Inside Social Apps 2010: Investors Talk Big Acquisitions and Mixed Opportunities

Inside Social Apps 2010 ended today with a panel on investing opportunities in social applications and games. While most of the investors weren’t too bullish on the short-term opportunities for small developers, they do believe there are all sorts of short and long term opportunities.

The panelists:

Maha Ibrahim, General Partner, Canaan Partners
Nick Lawler, Managing Director, Maverick Capital
Rick Thompson, Co-founder, Playdom, and Investor
Tim Chang, Principal, Norwest Venture Partners
Atul Bagga, VP Equity Research, ThinkEquity (Moderator)

Bagga: Rick, you’ve been working in this space for years, can you share any more about your perspective today?

Thompson: Two years ago if we were here talking about 40% penetration rates, I would have been forced to sober up. Today, it’s also remarkable that DAU traffic has been flat for the last 6 months. The basic reason is that Facebook has severly dialed back its virals. I’m impressed that we’ve been able to hold our own.

Viral has taken a back seat. People are taking more time to develop game mechanics, and building original games. This paradigm shift takes time for us to get our heads around, and to adapt to. I think this will take several months and we’ll be back to growth.

Long-term, my guess is that 90% of users will be in social gaming.

Bagga: Where will the growth come from?

Thompson: Facebook will double. ARPU will double. The focus will be on compelling, engaging user experience.

Bagga: Virality is going down. How do new companies compete?

Ibrahim: This is a really big challenge. It will be a lot harder for new entrants. Even with non-gaming developers with big audiences, there’s an almost inevitable shift to social gaming. Having users is a huge barrier to entry. But I also think it’s inevitable that Facebook will return to a more viral state; they’ll eventually realize that they need to expand.

Chang: Everybody’s for sale right now. Do you raise money or flip to Zynga? There are a lot of merits to getting acquired now. The three legs of the stool have been virality, cross-promotion and advertising. The virality leg has been cut out.

Thompson: I agree with tim that the stool has been unbalanced. But I think strictly looking at the Facebook platform, they have other levers. This ties into my investment thesis for creatives launching new studios. I think it will be made more friendly. Making the platform less transparent would help, because otherwise you’re a target as soon as you start growing. I could see Facebook coming up with custom ad programs for innovative new apps — a little runway, that would also put money in Facebook’s pockets. I think there’s a host of things that Facebook could do, just as virality has changed the game.

The game is not over for the indies, because they’re fundamentally also in fb’s best interests.

Ibrahim: I agree about Facebook, but not about independent developers. Right now, it’s not a great environment to be an independent developer growing apps. But there are also some opportunities for a large audience, like internationalization, that are untapped by even the big guys. If you’re in Turkey or Korea or other large social markets or gaming markets, the opportunities are still good for small developers. Others are developing social apps in contenxt of mobile or console — inevitably consoles are going away, but they have huge market share. If you could make a console game more social, maybe dumb down, there’d be a big licensing cost but still an opportunity.

Bagga: We’re seeing developers who are big off of Facebook getting more serious about Facebook. In this environment, how do you evaluate a new business and company?