Is Supercell the Fastest-Growing Game Company Ever?

Ilkka Paananen says the best way to make money in mobile gaming is to stop thinking about it. Think about fun instead. Fighting a mild case of flu and jet lag from a San Francisco flight back home to Helsinki, Paananen says companies that place revenue above fun (we’re talking to you, Zynga) will ultimately fail. “It really is that simple—just design something great, something that users love,” says the 34-year-old.

Paananen is CEO of Supercell, a startup that has had astonishing growth almost overnight. It has only two titles in Apple’s App Store—a tower defence game called Clash of Clans and a social-farming game called Hay Day—but it grossed $100 million last year and $179 million in the first quarter of 2013. Supercell netted $104 million in the quarter, after expenses and Apple’s 30 percent cut.

With daily revenue now at $2.4 million, Supercell is already at a run-rate of more than $800 million for 2013 and could reach $1 billion. That would make it more than twice the size of Electronic Arts’ mobile games division, which has 900-plus iOS apps. Supercell now attracts 8.5 million daily players who play an average of 10 times per day.

These stats attracted a $130 million financing round in February led by Index Ventures, which invested $52.5 million, along with Institutional Venture Partners and Atomico. All shareholders, including Accel Partners (an earlier investor), sold 16.7 percent of their holdings to the newcomers, pegging the company value at $770 million. So much cash can flood the engine of a little company, and will make a VC-worthy return far more difficult.

Paananen admits the round was more an opportunity to give shareholders a “thank-you” payout and to shrug off any pressure to go public. At the very least, it will pay for much-needed space. There’s an ever growing pile of shoes defrosting near the front door.

Index’s Neil Rimer, whose firm scored with Skype and Dropbox, is convinced Supercell may be as big a deal as any he has seen: “Once in a while you get the opportunity to invest in a studio that has some kind of proprietary technology or alternative take on the market—like a Pixar or a DreamWorks—where they can apply a different methodology and generate a stream of hits over a period of time.”

Most game studios have an autocratic executive producer green-lighting the work of designers and programmers. Supercell’s developers work in autonomous groups of five to seven. Each cell comes up with its own game ideas. They run them by Paananen (he can’t remember ever nixing a proposal), then develop those into a game. If the team likes it, the rest of the employees get to play. If they like it, the game gets tested in Canada’s iTunes App Store. If it’s a hit there, it will be deemed ready for global release. This staged approach has killed off four games so far, with each a cause for celebration. Employees crack open champagne to toast their failure. “We really want to celebrate...the learning that comes out of the failure,” says Paananen.

He and co-founder Mikko Kodisoja sold their maiden startup Sumea in 2004 for $6 million in cash and another $12 million in stock to Digital Chocolate and stayed for six years before venturing out with three colleagues to start Supercell. “It felt that we had to build something from scratch again.”

Supercell secured $12 million in a 2011 venture round led by Accel at a $52.3 million valuation, then dropped all other game platforms to focus on tablets, namely the iPad. The company released Clash of Clans and Hay Day in the summer of 2012. By year’s end, both games had held top-five positions in the App Store longer than any other game that year, and Clash of Clans was the biggest moneymaker more often than any other app to date. One rabid Clans fan, a Finnish government official, organised a cruise to Stockholm for 50 Clans friends. A relative of one of the company founders had his car break down and, while waiting for assistance, he started playing Clans on his phone and used its chat feature to get a teammate to pick him up.

The games attract players because they’re simple and chock-full of immersive details. Players pay the game back with money, time or both. In Hay Day, you can spend to speed up production of eggs and milk, or upgrade silos and barns. In Clash of Clans, players can buy gems to speed the production of troops and convert them into gold or elixir to upgrade buildings, walls and troops.

Paananen says the games are not designed to be “pay-to-win”. You can also obtain resources through committed gameplay. Some of the world’s leading players haven’t spent a dime, but Wedbush Securities analyst Michael Pachter found himself on the losing end of most of his Clans battles until he began spending money.

Paananen says Supercell’s plans over the next three years include Android games, Asian expansion, more global hits and “probably” an IPO. That could be a good thing for Supercell workers. In April, the board voted to give stock options to all employees, not just to the senior folks. “We thought, ‘This is not in line with our values. We should give equity to everybody.’”