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November 8, 2007 - 3 Comments

iStock_000002044004XSmall.jpgIf you want to know where a given space is on the path to being mainstream, there are few measures better than looking at the distribution of venture capital flowing into that space over the prior twelve months. In the case of the Virtual World market, the last twelve months have had somewhere in the neighborhood of 25 deals totaling $1.26B, ranging from investments in world developers, ‘producers’, and the supporting ecosystem of in-world economy and advertising companies. Including the Disney/Club Penguin and Intel/Havok deals, which skew the numbers heavily and account for 2/3 of all activity, you get a distribution roughly like this:by round.jpgWhat does this tell us?Out of $451M of non-acquisition money flowing into startups, the majority of it is round two. This generally means that there were many many startups with ideas for ‘metaverse’ platforms that were bootstrapped with the help of friends, family and angel investors (or deep corporate pockets, but we’ll touch on that in a separate blogpost). Out of the ‘many many’, some suffered what we call ‘execution failure’, which is to say that they were unable to make their vision a reality, even in prototype form to demonstrate to venture capitalists for more funding. This left a subset of startups that had/have prototypes in-hand and were out looking to take their invention mainstream with the help of a capital infusion from the venture community. They had received their smaller A/first/Seed/Angel round(s) already, and were looking to expand.Also interesting is the number of companies that have effectively retreaded their business models away from fully recreational or training simulations and are attempting to steer into consumer virtual world businesses. A number of startups have gone through their first two or three rounds of funding, at which point they were shipping product, only to take on one or two more rounds of funding and go back into product development mode to re-ship a retreaded product for a larger more consumer-focused mainstream user base.One final thing to note are the investments in surrounding and secondary technologies, such as platforms (Intel/Havok), producers (CBS/Electric Sheep and Omnicom/Millions of Us), economies (Bessemer/Sparter) and advertising companies for virtual worlds (Microsoft/Massive, Intel/IGA, Time Warner/Double Fusion). This usually follows consolidation and more mainstream adoption of the primary technology (in this case, virtual worlds), but is showing up early this time around.Effectively, if you see the majority of venture deals leaning towards rounds two and three, that means that you are on the verge of seeing a number of new products and platforms announced. Considerable potential energy. This should be a fun time to watch the industry and see the second generation of virtual world platforms emerge that integrate the key learnings and address the shortcomings of first generation worlds, and the consolidation of the market around key areas such as training, business collaboration, and social networking.

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  1. Indeed, great summary of the existing efforts – one mention though: these numbers concentrate mainly on the US landscape – my persoanl experience is that something of smaller magnitude is happening in Asia and Europe is building a lot of infrastructure for video and rich media applications. Christian, can you please add some insight into these and other potential high growth global markets?

  2. I find this all very encouraging! It is especially good to know that there is a subtle move towards more sustainable business applications of VIT.Those at the cutting edge are also those on the bleeding edge. Hope the ‘wait and see’ approach will not prevail, but that the ‘jump in and be part of it’ will set the trend….

  3. Excellent post and it ties in with the recent debate about Linden Labs’ theoretical $5 billion valuation