Kid-Friendly Web Businesses Raking in Funding and Profits

This week has been an exciting one for kid-focused web startups. U.K.-based Moshi Monsters, the online social game where kids can adopt their own virtual pet and then share it with friends, told Reuters it’s considering an initial public offering and is expanding to the U.S. Just a day later, another U.K. startup with a similar target audience and product, Fight My Monster, announced a new $1.2 million round of funding, which includes some big-name investors from the gaming industry like former Atari CEO Jeff Lapin.

Fight My Monster, a virtual trading card game which shares similarities with established phenomena like Pokémon and Magic: The Gathering, began as a bootstrapped effort, with an initial budget of around $240,000 U.S. The company’s Executive Chairman Dylan Collins wrote in an email interview that growth prompted the decision to seek outside funds. “The reason we went out to raise investment is that the game had grown to a point where we really needed to expand to just keep up with the players,” Collins told us. “Most of the investment is being allocated to scaling up our team and allowing us to create a structure that supports our player community as it continues to grow.”

Collins said that he thinks “companies are really starting to wake up to the opportunity that online communities can create in terms of merchandise and other non-online products” when it comes to younger demographics. Why? Collins believes it’s important to “consider just how disruptive the under-13 generation is going to be. They’re really the first of our society to grow up with internet access from the moment they could engage with their environment.”

Despite the fact that the under-13 audience could potentially be a huge marketing and merchandising opportunity, Collins notes that right now there’s very little aimed at them specifically. “It’s no surprise to see massive growth in kids properties which can really connect with that audience,” Collins said.

As for Mind Candy’s Moshi Monsters, its virtual pet model, which has already attracted a global audience some 60 million people, has been so successful that CEO Michael Acton Smith told Reuters earlier this week that an IPO might happen within the next few years. Mind Candy has already had success with the kind of offline merchandising tie-ins Collins mentioned above: the company said it sold $100 million worth of Moshi Monsters products in the past year alone. Collins says his company has nothing but respect for what Mind Candy has accomplished, even going so far as to say Acton Smith has “created the blueprint for this online brand extension model” with Moshi Monsters.

The two U.K.-based companies may be in the spotlight now, but other startups have also seen considerable success with the under-13 demographic. Outfit7, a Slovenian startup that’s since expanded to Cyprus, London and Seoul, has seen remarkable adoption of its series of Talking Friends virtual animated characters. The company announced 300 million downloads of its apps just last week, and also said it will be partnering with Iconicfuture and Digital Artists to introduce branded virtual merchandise to its games.

Outfit7 CMO Paul Baldwin wrote in an email interview that the result of its new merchandising efforts, the Talking Friends brand integration program, will help the company “create a powerful interactive platform that allows the world’s leading brands to tap into the Talking Friends global audience.” Baldwin noted that brands will be able to “reach millions of customers” by selling branded virtual goods the Talking Friends characters can use and interact with. He also believes that “the potential for expansion of the Talking Friends characters is huge – from books, to music, to films, and more.” In other words, Outfit7’s digital sales could soon be supplemented by real-world goods and media.

Outfit7 often compares itself and its success to Rovio, the Finnish entertainment company behind the wildly popular Angry Birds franchise. The appeal of Angry Birds extends beyond the under-13 demographic, but it’s a prime example of a company that understands how to market both online and off. Rovio recently announced the opening of its own digital storefront on Alibaba’s Tmall, which is essentially the Amazon of China. Tmall did an amazing $60 billion in sales in 2010. Amazon’s 2010 sales came in at $34.20 billion, for comparison, so Rovio’s expansion in the Chinese online retail space could definitely prove a significant source of additional revenue.

Even without offline tie-ins, online games and communities aimed at kids are money-makers. Moshi Monsters and Fight My Monster both feature subscription-based membership plans that allow users to access more features, in-game items and functionality than those who join for free. Fight My Monster founder and CEO Dominic Williams said subscriptions make more sense than freemium models, one that “works for parents best, [since] we need to give them good value (one payment only) but also a solution for the constant pestering that virtual items can lead to.”

With a clear strategy for monetizing the online business, an established roadmap for making money with offline tie-ins, and no sign of an end to growth opportunity in sight, it’s no wonder kid-friendly web startups are taking off.