The announcement yesterday that Hasbro acquired 70 percent of Backflip Studios for $112 million is great (and well deserved) for the Backflip team but potentially disastrous for many mid-level social game companies. Backflip has a history of successful—and profitable—games, highlighted by DragonVale, one of the most successful games in iOS history. The game launched in 2011 and still in the top 15 in the top-grossing charts.
The valuation bodes poorly for other social mobile game companies. Given the $112 million purchase price for 70 percent, the Backflip team accepted a valuation of $160 million. There are many, many, less successful mobile game developers who have taken significant amounts of venture capital at valuation two to six times the valuation Hasbro paid for Backflip. How could a company that does not have a franchise as strong as DragonVale argue it is worth more than $160 million?
For many of these developers—companies like Pocket Gems, TinyCo, Storm8, Crowdstar and Kabam—may not be able to raise additional capital and their investors will not be open to a sale. When investors are considering an investment in a game company, they will compare the transaction to the most recent major deals in the space. In this case, it would be difficult to argue any of these companies are more valuable than Backflip, yet their valuation from previous investment rounds is probably higher and those investors are likely to block any investment at a valuation relative to the Backflip transaction.
It will also make it very difficult for any company that raised a significant round at a very high valuation (e.g., $300 million to $1 billion) to have an exit. A potential acquirer is unlikely to pay a significantly higher multiple than what Hasbro paid for Backflip (by multiple, how much times revenue or profit Hasbro paid to reach the $160 million number). Yet an investor is unlikely to approve a deal at a valuation lower than at which they invested and thus take a loss on their investment. Unless the investment was small and the developer kept control (and most of the mid-major game developers did take large sums), there will not be any exit opportunities.
The Backflip team was smart in that they created really fun games that quickly became profitable and thus had to take little outside money. For them, this is a great deal and well deserved. For other less successful but more highly valued developers, it is ominous.