VentureBeat

With a recession looming, many online entertainment sites who currently depend on ad revenue are exploring a new source of revenue: Virtual goods.

Boston-based Viximo wants to make it as easy for publishers to earn money from selling virtual goods as it is to run ads on a website. And more profitable.

Viximo provides a plug-and play virtual goods platform that allows a publisher to offer their own version of Facebook Gifts, which are nice-looking graphical icons that you can exchange with friends. To create a virtual goods store, a publisher plugs a few lines of code into their website or Facebook application, and Viximo does the rest — handling everything from billing to keeping the inventory fresh with new virtual goods.

Many companies are competing to offer publishers access to this rich source of revenue. Some companies, like Twofish, provide the backend technology to enable the management of virtual goods sales. Others focus on providing the content, such as Virtual Greats, an agency that connects publishers to celebrity-branded virtual items. But for the moment, only Viximo offers both technology and content.

To create their virtual goods, Viximo reached out to top user-generated content creators in various virtual services, such as avatar-based chat service IMVU and virtual world Second Life. The content creators are free to create whatever they like. If the items they create are sold, the creators get a commission comparable with the commissions creators get for stock photography or 3D art.

So far, Viximo has lined up eight publishers for its beta. Two of these publishers are popular Facebook applications, Birthday Calendar and Family Tree.

But will virtual goods be a viable substitute for advertising?

According to one estimate, Facebook is earning $35 million a year from the sales of virtual gifts — Facebook has told us that this estimate was “very crude”, and didn’t include revenue from its “Sponsored Gifts” section. In China, where the virtual goods market is more mature, Internet portal Tencent earned more than $65 million on the sales of virtual goods in the first quarter of last year. Hardly a drop in the bucket, but not quite ready to match up to the estimated $8.2 billion that will be spent on online display advertising this year.

That may eventually change as more people are exposed to virtual goods. Many think that virtual goods are something that only foolish teenagers buy. Early data from Viximo punctures that myth. According to Viximo founder, Brian Balfour, women in the 30-40 age range spend nearly 10 times as much per purchase as do other demographics.

Balfour says the main reason people buy a virtual item is to send to a friend as a gift. “It’s classic merchandising, like in the real world, people send gifts around holidays, and especially birthdays.”

Viximo has raised $5 million dollars from Boston-based venture firms, North Bridge Venture Partners and Sigma Partners.

Bret Terrill writes daily about virtual goods, social games, and social networks on his blog: Bret on Social Games.

Two top executives at management software provider Entellium Corp. were arrested Tuesday for allegedly exaggerating the company’s revenue in order to attract more private funding.

We’re not talking about a little white lie. Former chief executive Paul Johnston and former chief financial officer Parris Jones are accused of cooking the books to show 400 percent more revenue than was actually brought in over the last three years. In 2006, they reported $3.95 million in revenue, when the actual figure was only $582,000. This worked so well for them, that they bumped their total from $1.45 million to $6.29 million in 2007, and from $1.74 million to $5.22 million this year. Where did the numbers come from? They must have just sounded good.

At least they did to Entellium’s investors, Sigma Partners, Intel Capital and West River Capital, among them, who helped the company raise a total of $50 million — $19 million coming from Ignition Partners alone.

The scheme fell apart at the end of September when a vice president of human resources discovered the phony books, according to TechDirt. She turned Johnston and Jones over to the board, which planned to send in a contract CFO to investigate. But that was too little too late, and the execs resigned before the investigation could happen. Several days later, the staff was told the company was out of money, and 50 of the 68 employees at its Seattle headquarters were let go.

Johnston and Jones appeared at an initial court hearing yesterday, and could face up to 20 years in prison and $250,000 in fines. They also authored apology emails to the heads of Ignition and Sigma, stating that they “made a grave mistake” and that “revenues have been overstated since 2004 with a delta [difference] of approximately $400K a month.”

One might ask why a thorough audit of the company wasn’t done sooner, considering its shaky origins. Johnston founded it in Malaysia in 2000, and just two years later it underwent an intense restructuring that left some employees without a paycheck for some time.

Meanwhile, Entellium, which develops customer relationship management (CRM) software, continues to operate largely out of its offices in Malaysia. Despite the recent news, Entellium plans to keep the its doors open, potentially finding a similar company to acquire at least some of its assets and employees. CRM software company Avidian Technologies was eyeing this option before the news broke, but negotiations may understandably cool.

Here’s an interesting new use of Adobe’s AIR platform for creating hybrid web/desktop applications. With a free AIR app called Demandbase Stream, users can watch in real-time as other businesses visit their websites, then use that info to pursue a sale. The data scrolls across the bottom of their screens like the CNN news ticker, and when you see something interesting, you can look up relevant contacts via the Demandbase Central Platform.

With Stream, chief executive Chris Golec says his company is bridging two different kinds of businesses. There are companies like LeadLander that provide reports on possible customers visiting your website, and there are others like Hoover’s and ZoomInfo that compile data about useful contacts. San Francisco-based Demandbase, on the other hand, ties the two processes together. Demandbase also makes money in a unique way — the Stream app, which provides the site visitor data (plus more analytics, as you can see in the screenshot below), is completely free. Then, when you actually want to call or email someone at a relevant company, Demandbase charges per contact rather than for an entire list, of which you’ll only use a small fraction.

Since I’ve never had to pursue business leads myself, it’s hard to say whether I’d like Demandbase’s pay-per-contact model, but the two sides of the startup’s business seem like a good match. Plus, there’s an undeniable “wow” factor when you use the Stream app and watch as company names scroll across your desktop.

Adobe was apparently impressed with Demandbase’s use of AIR technology, too. Along with Altos Ventures, Adobe provided Demandbase’s first round of funding. Both firms also participated in Demandbase’s new $8 million second round, which was led by Sigma Partners.

ScanCafe, a Burlingame, Calif. company that professionally restores old photos and other images, is announcing a new landmark in its two-year existence. It has scanned 10 million images.

The way the service works is that you send your images in, the company uses software and manual techniques to restore the photos, then it organizes the photos for you in a secure online account, while sending you back the originals. You select the images you want to keep offline — at least 50 percent — and the company sends you back digital copies of the selected images on a CD or DVD. See sample.

The service charges per scan, and provides a range of other options, like buying extra CDs. There are a wide range of competitors in this business, as seen in this price comparison list made by one of them apparently named Slide Scanning Pros (found via a comment on Crunchbase).

The company has another announcement today: It has raised $4 million from Sigma Partners.

YouSendIt, a company that lets you send and receive large files through your email, has raised $14 million in a third round of funding.

The financing comes from new investor Emergence Capital Partners (the online services-focused firm best-known for backing Salesforce.com) and existing investors Sigma Partners, Alloy Ventures, Sevin Rosen Funds and Cambrian Ventures. YouSendIt raised a $10 million second round last year.

YouSendIt has a range of offerings, including a free version of its basic service that lets you send files of up to 100 megabytes, as well as plugins For Microsoft Outlook, Adobe Photoshop and more. The Campbell, Calif. startup targets both consumers and corporations, but its niche is small businesses and independent professionals who need to send large files. YouSendIt says it already has 7 million users, and is growing by 200,000 per month.

Competitors include Pando, which is more consumer-focused and, unlike YouSendIt, uses peer-to-peer technology.

Vlingo, a Cambridge, Mass, speech recognition company, has just launched an awesome voice-powered interface for Blackberry smartphones.

In a recent post about speech-to-SMS provider Yap, we posited that the ultimate mobile interface would let us navigate a phone using a combination of voice and manual input. Yap’s goal was to get there eventually. But Vlingo, which launches such an application today, has left Yap — and even Microsoft’s heavyweight TellMe — choking on dust.

While voice-activated search and directory services have been around for a while — TellMe launched its version last year and the voice-recognition giant, Nuance, has one, as well — Vlingo combines these handy search features with the ability to call and dictate texts or e-mails to anyone in your address book and open applications like your calendar or map.

When I watched the video demonstrating what Vlingo could do (see below), I felt the first pang of phone-related envy to hit me since I defected from Blackberry to iPhone all those long months ago.

Vligno recently raised a $20 million round of funding led by none other than Yahoo, who had previously tapped Vlingo to power its voice-activated oneSearch application. First round investors Charles River Ventures and Sigma Partners participated, as well. All things considered, this investment may represent Yahoo’s single best move over the last few months — though admittedly, that’s not saying much.

Perhaps threatened by Vlingo’s agility and success, Nuance has filed a patent-infringement lawsuit against the young start-up, an all too typical move for big companies who can’t stand the competition.

Blackberry Pearl, Curve, and 8800 users can go here to download the new app, free of charge.

Updated

Outsourcing technology startup oDesk has raised a $15 million third round of funding led by DAG Ventures.

Menlo Park, Calif.-based oDesk allows companies to hire technology “providers” like programmers and web designers, and it provides companies with the technology to monitor those remote employees. Chief executive Gary Swart says the need for such a site is growing, as the number of companies looking to outsource some tech work and the number of workers tempted by the flexibility of remote, outsourced employment are both on the rise.

ODesk is best-situated to take advantage of that growing interest, Swart says, because it’s the only company whose service handles the hiring, management and even the payment of outsourced employees. Sites like Rentacoder.com and Elance function more like marketplaces without the management or payment components. [Update: Actually, Elance has been adding some management features.] That works for small, fixed projects, but creates problems for more long-term hiring or when you want to integrate the outsourced employees into your team. Swart offered some pretty compelling evidence, too — comparing the highest-paying jobs on Rentacoder, Elance and oDesk (in oDesk’s case, the numbers are presented through a cool feature called oConomy), it’s pretty clear that the top end of oDesk jobs offer more money.

This round was actually unsolicited, Swart says, because oDesk still had around $3 million of its $8 million second round in the bank. (In fact, oDesk controls costs by using its own technology to manage 41 contractors.) But DAG’s offer, along with the fact that the venture firm didn’t insist on taking a seat on oDesk’s board, was too good to pass up, he says, and it will mean that the startup doesn’t have to look for funding later this year or early next year, freeing it to continue focusing on building its customer base and improving the product.

Existing investors Benchmark Capital, Globespan Capital Partners and Sigma Partners also participated in the new round.

Updated

With just-announced improvements to its mobile service, Yahoo oneSearch gives customers the ability to search the web by simply speaking into their phones. To make this happen, Yahoo is partnering with startup Vlingo and has led Vlingo’s $20 million second round of funding.

Yahoo isn’t the only big tech company to set its sights on the voice market. Google, for example, may be in talks to acquire internet phone company Skype. (Ebay acquired Skype at the end of 2005 but hasn’t been happy with its financial performance.) A year ago, Microsoft acquired voice technology company TellMe, whose services include voice search. And a number of other startups offer voice search, including Promptu and V-Enable. (Read our coverage of Promptu.)

[Update: V-Enable also had a big announcement today: It's partnering with mobile nightlife directory buzzd, which plans to use V-Enable's Mobile411 search tool to help users search its site. ]

Voice search technology is still improving, but we were pretty impressed when we covered Vlingo last year. The Cambridge, Mass.-based startup uses each query to refine its service — as more people use it, the technology should become better and better at interpreting accents and phrases.

Yahoo will be adding other oneSearch features too, said Yahoo Vice President Marco Boerries at this week’s CTIA Wireless trade show in Las Vegas. The focus will be on “instant answers to any query,” not just links to different sites, he said.

I’m hoping to speak to Vlingo chief executive Dave Grannan later today to find out more about how Yahoo’s voice search compares to the competition. Vlingo previously raised $6.5 million from Charles River Ventures and Sigma Partners, who also participated in the new round.

[Update: I just got off the phone with Grannan, and he told me Vlingo won the deal with Yahoo in "a bake off with other speech tech players" last fall.

Vlingo stands out because it has the most unconstrained speech recognition technology around, he said. For example, using TellMe is similar to most customer-service voice systems: Rather than making a general query, you have to navigate through several menus to find what you want. ("What city did you want to search?", then "What business are you looking for?", etc.)

On Vlingo, however, you can say anything you want: You can say a flight number to learn its status, or you can ask, "Where's the best place to play craps in Las Vegas?"

Grannan said he plans to use the new funding to expand into international markets, which means offering Vlingo in foreign languages (including "UK English"), as well as hiring more sales and marketing staff. Vlingo's expansion may be a little limited, because the deal forbids the startup from providing its voice technology to Yahoo's mobile search competitors. But Grannan noted that Yahoo agreed to a similar exclusivity: It won't use anyone else's voice technology, either.

"In the balance of power, that worked in our favor," Grannan said.]