IMVU’s Road To Riches Already Paved with Virtual Goods

IMVU has had a quietly growing business, and now the company is talking about it. A virtual world, of sorts, inside a PC desktop client, its product lets users create titillating avatars, decorate them, then chat with each other in virtual rooms. Although it launched in 2004, IMVU has recently been fine-tuning its virtual goods business, and to great effect. It has doubled revenue this year, became profitable earlier this summer, and is now making $2 million in revenue a month. The company is on track to bring in $25 million in annualized revenue.

Its take on virtual goods is notable for relying on users themselves. IMVU has 40 million total registered users, with six million monthly uniques — and what it claims is the world’s largest catalog of virtual goods. It lets users create their own 3-D goods in the form of clothing and other decorations for avatars and rooms. Then it lets creators resell these goods within the game and on their own web sites. The result is that users have created around 3 million virtual goods while the company itself has only created 2,000. By this point in time, 150,000 people have signed up to be item creators, 175,000 goods are purchased per day, and in the last month 35,000 people have sold at least one item. Meanwhile, users create 4,000 unique new items every day. And these items sell, as the top 10 items sold are only 0.2 percent of the total sold.

In terms of money, 80 percent of revenue comes from direct transactions, while the other 20 percent is advertising (the company includes offers in the latter category). The company didn’t even hire an advertising sales guy until the company became profitable this summer.

So what made the difference?

In an interview last week, chief executive Cary Rosenzweig told us that the company has focused on fine-tuning the interface where users buy virtual currency, and has seen “overnight” jumps in revenue as a result. In July, for example, it began letting users try on virtual garb before purchasing. If users liked what they saw, they could buy the good with the click of a button.

It also introduced offers in March, although he says offer-takers are a new, separate group of customers — they are not first taking offers then eventually paying with cash. As many other web have discovered, “the first ten minutes are critical” — the initial interface and the currency integration are areas that the company will “work on forever,” Rosenzweig adds.

Where to now? The company has a wide range of users — not just the teens it was designed for — including 35 percent between the ages of 18 and 24, and 23 percent age 25 and older. As company co-founder Eric Ries detailed in this excellent post last month, IMVU has inadvertently become a place not just for young people to chat with each other, but with older adults to chat with each other. Out of these users 69 percent are female, and 62 percent are located in the US.

The company plans to expand in a few different ways. It wants to introduce more ways for people to access the service, including clients for Macs and mobile phones, as well as social networking applications. It also is looking at expanding into other languages. Within the service, it is also looking at what other features people might like — such as games.

Rosenzweig hopes to build a $100 million business, possibly by 2012. He doesn’t look to virtual worlds like Second Life for inspiration, though. Full-blown virtual worlds are more expensive to run, as they require that the entire world be synchronized. Because IMVU has rooms, those rooms only need to be activated when people are actually using them, meaning less load on the company’s servers.

Industry estimates put virtual world profitability at around 10 percent, but Rosenzweig aims for a lot more than that. His model is something like Chinese online gaming site Changyou, which makes nearly 50 percent profit through virtual goods.

So, with profitability, IMVU in a position to do major expansion. It raised $10 million last January in a round led by Best Buy, and still has most of it in the bank, Rosenzweig told us. This funding followed two previous rounds from Allegis Capital and Menlo Ventures; the total raised so far comes to nearly $30 million. Going forward has 59 employees — who, along with Rosenzweig, all got mohawk hair cuts when the company broke even earlier this year. With profits funding further expansion, look for the company to make more of a market presence, even as other virtual worlds struggle to make money. As Rosenzweig quipped at one point in the interview, not everyone in the industry is “going to get a mohawk.”