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@ CES: Norwest’s Chang: Things Could Get Scary For Facebook, Slide in ’09

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imageDespite all the predictions for slashed VC spending and stagnant growth in new media this year, clearly there is still money to be spent, as we’ve already seen a number of fundings in the past week. But some unlikely companies may be stretched thin this year, Norwest Venture Partners principal Tim Chang told us.

“I’m concerned about Facebook,” Chang said, when I asked him about the companies that he’d be watching this year. “Microsoft (NSDQ: MSFT) isn’t likely to renew its search-advertising contract — at least not at the same rate — and Facebook makes a significant amount of money from that deal. Imagine if you lost $300 million worth of revenue — how would you make it up? It’s not going to come from advertising, even if they have other ad platforms.” (That also begs the question of what will happen to MySpace when Google (NSDQ: GOOG) renegotiates its search deal — though the social net has been branching out beyond ad sales as well). But what about Facebook’s newly booming virtual-goods business? Chang said that the social net has actually missed the boat on that revenue stream. “They didn’t figure out the value in virtual goods until it was too late, and now third parties are doing it instead. That’s money they’ve left on the table.

More after the jump

Meanwhile, Chang said widget-maker Slide, which closed a mammoth $50 million round last January, is the “poster child of the Web 2.0 bubble. And if Slide spends through that money and has to raise again — I’d hate to be in their shoes. The onus is on them to find a business model beyond just advertising right now.”

Chang wasn’t all doom and gloom, however — he said that social gaming startups and the gaming industry as a whole would likely see stable revenue streams (not just from advertising) and continued investment from VCs in 2009. “We invested in myYearbook because they’re making really nice money on virtual goods and microtransactions. Social gaming site Zynga is another one — they’re making something like $30 million to $40 million per year mostly from people buying Texas Hold ‘Em chips on Facebook.”

The rest of our coverage is on our CES 2009 channel

2 Responses to “@ CES: Norwest’s Chang: Things Could Get Scary For Facebook, Slide in ’09”

  1. Some clarification regarding Zynga's potential revenues:

    The $30-40M annualized revenue runrate is a hypothetical response to the question "how big can social gaming really get — isn't it just widget hype all over again?" A leader in the space like Zynga could reach a $30-40m annualized runrate quite feasibly in 2009, based on a very simple back of the envelope calculation: a hit social game can generate $1M+/month, and thus three concurrent hit social games including an early breakout title like Texas Hold Em could easily add up to a $30-40m annualized gross revenue runrate (this extremely oversimplified figure obviously ignores game lifespan, churn rates, rev splits, etc. of course).

    NVP is not an investor in Zynga nor have we seen any of the company's actual data — the key takeaway is that social gaming (and it's eventual extension to mobile) as a sector is a bright spot of hope and growth in what looks to be a gloomy 2009. I remain a fan of the company and the overall space as an investment category.

    Tim Chang
    Norwest Venture Partners

  2. nice article tameka.

    facebook/virtual goods: correct me if i am wrong, but in theory, facebook could exercise the right to change the rules of the game (ie terms/conditions) and put their hands in the pockets of any app that makes money off virtual goods. they recently announced that they will charge an annual fee for official stamp of verification for third party applications and partnered with oodle for a classifieds section. i anticipate that we will see more chess moves that relate directly with the bottom line.

    re: zynga: *whoa*, $30-40 million?! that's a whole lot of Texas Hold ‘Em chips!