Kabam raising $50 million for employee liquidity amid IPO drought for game companies

By Erin Griffith and Michael Carney , written on June 19, 2013

From The News Desk

A scene from Kaban's game "The Godfather."

Kabam, a maker of "massively multiplayer social games," is in the market raising a $50 million round of outside funding to provide liquidity for employees, according to people familiar with the matter. Kabam has already raised at least $125 million in VC backing and is considered to be an IPO candidate.

However, thanks to the disaster that is Zynga, the IPO markets aren't exactly friendly to gaming companies at the moment. The landscape for M&A exits isn't too friendly either. EA has been on the sidelines since CEO John Riccitiello stepped down in March. And Kabam's games, which are expansive and targeted to hardcore gamers, aren't a "Disney kind of asset," one banker said.

Kabam "could have easily IPO'ed two years ago when the consumer Internet was doing better," one investor who looked at the deal and passed said.

Steve Swasey, VP of Corporate Communications for Kabam said the company is considering liquidity options for employees but would not confirm a dollar amount or the timing of such a deal. Investors are eager to back the company, he said, emphasizing that no new shares were being issued and that any deal would be in line with "making Kabam the best place for employees."

Kabam began putting out feelers for the round in March, according to our sources.

The challenge will be around valuation: Kabam's last round of funding, an $85 million Series D done in 2011, was raised in frothier times with a valuation to match. That round, led by Google, valued Kabam at $500 million. Even for a company that is performing well and growing, the valuation apparently scared off some investors. All in, Kabam has raised $125 million from Canaan Partners, Betfair, Redpoint Ventures, Intel Capital, Pinnacle Ventures, Performance Equity Management, SK Telecom Ventures and Google Ventures. It has also acquired five companies.

Kabam was profitable on $180 million in revenue in 2012, growing 70 percent over the year prior. The company has $50 million in cash on its balance sheet. It doesn't need a cash infusion, but employees would like to cash in on the seven-year-old company. The problem is that even for a good gaming company that is performing well, there is no obvious exit on the horizon.

Kabam has been talking to industry players about some sort of exit for a year. Last September, CEO Kevin Chou declared Kabam was preparing for an IPO. Then in December, Warner Brothers invested in Kabam via secondary share, buying out an early investor.

Kabam is known for its hit game Kingdoms of Camelot. The company got its start as a sports community that would leverage Facebook but quickly pivoted to a social gaming model. It basically took Zynga's model of social, community-driven games and applied it to hardcore gamers who are willing to spend more money on virtual goods. Like Zynga, Kabam relies heavily on Facebook for its livelihood, attributing 80 percent of revenue to the platform. Correction: Kabam says that it now generates 70 percent of its revenue independently of Facebook on and via its mobile apps. Unlike Zynga, its users are more loyal and willing to spend money. The challenge Kabam faces is distinguishing itself from Zynga to Wall Street investors.

In April, the company established a Kabam Western World Developers Fund, $50 million fund to help bring Asian games to western markets.

Despite the grim IPO markets for gaming companies, one of Kabam's peers is feeling lucky: London-based Midasplayer International Holding Co., which makes the casual game Candy Crush Saga, is rumored to have hired J.P. Morgan, Credit Suisse and Bank of America to prepare for a public offering, according to the Wall Street Journal.