Tim Chang wants to fund the future of gaming

The up-and-coming Norwest Partner also predicts VC consolidation and the rise of super angels

In the not-too-distant future, Tim Chang sees a brave new world of online “gaming-as-a-service”: cloud-based, free-to-play, frictionless distribution, all monetized through advertising, virtual goods and premium subscriptions. And to help build it, he's looking to fund everything from a vertical gaming cloud to "Paypal 2.0" microtransaction processing, next-gen publishers, new platforms, service layers, and technology enablers.

I spoke with Chang last week outside the Norwest offices on University Ave in Palo Alto. Below are his thoughts on the coming consolidation in the VC world, why he thinks gaming is a bright spot on an otherwise cloudy horizon, and what the new online entertainment utopia will look like.

MB: The recession has hit the VC industry hard. People are saying either the VC model is broken or it’s going to re-emerge completely changed. What’s your take?

TC: Well, there is some truth to the fact that it may be broken today, but like all financial markets, they self-correct, so it’s not that VC as a category goes away, but it will evolve and it is right sizing, so it is true that we may have a smaller venture capital industry than what we’ve had in the last five years. While it doesn’t go away, you could say that at worst you could say that maybe half the funds will be in existence five years from now, and maybe it’ll be half the size of what it has been, and maybe that’s the right size for the market.

At the same time, you’ll see the venture model evolve. You’ll have a bifurcation of venture funds that are growing larger and larger and becoming global players on a multi-stage type of model, and you’ll also see smaller, more boutique, focused funds probably specializing in a sector, a region, a particular stage, maybe smaller outcomes. You will see for example the rise of the super angels, who have smaller funds but operate like very early-stage VC models focused on a particular sector or a particular size of investment.

MB: Let’s talk specifically about your sector of expertise, digital media. What’s happening in that industry right now?

TC: Digital media’s particularly interesting because there are two tectonic plate shifts that are happening. One is the traditional business model of advertising is under pressure due to the recession, and so a lot of people come to the conclusion that pure-play ad business models don’t work any more for content and destination type of plays. On the other hand, distribution has become exceedingly fragmented with the Internet, with mobile, with Web 2.0 social media, and so traditional outlets and how you publish to a mass audience are disappearing. For me it’s a very interesting time because both media and the advertising industry have to reinvent themselves.

One of the brightest spots of hope on the horizon is in the gaming and interactive online entertainment areas. It’s kind of funny—I joke that virtual goods is becoming the advertising of 2009. So whereas last year all the business plans I saw had business models that would say “We’re ads-based,” today it’s all “We’re virtual-goods-based!” You’ve seen a lot of Web 2.0 entrepreneurs shift to try to be social gaming or free-to-play online games. It is true we’re seeing gaming rise, and I think it’s because gaming can monetize in multiple ways beyond just advertising, so we’re seeing a lot of people flock towards gaming as a potential safe spot.

MB: The virtual goods model is based on micropayments—the notion that people are going to be willing to open there purse strings to put up just a few bucks. A few year’s ago, the “penny barrier” was seen as a huge obstacle—people just weren’t willing to pay for small online goods. Do you think the consumer mentality is changing?

TC: I think it is, and young people are being trained from Day One on new services like Club Penguin, which is still subscription-based, but subscription as an offshoot of these virtual currencies that they’re racking up by playing and engaging with the online world. So I think you’re going to have a lot of young users being educated on how to interact an pay with these virtual gods systems from games and websites early on and it’ll be a very natural fit for them to then move over to microtransactions for things like mobile payments, first for online digital goods and then eventually for retail goods in the physical world as well.

MB: So given this new playing field what kind of companies are you looking to invest in?

TC: Having grown up playing games since age 10 on Apple, gaming is a big passion area of mine personally, and I’m very happy that it’s become a robust investment area. That said, I don’t typically invest in pure game companies that are just studios. Instead, we’re looking for next-gen publishers, platforms, and also gaming technologies and enablers. What I mean by that is even gaming itself is shifting from packaged media to really gaming-as-a-service, and that’s really just a template for the shift of the media industry overall towards what I call media-as-a-service, or entertainment-as-a-service. It’s going cloud-based. It’s going free-to-play with frictionless distribution, monetized through advertisements, virtual goods and premium subscriptions. We’re looking at all the pieces that enable that. We’re going to see vertical cloud solutions just for the gaming cloud. We’re going to see next-gen, “PayPal 2.0” for microtransactions payment processing, We’re going to see a whole lot of new service layers around gaming as well, in addition to the equivalent of a publisher 2.0, on new platforms like social networks and iPhones.

MB: Last question: What makes Tim Chang want to get up in the morning?

TC: I’m very lucky that I get to invest in what I’m passionate about personally. I’ve always been about gadgets and games, and I’m a big guitarist so music and media have been close to my heart. Those are things I do naturally, and to be able to weave that into my day job is something I’m very grateful for. These are things that I think and dream and talk about all the time anyway—it’s not really work, it’s sort of play. Working at Norwest, being able to investigate these areas to invest in, to make money and also to back really smart entrepreneurs and thought leaders in this area is an incredible experience. I’m lucky to have that.