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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
June 29th, 2007

By Brent Holliday
Greenstone Venture Partners

March Of The Different Penguins

“I'll give a little bit
I’ll give a little bit of my life for you.
Now's the time that we need to share…”
– Supertramp, Give A Little Bit

School’s out and the kids have more free time.  If the weather is crummy (a sure bet these days), then perhaps your little ones are playing indoors on the computer in virtual worlds, like Habbo Hotel, Webkinz, Neopets and BC’s own Club Penguin.  If you have kids between 7 and 14, no doubt these names are familiar to you.  If not, these names are as foreign as fullheadofhair.com would be to me.

Trust me, this is big business.  Social networking for teens and adults is huge business and is in the form of MySpace, LinkedIn and Facebook.  Massively Multiplayer On-line Games (MMOG) are also huge with the Sims, SecondLife and World of Warcraft attracting millions of paid users.  Club Penguin is a little of both.  It is a mix of MMOG and social networking, but for kids.  Anyone can register and enter the cute world of animated penguins and wander around to play games or interact.  But only the paid penguins can add clothes and accessories and trick out their igloo with the latest furniture.

Club Penguin is the brainchild of twentysomething Lane Merrifield and co-founders Lance Priebe and Dave Krysko up in Kelowna.  They started an on-line chat service about six years ago called Experimental Penguins that they originally sold as something you could install on your own site for $400.  That evolved into another Flash chat service called PenguinChat.  Through these lean years up to the launch of the Club Penguin you see now, they learned a lot about on-line communities and what works and what doesn’t.  The new Club Penguin was launched in October of 2005 and grew very quickly in popularity.  My daughter was hooked on Webkinz (a Toronto based web community for kids tied to the Ganz stuffed animal company) in mid 2006, when she mentioned to me that a new site was the place to be.  So I checked it out.

As a parent, the site rocks.  You can keep your kid from chatting openly to strangers by having them only pick phrases from a list.  If you let them go to Open Chat, you can rest easy as tons of bad words and objectionable “luring” phrases are screened for and people can get banned pretty quickly.  So I started piling up $6 a month for my daughter’s penguin bling.  Then I noticed in the press releases where the company is from and I was very intrigued.  Like many of my colleagues in the finance business, I was a bit too late to the party.  Lane and his crew did not accept calls from anyone as they were being inundated with requests to fund or to help.  This was last November! 

Sites like Paidcontent.org and Om Malik’s blog started quoting traffic numbers for MMOG’s earlier this year.  Most guesstimates have the Club Penguin site at over 4 million active users!  That puts them 4th in the world.  Now not all active users are paying, but do the math…  Many other blogs have done it and quote $60M in revenue this year with $30M in profit.  Of course the company is not saying anything about that… in fact they aren’t saying anything about anything.

In a vacuum of information, rumours start to swirl.  In April, the rumour was that Sony was buying them for $200M!  Then by May, many blogs were quoting insiders at Sony as saying the price was $400M or more.  Well, just two weeks ago, it appears that Sony walked away.  Other companies are rumoured to be interested still, including Disney.  Like I said, in a vacuum, rumours rush in to fill the void.  MySpace was bought for $450M last year and Neopets for $175M the year before.  So these sites are valuable, no doubt.

Now let’s take a second and think about a $500M exit for a BC technology company.  I can only think of a handful of BC companies that were bought for more than that: Crystal Decisions (CDN$1.2B), Abatis (CDN$900M) and ALI ($530M).  This is a huge deal… if it happens.

Now here’s something that the blogs are not talking about that your steadfast reporter has found out: the company’s values and mission in life.  This blew me away…

Apparently, there is a company charter that forbids any outside ownership… by anyone.  That makes it tough to invest in or buy, one would think.  The charter goes further to say that there will never, never, never, ever be advertising on the site.  Again, the potential buyers rumoured to be swirling would never, never, never NOT consider adding lucrative advertising to the site to fill my daughter’s head full of Disney or Sony or 3rd party kid’s merchandise. So that makes it tough to buy.  But here’s the best part: They have a set dividend for the founders (some low rate) and the majority of all of the cash generated by the company goes to philanthropy.  And I don’t mean writing cheques to UNICEF.  They have paid staff members looking into direct investment around the world to needy causes, like schools in Africa etc.  Cool huh?  They are so committed to this that the main stumbling block of the big company acquisition appears to be around how the profits will be used.

Now many of us are from the school of Bill Gates or Warren Buffet.  Make gobs of money by being a fervent capitalist.  Then spread the money around liberally to give back to your community and the world. Isn’t that the way life goes? These guys are saying that they want to give now and don’t care if that scuttles their chances of being wealthy. Isn’t that backwards?  Welcome to the new world of philanthropy… call it the march of the different penguins. 

I say “good on ‘em.”  Tell those big corporations to go pound sand until they “get” your way of running this on-line phenomenon.  Meanwhile, dream up the next big thing and invest in that to make yourself even bigger.

If anything, Club Penguin’s founders have started a great debate.  What would you do if you were them?

All of the “facts” in this story have come from information found through the blogosphere and indirect conversations with company insiders, so take it with a grain of salt.  But the company charter stuff is accurate.  Lane won’t call me or e-mail me, like every other person on the planet. In case he reads this, I am in Kelowna for the next two weeks, so I’d be happy to go in and learn more.  This is a great story that doesn’t have an ending written yet.

What Do You Think? Talk Back To Brent Holliday

Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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