VentureBeat

Twofish has raised $4.5 million in a second round of funding for its business of creating the economic infrastructure behind virtual worlds. The deal is another indication that the virtual goods economy is heating up, even as the real world economy spirals downward.

The Palo Alto, Calif. company made the announcement at The Virtual Goods Summit, a packed conference in San Francisco attended by several hundred people this morning. Twofish creates a “digital resources planning solution,” sort of like enterprise resource planning (ERP) for virtual worlds. The Twofish Elements solution is an economic infrastructure that allows virtual world creators to run virtual banks, track inventory, and set up an e-commerce system.

The company essentially outsources the process of setting up the system so that the game creators can focus on building a quality virtual world. Twofish can increase profits, better engage customers and reduce fraud. Its primary competition comes from game companies that wants to do this kind of work internally, but I’ll mention a few others in a second.

The whole virtual goods movement, popularized in Asia, offers an alternative business model to online game subscriptions. Strategy Analytics says virtual goods already make up a $1.5 billion industry. We’ve covered the topic, particularly on Facebook apps, previously. That makes it a viable alternative business model, along with advertising or “try before you buy” downloadable games. Virtual goods and ad models allow game companies to offer “free to play” games. Again, those are popular in Asia and that model is migrating to the United States. Here, we have yet to see a gigantic hit.

If you’re playing a fantasy game, for instance, you might not mind paying 50 cents for a better sword so that you can take on the ogres. The Twofish technology handles the transaction in real time. The investors include Triplepoint Capital, Rustic Canyon Ventures, and Venrock.

Lee Crawford, chief executive of Twofish, is up on stage right now. A couple of his competitors, Dan Kolkowitz, head of Playspan, and Chris Donahue, of Live Gamer, are also on the same panel. All of them can create a secondary market for gamers, who sometimes want to create their own virtual items and sell them. Donahue says that Live Gamer acquired the secondary market for Sony’s online games this year.

Crawford said the company’s solution gives real-time data so game-makers can monitor just how much money is coming in from virtual goods. One of the tricky things to balance is pricing, since users may balk at high-priced items that don’t do much for them in the game.

Susan Choe, chief executive of online games company Outspark, says that you need $200,000 in revenue a month before you consider adding the secondary market, which comes with costs. Choe noted that one company on the stage promised her that a secondary market could triple the virtual goods revenues, but she isn’t quite convinced that it is happening yet.

Latest tech roundup:

Digg removes listing of top diggers — The news ranking company has removed its list of the people who have contributed most do top Digg stories, to stop gaming of the site, or at least the perception of gaming. For starters, it removes the temptation for eager marketers to bribe top diggers for favors. Thus ends a hallmark of Digg. Ranking on the list was one motivation for Digg’s passionate users. (See founder Kevin Rose’s note.)

Rumors of Zune-enabled phone coming from Microsoft later this year — Details here. This makes sense, given weak reception of Microsoft’s new digital music player, the Zune. May as well change it quickly, add the phone, and stay up with Apple and its iPhone. Meanwhile, the Microsoft executive responsible for making the Zune, Bryan Lee, has resigned.

MySpace taking its time to enter China, lots of time — EBay and Yahoo stumbled when they entered China, facing local management and execution problems. Myspace is being careful. But now it has been months. Its downfall may be that it never gets there.

SplashCast, one more video player — We’ve written about the proliferation of video players, including the coming KyteTV. Splashcast does much of what KyteTV does, but doesn’t have Kyte’s mobile capabilities. Splashcast launched at DEMO. It lets you distribute video, blog posts, or other files over the player, from sites like your MySpace profile. More info here. It has raised $1.3 million in venture backing. More details from the Merc’s Dean Takahashi, and his summary of DEMO. Another mention: Ink2, which allows you to send personalized greeting cards for $3 by selecting artwork, and a stamp online, and then typing in the address of the recipient.

Twofish, latest MMO company — Twofish (no link), you’ll recall, is the stealth company we mentioned a few days ago. It is an MMO, or Massively Multiplayer Online Game, which is the rage these days, where thousands of players can play at the same time. Venture capitalists are interested in these as social networks. We’ve seen a number of new companies focused on this area, from Rupture, to D2C, Areae and Red 5. Founder Lee Crawford isn’t talking, but he’s a former VP at Shockwave, and was most recently Director of Engineering at Yahoo Games. The firm just raised $2.5 million from Venrock Associates.

What’s up at MontaVista? — Last week, we learned that MontaVista’s executive staff, along with a good number of director-level people, were fired or left the company in the last couple of weeks. The whole marketing division was cut, we were told by a source. We find this odd, given MontaVista just raised $21 million in funding in December. We contacted the company and, while we’ve reached someone last week, they still haven’t been able to comment. We’re now scheduled to talk with the CEO next week, so stay tuned. It may have something to do with MontaVista’s challenging open source model, though we’re not certain.

Roundup of the latest action in Silicon Valley & tech:

PayPal’s origin explored, one more time — Online payments company Paypal has spawned more Internet entrepreneurs from its founding team than any other company we know. Yet PayPal had a rushed and tumultuous birth; if you’re curious about yet another version of PayPal history, this is worth a read: Co-founder Elon Musk (pictured here) rejects the version that suggests he was a lesser player.

Wikio, which looks remarkably like Digg, raises $5.3M — Aside from ranking stories in various theme areas, like Digg does, Wikio gives you ways to publish articles and personalize your news page. The Luxembourg-based company has closed a first round by Lightspeed Venture Partners and Gemini Israel Funds. Its team has big-name European new media types: Founder is CEO Laurent Binard, who was founder of Mediapps (European Software Publisher), and chairman is Pierre Chappaz, who was Yahoo Europe President and co-CEO of Netvibes. Wikio’s seed investors include Loic Le Meur (VP Sixapart Europe), Martin Varsavsky (CEO FON), Freddy Mini (COO Netvibes), Ouriel Ohayon (Editor Techcrunch France), and Jeff Clavier.

Infinera, the fiber optic company, to pull IPO trigger — This is the company with the power board, with folks like TJ Rogers and Vinod Khosla, that has raised a huge $315 million in venture backing so far. It is reportedly planning to file for an IPO, at a $1 billion-plus valuation, says LightReading, noting Infinera has sent lock-up agreements to shareholders.

Start-ups are killing big software companies — That’s the only conclusion you can draw if software sales are going up and sales of the big guys, SAP and Oracle, are falling. More here.

Stealth companies of the week — Thealarmclock mentions Ron Conway’s latest company, Portfolia, and Redwood City’s Twofish, but has few other details. Let us know if you know more.

Acquisition environment humming — Dow Jones (sorry, subscription only, so no link) cites analysts and others saying M&A activity remains robust for now. We wrote about secondary activity. There’s a notable quote of Foundation Capital venture capitalist Warren Weiss saying the firm sold five of its portfolio companies in 2006 - and “turned down an extraordinary five offers for every one it accepted.”

Good to have power players on your board — Video company Veoh has not escaped the shakeout happening among video start-ups now that YouTube has emerged as leader, but Veoh backer and former Disney CEO Michael Eisner has a way of making news. When Veoh announced a partnership with Wenner Media’s Usmagazine.com, to create a celebrity entertainment channel on Veoh, the NYT wrote about it (even though there are lots of celebrity entertainment sites already).

Google adds sponsored links to your search history — Details here.

Google in talks to buy Adscape Media, for ads in videogames — The search giant is in talks to acquire the San Francisco company, which delivers online advertising and also places ads within videogames, according to the WSJ. A deal could be reached next week. The company has a member of H.I.G. Ventures on its board. (The WSJ notes that Microsoft last year acquired Massive, a company that delivers in-game ads, for close to $200 million).

Kiptronic raises cash for ad-insertion in podcasts — Our story yesterday, in case you missed it, is here. Kiptronic inserts ads in audio and video files as they’re downloaded for off-line use; this is different from the broadcasting ad-insertion technologies. See Techdirt’s critique of broadcasting hype here. More analysis here.

IBM Joins social networking field — Details here.

ThinkFree wins Web-based office software comparison — Computer World compares various Web-based software packages, and rates ThinkFree (first) and Zoho (second) the winners. ThinkFree edged out Zoho because it is more compatible with Microsoft Office. In a significant partnership with Omnidrive, though, Zoho lets users open and edit documents directly within Web-based storage service, Omnidrive, and then save them too — a first, to our knowledge.