VCs Game Shy

Venture firms pulled back on gaming investments in 2006 despite lucrative exits early in the year. Investment dollars dropped nearly 38% in 2006 to $137 million, down from the $219 million invested during 2005, according to data from Thomson Financial (publisher of

It seems odd there would be a dip in 2006. Especially after VCs scored with the sale of Massive and XFire.

XFire wraps ads around its communications platform and enables marketers to target their ads to the predominantly young male video game players, raised $12.5 million over four rounds from Draper Fisher Jurvetson, New Enterprise Associates and Granite Global Ventures. Viacom purchased the VC-backed company for $102 million, and will use XFire’s online gaming technology to enhance its MTV Networks.

Massive allows advertisers to tap directly into the game play, posting ads within the video games. It raised nearly $18 million in three rounds from DFJ Gotham, Tobat Capital, Newlight Capital, RRE Ventures and NeoCarta Ventures. The purchase price was undisclosed, though an investor in XFire pegged the acquisition at about $150 million. (The Wall Street Journal reported Microsoft paid between $250 million and $400 million.)

The year would have been even further off last year’s numbers if it hadn’t been for a couple of big deals this past week. Red 5 Studios, founded by the team that built World of Warcraft raised $18.5 million from Benchmark Capital and Sierra Ventures on Monday and Dan got the scoop on Major League Gaming, which scored $25 million in VC funding from Oak Investment Partners on Wednesday.