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Risky business: social network gaming startups profit, but is Facebook enough?

San Francisco game developer Kixeye raises $18 million for Facebook games; a Zynga co-founder joins its board. Can companies like this survive on a single, shifting social platform?
Written by Andrew Nusca, Contributor on

The news out of San Francisco this morning is that independent game developer Kixeye raised $18 million in Series C funding for its action games that appear, thus far, exclusively on Facebook.

The funding was led by Jafco Ventures, and tucked into that announcement was the fact that Jafco partner Joe Horowitz and Zynga co-founder Andrew Trader will join Kixeye's board of directors.

Zynga, of course, is the immensely profitable company that brought you FarmVille, Mafia Wars and virtually half of all the Facebook games you try so desperately to hide your news feed every week.

Kixeye notes that the company "has been profitable and cash-flow positive" for the past eight months and is preparing to "rapidly expand its business" through new hires and additional titles.

Profitable, yes. But also highly risky.

There's a growing cottage industry -- mind you, these cottages are the size of McMansions -- developing content exclusively for a single platform. Zynga was the first one to strike gold in a major way, and it's clear that Jafco (and Trinity Partners and Lightspeed Venture Partners) see Kixeye as the next in line.

But I can't help but wonder if there's a bit of a bubble here, too. (Boy, I hate that word.)

In the finance world, the key long-haul strategy is simple: "diversify." Our colleagues at CBS MoneyWatch preach all the time about diversifying your investments. The idea: if a terrible thing happens in one part of the market, you don't want all your eggs in one (now-obliterated) monetary basket.

But that's exactly what companies like Kixeye are doing, at least so far. The three games it offers -- "Backyard Monsters," "Battle Pirates" and "Desktop Defender" -- are only playable on the Facebook platform.

There's nothing wrong with that by itself; after all, plenty of game and app developers have made lots of money by working on a single platform. But the ones that truly succeed over the long-term are present on all platforms, hedging their bets against shifting winners and losers in the platform race.

What other platform besides Facebook is there? Google Plus is simply too much in its infancy to use as a counterbalance. Zynga's moved to MySpace, Yahoo and mobile, but I only see the last one as a way out.

The other wild card is that Facebook changes its priorities (and its products) on a whim.

In ages past, developers for a console or computer could at least be sure that the platform would stick around for a few years. There was no question of how their game would be offered: pop in a piece of media and away we go.

But Facebook has a considerable reputation for changing the playing field with little to no notice. Zynga is already at odds with the social media company; it may be the only developer large enough to make a dent in the company's practices, and that's a big maybe.

So when I see exploding valuations like this, color me skeptical. I'm sure the folks at Kixeye are lovely, hard-working individuals but from a business standpoint it's hard to position your entire business on the back of another -- especially one whose own long-term plans continue to shift.

Can these startup companies evolve and adapt quickly? We're beginning to see this with Zynga but until the other shoe drops I have a hard time believing that Kixeye and others will "scale to hundreds of millions in revenue in a short period of time."

It all rides on the assumption that Facebook will, in the future, act as it has in the past. And as they say in the financial services sector, past performance is no indication of future returns. But even if the returns continue to be substantial, the question remains: is it still worth it after Facebook starts to take its own cut from the proceedings?

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