CrowdStar Backer Sees Early Profits

I had an interesting conversation this week with Peter Relan, the founder of YouWeb, the shoestring-budget Silicon Valley incubator that spawned social gaming hitmaker CrowdStar.

Relan, YouWeb and CrowdStar are interesting for a number of reasons. One is that Crowdstar, a social gaming startup that launched by an Armenian physics major named Suren Markosian, has gained phenomenal traction in the last couple of months. The 17-person company’s biggest hit, Happy Aquarium, a virtual fish-raising game, now has 27.5 million monthly active users on Facebook, according to AllFacebook.com. Across all games, CrowdStar has just shy of 40 million monthly Facebook users.

So are they making money? Relan says Happy Aquarium is bringing in about a million dollars a month selling virtual fish- and fish-related goods, with profit margins around 90% or higher. Other games in a similar style, such as Happy Pets, with 11 million monthly users, are monetizing at similar rates, he says. And looking ahead, he says, the company’s plan is to launch a new game every month.

CrowdStar’s sharp growth curve (it launched Happy Aquarium less than four months ago), has started to draw attention from investors. “Every firm on Sand Hill Road has tried to call me about CrowdStar,” Relan says. “Our view is, what is the value add? At this point it’s not the money… I keep looking or people who can actually add value.” Because it’s younger and smaller than industry leader Zynga (which announced a $180 million investment round last week, in part to provide employee liquidity, shortly after launching Happy Aquarium rival Fishville), Relan says providing employee liquidity isn’t currently a top priority.

YouWeb, the incubator behind CrowdStar, is one of several micro-incubators (think YCombinator) launched in the last couple of years to capitalize on the rapidly falling cost of starting and scaling an Internet company. Its main office space, in Burlingame, Calif., includes the usual crowded room of jeans-clad twenty-somethings hunched over keyboards and caffeinated beverages. The model, Relan says, is to seek out brilliant technologists from top schools, pay them a moderate salary, and have them start businesses. But unlike most incubator models, in-house entrepreneurs come without a team or a business plan.

Relan calls the model an exemplar of “the next generation of microfinancing.” The whole thing was funded by less than a million dollars from a group of private angel investors, Relan says, including Silverlake Partners co-CEO David Roux and David Whorton, formerly of TPG Ventures and KPCB. Relan himself was formerly CTO at defunct grocery delivery service Webvan and founding vice president of Oracle’s Internet division. He’s also started and funded a number of startups since then, including Business Signatures, acquired by security software developer Entrust in 2006.
 
I’m always mystified by how startups today grow to massive scale without massive staffing. Usually when I ask how, there’s a reply about cloud computing, crowdsourcing and outsourcing. Relan’s reply to the how-do-you-scale question relied heavily on cloud and crowdsourcing. To cut back on customer service, the company appoints users to be administrators of the game, which they do voluntarily, ostensibly for recognition. (Go figure.) CrowdStar also saves some on advertising by running promotions for its games on content and quiz-oriented Facebook applications it has developed, such as Know-It-All Trivia.

Content applications, such as quizzes, don’t make a lot money, since users don’t buy virtual goods on them, Relan says, However, they can be a good platform to promote games in which people do buy virtual goods.

Even in the game space, however, the vast majority of users play for free. Relan estimates that “98% of people create the virality and community; 2% of people or less actually monetize the game.” Still considering that it costs nothing to produce a virtual good, virtually any revenue is pure profit.