Sequoia Capital’s New Game

Today, Austin-based Challenge Games announces a $4.5 million Series A round from Sequoia Capital — which is great for the startup; Sequoia has backed a long roster of some of technology’s biggest stars, from YouTube to Google to Yahoo to Apple.

I also think Sequoia was lucky to land this funding. Challenge Games, which has released two multi-player online games — Duels and Baseball Boss — seems particularly promising. Duels was introduced last summer; the free, online game where players build their own avatars and then challenge others who’ve registered online, can be played in minute-long bouts and is highly addictive if you have a little time on your hands between calls. Baseball Boss comes out of beta today. It’s another “short form” game, but it combines virtual baseball card collecting with fantasy sports. (You can create teams based on whichever historical players you choose, then challenge the teams of other registrants.)

I spoke yesterday with the startup’s 37-year-old founder, Andrew Busey, who’s impressive in his own right. Challenge is the sixth company for the Wharton-educated software developer. Three of those companies have been acquired, and all, though focused on consumers, have been completely different. In 1995, for example, he founded iChat, one of the first standalone instant messaging systems. (It’s now Apple’s chat client.) More recently, in 2003, Busey co-founded the social media platform Pluck. It raised $17 million over the years, including from Mayfield Fund and Austin Ventures. In March, it sold to Web site aggregator Demand Media for $75 million.

Congrats on the funding. How will it be used? How much are you investing in development per game?

Well, there’s a range. I’d say between $300,000 and $600,000 per game.

And how are you getting distribution? I know there’s a Duels Facebook application. Will Baseball Boss have one as well?

There will be a Facebook component but it will come later. There’s also a viral component in the form of leagues. You can basically create a private league for 10 of your friends to play. There’s a way to play leagues for free or to play in a premium league, where the league head can pay for everything.

So ecommerce is a component.

Yes, our business model revolves almost entirely around virtual goods, actually. [The buying of armor and swords in Duels, and baseball cards that cost anywhere from 75 cents to a few dollars in Baseball Boss.] The games are free but if you want to get more cards or expand more aggressively or have a ton of extra teams, you can do that via microtransactions, too.

Are there any synergies between the games?

We have an underlying technology platform. So some parts are generic in nature. There are tournaments in both that use the same underlying functionality. And ladders — how you set up matches between people and adjust their rankings on a regular basis — we’re using the same technology across games.

Then more are to come?

We’re planning to introduce a new game every quarter. We have five in the pipeline now; the next game will be a collectible trading card game like Pokemon but a bit different.

Do you imagine you’ll attract the same users? How many users have already signed up for Duels, by the way?

About 250,000 people have registered to play Duels, and between 30,000 and 50,000 play actively. I think there will be some crossover, but I don’t know if it will be 5 percent or 30 percent. Duels is a very international audience, whereas baseball is heavily north American.

You have a licensing agreement with Major League Baseball. How did an entrepreneur with no background in games pull that off?

Well, we pitched them, and the Sequoia funding helped legitimize us with them. And our story was good, and I think it’s reflected in the game.

Do you have a revenue split with the MLB? I know baseball doesn’t do anything for free.

No, it doesn’t. [Laughs.] I can’t talk about terms of deal, but it’s a mutually beneficial partnership.

Is that an exclusive? Are you the only gamemaker allowed to create these virtual trading cards?

There are some restrictions, but it’s not exclusive. Those guys are pretty good about exploiting their IP. But we feel it’s more important to make a great game. Exclusivity would be nice, but we knew it wouldn’t be part of the equation. We think being first to market matters a lot. Also, there’s a ton of complexity in what we’re doing; we don’t think someone can pop out something [competitive] quickly.

Who would the ultimate acquirer be, an EA, or a Zinga?

I don’t think Zinga; I think we’ll be as big as they are. EA or Activision Blizzard or Viacom or Google or Disney. I think there are a lot of potential acquirers. But I fundamentally think there’s a large company here. You have the EAs and Activisions, but their games take years and tens of millions of dollars to make, they can only make so many, and the games take a long time to play. On the other end, from entrenched guys like Yahoo games and Zinga, who make casual games, there’s not a lot to the games. Their simplicity and straightforwardness can attract audiences quickly, but the business model doesn’t stretch much beyond advertising. What we’re doing is more immersive, but you can still play in five or 10-minute-long increments. And with Baseball Boss, for example, your team evolves as you get new cards, and over time, that creates a very compelling relationship between the game and its players.

I don’t know much about the game space. How are startups valued, by registered users, or their intellectual property?

It’s hard to tell; it depends on the business model. Some are focused on getting as many visits as they can. But I think compelling IP can create a lot of opportunities.

Is there any advertising piece to your business model — like corporate sponsors, that sort of thing?

There is advertising in Baseball Boss. If you buy a VIP membership, it gets turned off, but right now it’s ads on the page, though we might shift over time and do more sponsorship-oriented stuff.

Austin Ventures backed you in three rounds at Pluck. Did you talk with them about doing this Series A, too?

Obviously I talked with them at different levels but they’re not really a consumer player, and they’re doing a lot of later-stage deals, so it wasn’t the optimal fit, whereas Sequoia was. They’ve done a lot in the game space. They’re big-time game-play kinds of guys.

How did you connect with Roelof Botha, the Sequoia partner on the deal?

He was actually playing Duels for fun and he tried to buy something in the game using a Paypal eCheck [an electronic funds transfer], and it didn’t clear right away, so he wrote to our support email. I wrote back saying, ‘sorry you haven’t received your virtual good yet. We’re actually going to turn off PayPal eCheck because it’s causing all this confusion.’ Then I saw him pay him with a credit card, after which he wrote again, saying he had the wrong settings on his PayPal account, and isn’t that funny because he used to work there. [Botha was PayPal’s CFO before and after its IPO.] Then he said, I’m at Sequoia now if you want to talk about your company.

That’s pretty funny.