NEW YORK ( TheStreet) -- Led by positive reception for newly-public social media firms -- and Zynga's impending $10 billion IPO -- early-stage investors are scrambling to pour funding into the social gaming space.
Their big bet: Social gaming start-ups will be the next big thing to hit the public markets.
Offering fresh alternatives to established gaming firms like Activision Blizzard (ATVI - Get Report) and Electronic Arts (ERTS), Zynga and companies like PopCap Games could light up the gaming sector if they go public.
It's no secret that the traditional video game sector as a whole has slowed, with sales of hardware, software and accessories dropping 6% last year to $18.6 billion, according to industry tracker NPD Group.Just one example is Activision, which despite claiming title to the best-selling video game of all time -- Call of Duty: Black Ops, sales of which topped $1 billion six weeks after its debut -- posted sluggish growth over the past year. Its stock price has also remained largely flat since the beginning of the year, as investors question the company's ability to drive growth beyond its core titles. Video game watchers are now turning their attention to the global social gaming market, which is forecast to reach almost $4 billion in 2015, up from $1.5 billion last year, according to market research firm Business Insights. Companies receiving investment and pre-IPO buzz are plentiful. Kabam, a maker of Facebook games like Dragons of Atlantis, raised $85 million last month in a financing round led by Google (GOOG) Ventures. CrowdStar, which has developed hits like Happy Aquarium and Happy Island, took in $23 million in its first funding round in May from Intel Capital (INTC) and Time Warner Investments (TWX). And Wooga, known as the Zynga of Europe, scored $24 million, which was led by Highland Capital Partners. Besides tapping into a whole new generation of gamers -- Zynga's popular FarmVille and CityVille Facebook titles are played mostly by women ages 25 to 44, for example -- the social gaming space is attractive to investors because it's not as capital intensive as the traditional gaming industry, said Maha Ibrahim, a partner at Canaan Partners who was an early investor in Kabam. "You're spending $1 million to develop a game rather than $50 million," she said. Social gaming start-ups also have a less risky business model. If a title initially flops, these companies can pull the plug quickly, a process that is much more difficult for large publishers who spend millions of dollars to develop a game franchise's deep story lines, high-resolution graphics, huge marketing push and global retail rollout.