accompanying the MoneyTree report. “This level of investment cannot continue if we do not start to see a pick-up in exits and, subsequently, fundraising.”

Venture capital firms have had difficulty raising new funds for several years now. And while there is a lot of talk about the recent splashy exits such as LinkedIn’s blockbuster IPO, the fact is that the current return on investment is still not as high as many VCs — or their institutional investors — would like.

But for now, at least, it’s a good time to be building a venture-backed business. “Overall, the increase in investment levels in Q2 remains encouraging for entrepreneurs,” said PwC global managing partner Tracy T. Lefteroff. “At the current pace of venture capital investing, 2011 is on track to exceed $26 billion, which would put it as the sixth most active year in VC investing history.”

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Just about every entrepreneur and investor in Silicon Valley has a special take on what works and what doesn’t when it comes to a startup. But precious few of their assessments are based on cold, hard facts. For an industry that runs on data and analytics, there has been surprisingly little in-depth research in the tech sector about what actually makes startups successful.

Seed accelerator Blackbox, has released the Startup Genome Report on Saturday, a comprehensive map of the factors beyond luck, talent and money that make Silicon Valley startups successful and spur innovation. Through surveys and interviews with nearly 1000 startups, co-authors Bjoern Lasse Herrmann and Max Marmer have come up with a framework to assess startups and understand the drivers of entrepreneurial performance.

Dubbed the Startup Genome Project because of its stated mission to “crack the innovation code of Silicon Valley and share it with the rest of the world,” the project was supported by lean-startup guru Steve Blank, who also teaches classes in entrepreneurship at U.C. Berkeley and Stanford University. The foundation for the project was based on two discoveries:

• Startups evolve through four, top-level stages of development, and each stage can be measured with specific milestones and thresholds. Startups that skip these stages perform worse. They tend to lose the battle early on by getting ahead of themselves.

• There are four types of startups. Each type evolves through the developmental stages differently, works best with different types of founding teams and has different motivations.

Here are the four “personality” types as described by the Genome Report:

The Automizer

Common characteristics: These are self-service, customer acquisition and consumer-focused companies that have fast execution and often automize a manual process.

Examples: Google, Dropbox, Eventbrite, Slideshare, Mint, Pandora, Kickstarter, Hunch, Zynga, Playdom, Modcloth, Box.net, Basecamp, Hipmunk.

The Social Transformer

Common characteristics: These self-service customer acquisition companies hit critical mass with runaway user growth in winner-take-all markets. They typically create new ways for people to interact.

Examples: eBay, OkCupid, Skype, Airbnb, Craigslist, Etsy, IMVU, Flickr, LinkedIn, Yelp, Aardvark, Facebook, Twitter, Foursquare, YouTube, Mechanical Turk, MyYearbook, Prosper, PayPal, Quora.

The Integrator

Common characteristics: The companies thrive on lead generation with inside sales reps. They are product-centric and rely on early monetization in smaller markets. They often take innovations from consumer Internet and rebuild it for smaller enterprises.

Examples: PBworks, Uservoice, Mixpanel, Dimdim, HubSpot, Marketo, Xignite, Zendesk, GetSatisfaction, Flowtown.

The Challenger

Common characteristics: Focused on enterprise sales, these companies have a high customer dependency, work in complex and rigid markets and have built arepeatable sales process.

Examples: Oracle, Salesforce, MySQL, Red Hat, Jive, Ariba, Rapleaf, Involver, BazaarVoice, Atlassian, BuddyMedia, Palantir, NetSuite, Passkey, WorkDay, Apptio, Zuora, Cloudera, Splunk, SuccessFactor, Yammer, Postini.

Here are five of the  many findings of the research report that might come in handy:

• Don’t be afraid to change. Startups that pivot, or change a major aspect of their business/ product one or two times raise 2.5 times more money, have 3.6 times better user growth and are 52 percent less likely to scale prematurely than startups that pivot more than 2 times or not at all.
• Seek out mentors. Startups that have helpful mentors and learn from popular startup thought leaders including Blank, Dave McClure and Sean Ellis raised 7 times more money and have 3.5 times more user growth than those without mentors, suggesting the right mentors significantly influence a company’s performance and ability to raise money.
• Don’t look to investors for the day-to-day:.“The value-add that investors claim to offer in an operational capacity has little to no effect,” the report says. Investors who provide hands-on help have little or no effect on the company’s operational performance. Meanwhile, many investors invest 2-3 times more capital than necessary in startups that haven’t reached problem solution fit yet. They also over-invest in solo founders and founding teams without technical cofounders based on our indicators that show that these teams have a much lower probability of success.
• Get tech support. Startups without a technical cofounder are 80 percent more likely to scale prematurely, have 152 percent less user growth and need 45 percent longer to reach product market fit than startups with one technical cofounder.
• Plan accordingly. Founders generally underestimate how long it will take to validate a market by 100 to 200 percent.

Now that the study is out, Blackbox says it will continue gathering and analyzing more advanced data with the goal of releasing a new software program this year that will assess what stage a startup is in and use the information and provide tools and resources to help entrepreneurs figure out whether they are making progress, and how they should allocate their time and energy to increase their chances of success.

It’s an idea that’s time has come. According to a recent Kauffman Foundation study, more than 90 percent of all job growth in the United States comes from highly scalable startups. Yet more than 90 percent of funded startups fail. From the report:

The window of opportunity for this project has only recently been opened. In just the last 2-3 years the number of people extracting and codifying the informal learning of Silicon Valley has hit a point of critical mass. Concurrently the costs of startup creation have fallen dramatically triggering a huge increase in technology entrepreneurship all over the world.

The report’s authors say their work will shine a light on the idea the fallacy that creating successful startup is largely dependent on combination of magic and guesswork. “For a long time there has been this resistance to the idea of turning art of entrepreneurship could be a science,” Marmer says. “And we don’t want to remove the art. But when you add the science, I believe we can dramatically increase the pace of innovation.”

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