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Venture Capital Checks In To Habbo Hotel

By Leslie Walker
Thursday, January 27, 2005; Page E01

Yesterday I stopped by Habbo Hotel USA, where nearly 4,000 "habbos" had checked into cartoon-like rooms to partake in a virtual party. I wanted to see for myself what sorts of Internet companies are pulling in big bucks from venture capitalists these days.

Habbo Hotel, an Internet-based gaming community for teens, reeled in a whopping $23.5 million this month from Benchmark Capital and other investors. Although the business is losing money, a European version has proven popular, with more than 3 million people playing each month.

Who's Up, Who's Down A comparison of venture capital investments in 2003 and 2004, by sector.
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Timeline Annual Washington Area Venture Investment
Complete VC Coverage

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Next I clicked over to Mercora Inc.'s Web site to check out IM Radio, an unusual song-sharing network that turns people's computers into Internet radio stations by letting users stream songs from one another's machines. Founded in May 2003, Mercora landed $5 million this week from Norwest Venture Partners.

Mercora and Habbo Hotel illustrate what's happening at both ends of the funding pipeline for start-ups: Money is flowing again not only into survivors of the dot-com boom (Finland-based Habbo Hotel started in 2000) but also to a promising generation of newcomers hoping to grow up and become the next eBay, Yahoo or Google.

"We are seeing a real upswing in the number of really interesting new start-up ideas out there," said James R. Lussier, a member of the investment team at Norwest Venture Partners, which doubled its dealmaking activity last year compared with 2003. "We are looking at investment opportunities now that will be significant companies three to five years out."

That appears to be true throughout the venture capital industry, judging by reports showing that investors finally boosted spending on start-ups last year, reversing three straight years of declines. The latest MoneyTree survey (conducted quarterly by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association) found that venture firms in the United States invested $20.9 billion in new and young businesses last year, up 10.5 percent from 2003.

Last year's $21 billion tally still pales beside the $106 billion invested in 2000, when the Internet investment boom turned to bust. But venture investing has always been cyclical, with a pipeline running 10 years or so, and many think the 2004 uptick represents a new beginning.

Mercora chief executive Srivats Sampath, who founded security software company McAfee.com in 1998, agreed a new cycle has kicked into serious gear.

"It represents the beginning of the second wave of Internet companies," said Sampath, who thinks this group will be wiser than the first because of lessons gleaned from the bust. "Typically the second time around is when you find some great companies being built."

Mercora has 10 employees and got its first funding infusion in 2003 from Sampath's own bank account. Before seeking outside capital, the company created and released a free version of its music-sharing software to prove it could work. The software is designed to enforce Internet radio's elaborate rules, such as how many of an artist's songs can be played consecutively by any one person. Mercora has 300,000 users and has been talking to record labels to convince them it complies with Internet radio laws, including paying royalties. Free for now, Mercora plans a premium version costing $3 to $5 a month within six weeks.

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