Online games publisher Outspark landed a key strategic partner and $11 million in fresh capital in a Series B round of venture financing led by Tencent Holdings, China's leader in instant messaging and its top Web portal.

The deal comes five months after San Francisco-based Outspark launched its gaming site, and less than a year from the company's formation with $4 million in backing from DCM and Altos Ventures, both of Menlo Park, Calif.
Outspark founder and CEO Susan Choe said the company was not actively fundraising, but took the investment opportunistically as it enters a strategic relationship with Tencent, which she expects will accelerate the company's move into deeper social networks and online community development.

"We met Tencent in August, and had been talking about a shared vision of how multi-player gaming fits with social networks," Choe said. "We weren't particularly looking for money, but when a potentially great strategic partner comes along and you have an aligned view of the market and how to leverage global talent, it makes sense to take it."

Choe said the company had the resources it needed for its current business plan, but that new money will allow the company to expedite release of additional games, and she said the cash and the partnership will likely allow it to move faster in attracting personnel and additional partners. Outspark has about 35 people at its San Francisco headquarters, but works with developers and game designers in Japan, China, and particularly Korea.

David Wallerstein, Tencent's Redwood City, Calif.-based senior executive vice president of international operations, said the investment will give the company a greater presence in gaming, and increase its U.S. presence.

"Online gaming has become one of the most important new cultural phenomena in Asia, and we believe that PC-based online games will find a huge market here in North America as well," Wallerstein said. "Outspark is off to a great start in building a strong user community with its titles."

Han Kim, a general partner with Altos Ventures, said investors had positioned the company to reach profitability this year, and that the new investment will not alter its course dramatically. Outspark has built its user audience to more than 1 million registered gamers since launching in August, and draws revenues from the sale of virtual items to improve competitive abilities or enhance the user experience, and from advertising.

Kim, who incubated the company with Choe, former international director of Yahoo! Games, said they began exploring ideas in the summer of 2006, and made a commitment to working together on some type of gaming site. With both partners having a great deal of experience in Korea, which has a much more mature gaming industry, they saw an opportunity to create a broad community of users of what are known as "casual games," that are less intricate and easier to use than virtual world type games, but that can still be difficult to master.

Choe calls Outspark a "virtual playground," with a variety of different play options, but with a shared environment.
As instant messaging is the preferred method of communication between individual gamers, and the company sought expansion in Asia, investors saw the partnership as an obvious advantage despite no particular need for capital. Kim said investors won a healthy increase in valuation with the new investment round, but that they were more interested in its strategic aspects.

"This gives us more room to breathe, but doesn't fundamentally change the way we operate," Kim said. "We hope to be profitable by the end of the year, and we don't want to spend, spend, spend just because we have more money: as a firm, Altos usually invests as the first institutional money, and we have a philosophy that companies need to learn to be profitable early."

Choe said she has no plans to raise additional money for operating costs, but that given the current media market, the company will explore the option of taking on additional equity investments as partnership or acquisition opportunities arise.

Outspark used no outside financial adviser for the round, and had legal work on the deal from Andrew Zeif of DLA Piper in East Palo Alto, Calif.