Credit: jelene

Run a farm. Join a Mafia family. Become a vampire, play poker, or open a restaurant.

Seems like you can do just about anything you want in the vast universe of social gaming.

Social gaming, those simulated games populating social networking sites such as Facebook and MySpace, are everywhere, and their popularity is growing every day. Despite their critics who liken developers to virtual scam artists, social gaming startups are becoming immensely attractive to angel investors seeking new frontiers.

Growing Audience

What’s compelling about social gaming is these aren’t just adolescent boys addicted to Grand Theft Auto. Social games are designed for the casual user, people who want to fritter away a few hours playing with friend. That opens up the window for unlimited growth. According to VentureBeat, social gaming is attracting a new and much more far-flung demographic than traditional video games: Women, older users and people who don’t consider themselves gamers.

And they grow fast, spreading like wild fire, racking up new users almost overnight.

Farmville launched on a Friday, and by Monday had 500,000 users. Playfish was able to get 5 million players to join its Restaurant City game in just 5 weeks. Zynga says more than 25 million people are now playing Mafia Wars, its game of crime families and mob warfare – that’s more than the population of Texas.

Zynga, which along with Playdom and Playfish comprise the Big 3 of social gaming. Launched 3 years ago this winter, the company boasts 50 million regular users and is profitable – some reports estimate it could turn US $100 million in revenue this year. Zynga has raised US $40 million and Playdom just got US $43 million in its first round.

Devil in Disguise?

But it’s not all fun and games, some say. Critics charge these social gaming outfits, especially the larger ones, amount to little more than elaborate scams aimed at getting users to cash in on “free” virtual goodies. A typical scam asks users to fill out a survey — in exchange for virtual currency to purchase make-believe geegaws and a surprise subscription fee tacked onto their cell phone bill.

Angel Backing

Social games still represent just a tiny segment of the US$50 billion international video gaming. But it’s a very successful segment: Social gaming is adding employees, adding users, and turning a profit. It’s an industry that’s not just surviving, but thriving in a difficult tech landscape.

Jeff Bezos apparently sees the opportunities. He’s pumped money into social gaming startups, including an undisclosed amount to Social Gaming Network and US $3 million to Kongregate through his personal investment vehicle.

The Right Mix

Social gaming may just be the right mix for some angels. “They’re really good at using the right mix of ingredients … not just for profitability, but for growing your user base,” says Tim Chang, principal at Norwest Venture Partners. Viral marketing and cross-promotion aid in driving traffic – and profitability.

Ultimately, social gaming offers more exit strategies than the traditional video game industry – the sphere of interest is so much larger. Earlier this week, in fact, there was a grand exit when Electronic Arts snapped up Playfish for a reported US $400 million.

That alone might be enough to sow your seeds in FarmVille.

But angels, ask yourself: Is this entrepreneur willing to flip a few burgers? Or at least willing to make some sales calls or write a few product specs? You know … do the dirty work?

Flip a Few Burgers

Sometimes, that’s what it will take. Smart startup founders should be willing to take a hands-on approach, says entrepreneur-turned-investor Mark Suster. That’s right – they should flip burgers.

Suster did it both ways – hands-off and hands-on. In his first tech startup, Suster and his partner landed US$16.5 million in capital before they were even working it full-time; they hired a team of executives and a corral of developers. This was in 2000 – as market valuations fell, the fledgling startup had to cut its staff by more than half in one day. Then, Suster says, he was forced to do the hands-on stuff – make sales calls, make decisions about technical operations. He was flipping the burgers and getting an education in how his company worked.

Grill Marks

The second time around, Suster stayed closer to the flame. This time, his startup raised only US$500,000 – and had a shoestring staff as a result. Suster did more of the down-and-dirty work himself, including marketing, sales, even designing the company logo.

“I did the grunt work. And this is how it should be in startups,” he says.

Just don’t confuse a willingness to take a hands-on approach with the steamrolling Know-It-Alls. The latter, the Armies of One, think they can do it better than anyone else. So they do. And usually, it becomes quite apparent they can’t do everything they think they can. It can be a fine line, but an important distinction.

Lean Times

Often, flipping burgers is a simple matter of survival. Face it: Angels are investing less. A study just released by the Center for Venture Research shows investments were down 27%, to US$9.1 billion, in 2009. The average deal size shrank considerably — by 31% — as well.

That’s not to say angels have shut Heaven’s gate. Angels are investing less, but they’re spreading the wealth thinner and farther afield – they’re spending less on more startups. With less venture capital upfront, the playing field has changed. As a result, the Do-It-Yourself approach is becoming one of the new rules of angel investing.

“Entrepreneurs should find ways to finance their own growth: working without salary, moonlighting, seeking grants, running lean operations, and focusing on an aspect of the business that can generate revenue,” the New York Times wrote last week.

Red Flags

Angels, consider the burger litmus test when as part of the pitch. As the competition heats up, which entrepreneurs are best equipped to withstand the grilling?

As Suster says, if the “CEO can’t drive the demo or the financial model themselves it is a big red flag.”

Sound advice for anyone, for just about any situation. But for entrepreneurs, keeping it simple can mean the difference between boom and bust.

“Your idea doesn’t have to be big. It has to be simple,” Lisa Barone advises entrepreneurs in a recent post at Smallbiztrends.com.

MISS the Point

Even with a simple brilliant idea, the odds are against any new startup making it big – in fact, 55% of new ventures fail within the first 5 years. So how do you pick a winner?

Angel investors eyeing a new startup should remember the KISS Principle, but they may want to adopt a new mantra as well. Let’s call it the MISS Strategy – Make It Simpler, Stupid. An idea can be simple, sure. But the key to success is making it simpler for the customer.

Think about ideas based on making life simpler that grew into household names. Amazon.com made it simpler to buy books online. Google gave us an easy search engine in a plain white wrapper. And Diapers.com, one of the fastest growing e-retailer out there, made it simple to buy diapers online and have them delivered to your doorstep.

Back to Basics

New Jersey dads Marc Lore and Vinit Bharara applied the MISS strategy when they started Diapers.com in 2005. The idea was born of their own frustration: They were tired of late-night runs to the store for diapers and figured there must be an easier way. After discovering the Internet was surprisingly void of diaper offerings, they set up their own online store with just the essentials: diapers, formula, and wipes.

“Having my second kid and seeing my wife having to keep us in stock with diapers and formula and stuff – it wasn’t easy for her. I thought, if we could make this an easy experience for Mom, offer premium service and speedy delivery, we could extend into the other high-margin baby products,” Lore said in a recent interview with Inc.

Cleaning Up

Other frustrated parents soon flocked to the site to order diapering supplies. Diapers.com grew exponentially, adding more baby supplies as it grew. Today, Diapers.com offers a full menu of products ranging from jars of baby food to nursery furniture. But the focus remains on making life simpler for its 500,000 customers.

The dollars have followed. Diapers.com tallied web sales of US$89 million last year, making it the 5th fastest growing e-retailer in the Internet Retailer Top 500 Guide 2009 edition – that’s an increase of 147% from its sales of US$36 million in 2007. It just raised US$30 million in funding from several venture firms and Lore says the e-retailer is on track for another blockbuster year.

A simple idea that made life simpler for the customer. It was a sure MISS from the get-go.

Credit: The 5th Ape

Do women have the guts to wear a halo? The stereotype says no: Women want to play it safe with their money. They just aren’t as adventurous as men when it comes to investing – and that means most will shy away from becoming angels.

It’s true women are still underrepresented in angel investing: Just 8% of the 225,000 active angels in 2005 were female, according to the Kauffman Foundation.

But a female serial entrepreneur who has ridden the “rollercoaster ride” of angel investing shatters that old stereotype and offers inspiration for women interested in getting started.

Gender Gap

Francine Hardaway, founder of Stealthmode Partners in Phoenix, understands why women aren’t interested in the game – at least initially.

“Women aren’t as risk tolerant and they hit singles rather than swing for the fences. I’d call my own first business either a single or a bunt,” she writes in a guest post.

One Step At A Time

So how does a woman go from timid spectator to bold angel? For Hardaway, an early success paved the way to more, with a few lessons learned along the way.

Hardaway took her first foray into angel investing by putting up US$5,000 for a former student. She ended up making US$50,000 when the company went public – a sizeable enough return in the 1970s to hook her.

She went on to more success (a FFF — Friends, Family, Fools — investment helped 2 friends start a “rag” that is now Village Voice Media) and she was on her way.

Roller Coaster To Success

Of course, through the years, Hardaway has had ups and downs. She lost a million in 1990 in real estate, but “made a ton of money” by flipping houses in the mid-2000s.

All told, she estimates she’s been in about 50 real estate deals and 15 tech deals. She calls herself a “deal junkie” – an image that blows up the notion that women aren’t interested in high risk, high yield investments.

In fact, women like Hardaway are particularly well-suited for angel investing.

“Most of the men I talk to don’t have my stomach for roller coaster rides,” she says.

Pay Off Worth It

If you’re standing there at the gate, wanting to get on the ride, you’re probably ready to become an angel investor. But it’s important to understand the basics and your own tolerance for risk. If you want a little help along the way, consider joining an angel group. An angel group will pool your resources with other investors  — spreading the risk while maximizing your potential for success. You can also learn the ropes and pick up some invaluable advice.

Be prepared for a few bumps. For most investors, including Hardaway, a few twists and turns along the way are worth it.

“I’ve never lost everything, and I have had a fabulous time,” she says. “I will obviously do this until I completely lose my senses.”

PerfectBusiness.com (which bills itself as “the path to entrepreneurship”) is holding its “Perfect Pitch” contest to help get the right business ideas in front of the right investors. Contest entries are business pitches that include a written description, pictures, and video. These entries will be reviewed by a panel of noted judges who are popular, humorous, and extremely good looking. (Venture Hype is one of the judges.)

The panel of judges will select the top 10 pitches and request more information from those businesses. Then, with the additional information in hand, 3 winners will be awarded airfare, accommodations, and the chance to pitch their idea to Virgin’s Richard Branson and a roomful of investors at The Perfect Pitch 2009 Entrepreneur and Investor Conference on Oct 26 at the beautiful Marina del Ray California.

So, if you’re an entrepreneur and you have an amazing idea for a better mousetrap or the next best thing since sliced bread, and you’re just bursting with excitement because you know this idea will make bazillions of dollars, you’re running out of time to enter your pitch. The submission deadline is Sept 8 21, before midnight. (In fact, if you’re reading this and it’s too late, you might want to invent a time machine then go back in time to submit your idea).

Or, if you’re an angel investor, you can still participate. Chances are, you know a whole bunch of entrepreneurs who’d love to pitch their ideas. Maybe they’re not in your industry but they have a good idea, or maybe it’s your cousin Frank and you think his idea should reach a broader audience. Whatever. You can spread the words and encourage entrepreneurs you know to submit their pitches. They’ll appreciate another chance to have their pitch heard. Don’t forget to tell your fellow angel friends about the upcoming conference too!

Link:

• The Perfect Pitch 2009

These shrinking investments have not left angel investors unscathed and some are shying away from making investments. Not only is the status of growth in the market a problem, but some may view now as the wrong time to launch a startup – no matter how promising the opportunity.

For those startups that are seeking seed money, angels are still a primary source for consideration due to low entry barrier, simple and quick decision process, low return rate requirement and flexible time limitation relative to venture capital. In the Chinese market especially, angel investing is taking a more dominant position, especially in high-technology firms.

In reality, now is the perfect time to invest. Valuation is low, helping to produce a better overall return. In addition, this is a great time for angels to invest in syndication. Thanks to the free-flow of exchange of information and deals between angel groups, companies are better prepared with their presentations and angels are more educated about the industry.

Angel syndicates are enjoying strong growth as angels are seeking increasing opportunities to spread the risk through pooling their money. Not only is this good for investment-shy angels, it also benefits those companies seeking investments as syndicates are investing much higher amounts than stand-alone angel investors. According to a survey of Angel Capital Association members, the average pooled investment in 2008 was US$281,000. Individual angel investment ranged from US$10,000 to US$200,000 per startup.

Remember that old saying that you are always safer in pairs? The same is definitely true in investing. It can be scary to go in on a deal all by yourself. It can be especially intense if you are a new angel and the opportunities seem to outweigh the amount of time you have to evaluate each one. In working with others, you have the opportunity to share the burden, even if you do have to share the spoils.

Often dubbed “Smart Money”, syndicate investing allows for not only the pooling of financial resources, but also expertise and skills. By combining incisive business knowledge together with cash, angels of all backgrounds can benefit from working together. This creation of Smart Money is causing the number of angel syndicates to experience strong growth.

If you’re not sure how to get stared with a syndicate, you haven’t been asking the right questions. Use your networking skills already in place to identify opportunities in your field of investments. Others are looking, too and enough of the right conversations will create for you the right connections.