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Venture Capital Checks In To Habbo Hotel

"We reduced our product risk, our legal risk, our marketing risk" before seeking venture capital, Sampath said.

Late last year, the company targeted three investment funds and met with each. After receiving two quick offers, Mercora accepted Norwest's. "For us, it was a breeze. We went from meeting with the venture guys on a Friday -- to closing the deal three weeks later."

Who's Up, Who's Down A comparison of venture capital investments in 2003 and 2004, by sector.
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Chart Disclosed Fourth-Quarter Venture Capital Deals for Washington Area Companies
Timeline Annual Washington Area Venture Investment
Complete VC Coverage

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Yet a close look at the MoneyTree survey suggests the 2004 spending increase was fueled largely by companies in later stages of development than Mercora, outfits more like five-year-old Habbo Hotel.

Venture money is classified in sequential stages, dubbed "seed," "early," "expansion" and "later." Later-stage funding soared 47.5 percent last year; early-stage spending rose 15 percent; and the other two stages saw slight declines.

Software remained king of the investment jungle, drawing $5.1 billion, up 18 percent over 2003. But if you lump biotechnology in with medical gear, the life-sciences sector eclipsed software, drawing $5.6 billion, up 10.6 percent.

One interesting switch occurred in services targeted at consumers and businesses. While funding for consumer-oriented products and services grew 43 percent last year, investments in business-oriented firms dropped 37 percent. And while total venture spending in the business sector still exceeded the consumer sector's, the trend reversed among start-ups landing their first funding.

The larger amounts pumped into consumer start-ups dovetailed with reports that for the first time in 2004, more money was spent embedding semiconductors into consumer products than into industrial or business gear.

"So we believe that a lot of the focus of technology for the next 10 years will be in the in the consumer space, as opposed to being in the enterprise space," said Bill Stensrud, a managing director at Enterprise Partners, in a conference call discussing the MoneyTree Survey. "And we are moving our focus accordingly."

Habbo Hotel and its parent, Sulake Corp., are the kind of consumer product that fell into disfavor with investors when the Internet investment bubble burst. The Internet-only firm raked in a mere $18 million in revenue last year, chiefly by charging for virtual hotel room furniture, cool clothes for players' "habbo" characters and other game extras.

As many a dead American dot-com can attest, virtual worlds are tough to build and tougher still to keep going. Investors, however, were intrigued by the site because it offers a simple, wacky way for youngsters to socialize and express themselves.

Fast-growing Sulake now has 160 employees in 16 countries. It opened the U.S. gaming site four months ago and plans to introduce Habbo Hotel to China and South Korea this year.

Sulake chief executive Timo Soininen, in a phone interview from Finland, said it didn't hurt that Habbo Hotel got its start five years ago, when potential rivals were getting terminally ill.

"The timing was good to start when everyone else was going down," he said. It demanded austerity and winnowed the competition, he added.

As to where Sulake goes from here, Soininen says the company has other entertainment products on its drawing board: "Our big dream is to create a new type of interactive entertainment brand, rooted in online community."

Those kinds of dreams, chased by big investment bucks, show why the Internet's innovative stage is far from over.

Leslie Walker's e-mail address is walkerl@washpost.com.

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