PartyGaming

On June 27th, a remarkable thing took place in London.

PartyGaming.com, an on-line site best known for poker, raised $1.4bn dollars in an IPO. All $1.4bn went to the founders, who retain material stakes in the company, and the IPO raised no new money for the company. The IPO's success comes despite the fact that the US government bans on-line gaming, that the founders will be arrested if they ever come back the US, and that the founders previously ran on-line porn businesses.

The company's financials tell a remarkable story of growth and profitability.

Revenues grew from $30m in 2002 to $600m in 2004. Annualized first quarter revenues were $890m. The company is not only growing rapidly (30x in three years) but is also delivering profit margins in in excess of 50%. Click here for more detail on financials. The company's PE ratio remains in the low teens, despite the growth and profitability delivered to date. Clearly, a regulatory overhang impacts the valuation, however, the fundamentals and prospects of the business are remarkable.

Is this an anomaly? Is the company and IPO a freak event?

In my mind, Partygaming represents a wealth creation vehicle that validates the power of consumer Internet applications and the marginal profits possible in electronic content. Partygaming's backend supports up to 70,000 simultaneous users, with the marginal cost of another user/player close to zero. Growth will drive increased profits as largely fixed IT costs are amortized across a larger universe of players. The demand for on-line gaming is exploding as broadband penetrates households and multi-player games attract off-line enthusiasts.

Google, Yahoo, Partygaming, and a myriad of emerging companies are validating that Web 2.0 business models can be cash-flow machines. The return of the consumer Internet investment is an increasingly common story. When I first got into the VC business, in fact when I tried to raise money as a consumer Internet service CEO, consumer investments were an anathema. Investors associated all Internet deals with webvan and pets.com. Three years after the crash, it is fascinating to see the Internet's hype instantiated in 50% net margins and I am confident that PartyGaming is a herald of more interesting consumer applications and innovation to come.

PartyGaming's IPO is true testament to profitability and growth possible in Internet services and a good reminder to all of us that contrarian investing (think about backing this in 2001)leveraging pretty clear market characteristics (gaming is big, web access is growing, etc) drives healthy returns.