SAIF's Perfect World: $8M Investment Becomes $250m In One Year. Or Why Investing In Online Games Still Makes Sense.

SAIF Partners may have made the best China venture capital investment of all time, at least in terms of IRR. SAIF invested $8M into Perfect World (完美时空), a Beijing-based MMOPRG game developer and operator, in September 2006. Perfect World went public on the NASDAQ in July 2007, and as of Friday, September 8 2007, PWRD's market cap is $830M. Following dilution from the July IPO, SAIF owns 30.08% of Perfect World, worth approximately $250M. So SAIF has a 31X return on paper in just about 12 months!! A lot can happen between now and the end of the lockup in January, but things look pretty good right now.

Congrats to SAIF and to Daniel Yang, the SAIF partner behind the deal.

Anyone know of any better investments by China VCs?

Online games and virtual worlds are hot again for VCs in China. No wonder, online game revenue in China in 2007 is projected to be at least $1.2B USD, while online advertising revenue will be around $650M USD. Online advertising is growing faster--50%+ annually, but the online game market is still growing at a @30%+ annual clip and will be a larger market than will online advertising for several years into the future. And for all the China Web 2.0 darlings, I can't think of a single material exit since the Web 2.0 craze began.

As Perfect World shows, online game companies can go from zero to hundreds of millions of dollars in value in just a couple of years, even without Google acquiring them.  The next example of this will be the imminent IPO of Giant Interactive Group, developer and operator of what may be China's largest MMORPG--ZT Online (征途), aka Zhengtu. Giant Interactive is rumored to be on track for over $100m in NET INCOME in 2007, from zero revenue at the start of 2006. The IPO should value the company in the billions of dollars.

Game investing gets a bad wrap--it is unpredictable and hit-driven. But can't the same be said of startup trying to build and sell a new software application, or of a new Web 2.0 service? If their products are not hits how do they make money? And you can blow as much or more on marketing and, at least of the case of Web 2.0 bandwidth hogs like Youtube clones, bandwidth, as you will on developing a game or a virtual world in China. If you have enough money invest in both, but online games and virtual worlds have been given short shrift by too many VCs.

Full disclosure, I am in investor in a handful of private and public game companies.