PopCap Games never really operated by the book. The Seattle game maker eschewed venture capital financing throughout much its history, with founders John Vechey, Brian Fiete and Jason Kapalka choosing to build the business on the back of profitable games such as Bejeweled and Zuma.
That decision made the founders fabulously rich, but there’s a relatively unknown venture capitalist who is smiling today as well in the aftermath of Electronic Arts’ $1.3 billion buyout of PopCap.
In October 2009, nearly a decade after PopCap was formed, the company surprised some in the industry when it raised a $22.5 million venture capital round — the first institutional money to go into the fast-growing casual game maker.
It was a hotly-contested deal, but Silicon Valley’s Meritech Capital Partners prevailed in part because of its late-stage and low-meddling approach.
We chatted today with Meritech co-founder and PopCap board member Rob Ward to get his thoughts on the acquisition; what the deal means for his firm and why he thinks PopCap excelled where others failed. The PopCap deal is certainly a lucrative one for Meritech, but it probably won’t be the biggest payout for a firm. After all, the firm also happens to be a backer of Facebook.
Here are excerpts from the conversation:
This is a big day for you guys: “Absolutely, but it is a bigger day for Dave (Roberts); John (Vechey); Jason (Kapalka) and those guys. I am very happy for them. They built a very special company. It is a big statement on what a nice job they have done over the last 10 years.”
Were you the only venture fund that backed PopCap? “From a true venture fund perspective, that is correct. Larry Bowman, who had a large technology hedge fund for a while, was a big personal investor in the deal. But, yeah, it was ourselves and Larry and small amount from John McCaw’s personal investment fund.”
PopCap was already well established in 2009. Why did you decide to invest? “Our model is to look for the category leaders across technology, and we had spent a lot of time looking at gaming companies in all different categories: advertising, mobile gaming, 
MMOGs. And we never made an investment and one of the reasons was that we really wanted to find a company that was that unique business that had demonstrated the ability to consistently produce hits in what is otherwise a very hits-driven business. That’s what PopCap was. When we saw the track record of success they had had developing these massive hits, one after another, just some of the absolute best brands in casual gaming, from Bejeweled to Zuma to Peggle to Plants vs. Zombies, and even more so how they had been able to take additional steps in moving those brands into all of those distribution platforms that were available to game developers at that point in the market, it was our bet that they were going to continue to succeed in that manner.
What else stood out? “We thought it was one of the very unique assets in the gaming world with a proven business model — they were profitable from day one. Very impressive operating margins. There was a stable existing business, and the bet was that they’d be able to accelerate the growth rate as they moved into social and mobile, and that’s exactly what happened.”
How much did you own of PopCap? “We owned between five and 10 percent. It was a pretty typical investment percent for our model. We’ve owned more and we’ve owned less. We own less than that in Facebook. And to us, it is really less about the ownership percentage and more about getting the dollars in to make the math work for us on a $400 million fund. Our typical size is anywhere from $10 million to $20 million, and this was right in the middle at $15 million.”
So what sort of return are you seeing on PopCap? “The way I’d characterize it is that it is a very, very good return — one that is exactly what we look for with our late-stage model. We are making multiples on our money after a little less than a two year hold.”
Excluding all of the earn outs, how much will you make? “Sorry to be evasive, but I’ll just tell you that it is a very, very good return for us just on the front-side.”
You are an investor in Facebook, so I am guessing it won’t exceed that return? “I can tell you that it probably won’t turn out to be as good as Facebook (laughs). But what deal is? On an IRR (internal rate of of return) basis, it is way up there. We’ve had a couple deals where we doubled our money within a month if you can believe it. But (PopCap) will be a very strong IRR, for sure.”
Why did PopCap go the M&A route versus the IPO route? “Just about every relevant game company has made a run at PopCap at some point in the past, and in some cases multiple runs. And they’ve always said no. And sometimes it was a timing issue … and sometimes it wasn’t the right culture fit. They care a lot about having the right appreciation for great game development, and that’s really in their DNA. It is not a cookie-cutter approach. They are not afraid to kill stuff if it is not going to be what they feel is a great game, so that is very important to them. At the end of the day, they were proceeding down the IPO path, but they did the right thing to do a market check as part of that process.”
On EA’s bid: “I think EA saw this as an opportunity to really change the direction of their business. Frankly, I think it is a brilliant move by (EA CEO) John Riccitiello because here you have one of the last great acquirable franchises in casual gaming and with it, it puts EA back where they belong: front and center in the digital gaming conversation…. To me, that’s why EA came at them so aggressively this time.”
What led to PopCap’s success: “I think John and Jason and Brian, to their credit, if you asked the same question to them, they’d say part of it is just dumb luck. On their very first game, they wanted to sell the game and the company and Microsoft wanted a licensing deal. You always have to be intellectually honest, and say there are some twists and turns in the story that played into your favor through dumb luck.”
On the importance of celebrating game development: “But the other important part is that they are true gamers. They believe in developing these great brands that have different game mechanics that are unique and long-lasting franchises. They are not about cloning out the games as quickly as possible and trying to seize the market opportunity because it is there. If you look back the last 10 years of gaming, there have been these waves. And PopCap has never been the first to take the hill…. but they have taken their time and taken an approach that is long-lasting and furthering the long-term value of the brand. At the end of the day, I do think by being a little more deliberate and thoughtful it paid off in the long run.”
Do you know how much was on the table when the founders were hoping to sell to Microsoft back in the day? “I don’t off the top of my head, but it was a very small number…. It wasn’t much. It was a heck of a lot less than $1.35 billion, or $750 million or however you want to look at the numbers today.”
On what the deal means for Seattle: “Hopefully, this news is well received in the community as an example of the kind of great outcomes that can occur.”
Related: “Q&A: PopCap co-founder on the EA deal, and the future”
“EA buying PopCap Games for up to $1.3 billion”
“Meet Rob Ward: A Silicon Valley venture capitalist who loves what’s going on in Seattle”
