'There's too much capital floating around in China right now. So what's happening is if you have a good company [like Shanda], all the VC guys want to pump money [into similar companies],' said Shaun Rein, a former researcher at Inter-Asia Venture Management.

'Online games - it is a huge market. It is a sector supported by the government. I'm just worried that there's a herd mentality.'

James Levy, who founded Activision in the late 1970s and now advises start-up companies, has seen it all before. In the early days of console gaming, there were as many as 50 game publishers vying for the fast-growing market of home digital entertainment. Now there are just a handful of names, one of which remains Activision.

'Whenever you have a rapidly growing market, it sucks in a lot of money, and a lot of that isn't smart [money],' Mr Levy said.

The inevitable result is consolidation. But that does not mean venture capitalists are unwilling to fund game start-ups. They are looking for fresh concepts and new ways to approach the market.

That was the message James Savage, associate director of HSBC Private Equity's technology fund, brought to a venture capital forum held at Cyberport last week. 'You guys have got to come up with an imaginative idea and then bring it to us,' he told the assembled crowd of more than 200 entrepreneurs.

New ideas, however, are in short supply. Few of the multiplayer, role-playing titles on offer today break from the sword-fighting genre that is popular with young Chinese gamers.

Gobi Partners co-founder Lawrence Tse said: 'Why is every game a fantasy game? Why is every game a kung fu game? Why is it always fighting swords and magic spells?'

Gobi, which has US$30 million to invest in incubation and early-stage digital media companies, believes new entrants must offer something extra to compete with incumbents such as Shanda.

The venture capital fund has poured money into a Chinese start-up which is developing a 3-D movie to be launched at the same time as its online game counterpart. Mr Tse said to expect more cross-promotion strategies as the game sector became more competitive.

Mr Levy also saw another way to play the online game market: communities. Considered by industry peers to be the godfather of home video game software, Mr Levy is advising a start-up - XFire.com - which aims to stitch together the fragmented online game community in the United States.

While the mainland market is less fragmented, the same model could be applied there.

Mr Rein, whose forte is education investments - he is now the chief executive of e-learning company WebCT in China - also advocated approaching the games market from a different angle. 'I would love to see someone come in and set up a training school for programmers,' he said.

At the end of the day, few investments are likely to pay off like Shanda, and fewer still are likely to go public - although a 'trade sell' is always an option for venture capitalists looking to exit their investments. (For example, Electronics Arts is seeking a mainland partner.)

Shanda has a commanding lead and rivals were unlikely to close the gap, according to Brandon Lin, director and general counsel at SAIF Advisers, the advisory company for Softbank Asia Infrastructure Fund, which put US$40 million into Shanda. Softbank earned 13 times its Shanda investment.

Mr Lin pointed to the prospectus of mainland game operator The9, which is also planning a Nasdaq initial public offering.

The company's scale was far smaller - 189,000 peak concurrent users, compared with 1.7 million for Shanda - and earnings were dropping. Furthermore, its smaller size put it at a disadvantage when negotiating licensing terms with South Korean game developers.

'It's very difficult to challenge the incumbent. You need the scale to develop your own games,' Mr Lin said.

The9 has promised more than US$50 million in royalty payments to license World of Warcraft.

'If they don't get this IPO off, they're done,' Mr Lin said.