VentureBeat

Conduit Labs is a secretive new company, not launched yet, but which says it wants to build a new social network: One built around virtual world gaming, but with networking components that reflect real life, just like Facebook does for students on college campuses.

It has just received $5.5. million from Charles River Ventures and Prism Ventureworks.

Conduit Lab founder Nabeel Hyatt and Susan Wu, a virtual world games expert who led the investment for Charles River, are coy on specifics. However, they says there’s something missing in the experience of today’s most popular games, such as World of Warcraft: Interactions designed around real-life relationships.

Friends playing on WoW, but who live far away from each other, can only hang out online. They can also meet at Second Life or other online worlds and gaming sites, but they can’t go out and play a casual game of basketball on a Saturday afternoon.

Conduit Labs, based in Cambridge, Mass., wants to combine the social web of real life, as embodied in social networks, within a meaningful virtual environment that could include virtual pick-up games of basketball, or any number of other activities that friends might want to do together — karaoke, dancing, etc. It would still be online, only much more realistic.

Wu was an early skeptic about Second Life, because it didn’t offer these things.

Conduit wants, in part, to improve upon Facebook’s carefully plans meaningful social interactions on its site. Facebook features such as news feeds and mini feeds show people what their friends are up to and what their common interests are. Email notifications and pokes create an experience for Facebook users similar to a real-life community bulletin board, or pen-pal correspondences between friends, Wu says. However, most of these communications aren’t in real-time. There’s little instant messaging and no instant gratification of real communication.

The promise of the gaming angle, as proven by World of Warcraft and other online gaming worlds is that friends can interact in real-time, Hyatt explains.

Carefully designed social interactions have the potential to create the next generation of online relationships, they say. Hyatt and the other Conduit founders have a strong background in building online games and worlds, having worked on such diverse mainstream hits as Guitar Hero, Lord of the Rings Online and Asheron’s Call.

The market opportunity, Wu and Hyatt stress, has been recently highlighted by Disney’s purchase of kid virtual world Club Penguin. That site developed a paid-subscription service and virtual goods that allowed the company to grow without taking on VC funding.

In short, it’s all a little vague. We’re not entirely sure how the company can improve on instant messaging and real-time video interactions that are already possible. We do know, however, that Wu has given a lot of thought to gaming. So we look forward to following this company as it emerges.

Shawn Fanning, founder of the popular music file sharing company Napster, is back in the game with a new start-up.

This time, Fanning wants to bring social networking to popular online games like World of Warcraft, as BusinessWeek first reported.

Experts say this is a promising area, because millions of gamers have formed communities with each other through playing, but their interactions have been limited by the confines of proprietary software. Why not open up these interactions to the full richness of the Web, let gamers flirt with each other, communicate offline or any number of other things?

Fanning’s new company start-up, Rupture, results from Fanning’s own frustration with WoW, which has 7.5 million players. The more he played, the more of a stake he had in the game, but the more he felt hampered in organizing game playing and learning about others’ identities.

He has raised seed money from investors including Ron Conway and Joi Ito. That makes sense because Conway has backed Fanning in his previous endeavors at Napster, and subsequently at SnoCap, a music store service that recently partnered with MySpace.

There are other services that extract character names, profiles and other data from WoW and other games. But few, if any, have sought to take it to the next level, personalizing it all in other ways. Rupture will create individual and guild rankings and facilitate playing and chat, starting with WoW, but pulling in information from other games, too, according to BusinessWeek.

There are several other stealth start-ups working on this, Susan Wu, venture capitalist at Charles River Ventures, says. She dismisses concerns that they may violate WoW’s terms of service. There’s tension, certainly. The walled garden has benefits — a rich and immersive storyline in a constrained but focused environment. However, players of WoW tend to spend time outside the game interacting with their “guildmates,” but have no easy way to do that. And there are thousands of plugins that have established precedence for how services get layered atop WoW, she points out.

Check out Allakhazam (plugin info here), for example, where you can view people’s WoW characters, guild rosters and quests. There are hosting providers that provide your guild with its own Web site, with ranking, communications, and management tools.

However, most of these other services are run by small grassroots contributors, have lacked a spectacular user experience, and there’s opportunity to offer a more cohesive and more comprehensive networking toolset, Wu says. Allakhazam’s focus on extracting user content (tips, maps, strategy, quests) has, perhaps incidentally, helped bridge communications between in- and out-of-game networks (forums are a bit part of Allakhazam). But social networking, i.e., building relationships, hasn’t driven its experience. That’s apparently what Rupture wants to do. Rupture will launch sometime in the first half of next year; for now, you can request more info at the site.

Below is a screenshot of a Modded Wow interface (with numerous plugins installed):

Susan Wu is an associate at Charles River Ventures, and becomes the latest in the rare group of female venture capitalists writing a blog (you can count them on one hand).

The blog is called Reality, a play on the theme of her interest, which is virtual worlds. She’s one of the three partners at CRV who made waves earlier this month after launching the Quickstart seed program for start-ups.

Her area has gotten a lot of buzz lately. She is former chief marketing officer of the Apache Software Foundation, and has an open source background. She told us she spends a lot of time playing World of Warcraft (evident on her blog, too), and that she’s looking to invest in virtual world related businesses. She’s even taking pitches virtually.

That’s a dangerous thing, given the “copybot” that riled the Second Life community, going through the site and copying things to remind people that virtual stuff is essentially worthless (see the VentureBeat column by Raph Koster).

But no one wants to really think about that.

The hype continues. Second Life’s Ansche Chung says she has become the first real millionaire there, making her money by buying the virtual land while it was cheap, and reselling it to people now that real estate at Second Life has become more popular. If she were to sell her Linden currency assets, and then exchange them into real dollars via Second Life’s currency exchange, she’d be a millionaire — at least in theory.

Updated

Charles River Ventures, an early stage venture capital firm, has launched a new investment strategy, offering rapid but tiny $250,000 checks to Internet start-ups.

The program, called QuickStart, recognizes times have changed, and that Internet companies no longer need the vast amounts of cash that most venture capital firms want to give to them. The CRV program also offers entrepreneur the friendly terms of the “convertible” seed round, explained below.

VentureBeat talked with the firm’s Silicon Valley team — led by Bill Tai, George Zachary and Susan Wu — about the program. They said that most Internet entrepreneurs can design prototypes and launch their ideas on a quarter million dollars. Under the program, if the start-up does well and needs more money to expand, Charles River will have the right to invest during the first round of institutional funding, called a “Series A.”

Many venture firms provide seed money to start-ups, but typically as an exception or on an ad-hoc basis. This is one of the first formal seed programs by a venture firm that we’re aware of.

The advantage of a seed round is that it done as a “convertible” loan, which means the $250,000 is essentially a no-strings-attached loan to an entrepreneur. There is no equity stake claim by the investor at the time, which is good for the entrepreneur, who can see how good his idea is first. If the idea gains traction, he can raise money in the series A and negotiate a high valuation for his company. If he can command a $5 million valuation, for example, the investor’s $250,000 seed money converts into only 5 percent of the company.

Zachary (pictured here) says he sees too many entrepreneurs giving away between 10 to 20 percent of their company in the seed round. They have fewer shares to give to employees, and they’re less attractive to venture capitalists.

Tai (pictured below) adds that most Internet companies need to move swiftly, and grow virally. Technology has become a commodity in most cases, he says, and most companies don’t need hordes of cash to develop it.

Zachary last year invested $4 million into podcasting company Odeo, which turned out to be too much money — or at least entrepreneur Evan Williams decided he didn’t want to use it. Instead, Williams bought back the company, and decided to launch an incubator instead, owning the vast majority himself.

Of CRV’s last five deals, four were seed rounds (three consumer Internet companies, and one chip intellectual property company). The partners acknowledged that some deals — such as solar companies — need millions. But they said a majority of the deal leads they see these days falls into this seed category.

CRV has downsized considerably in recent years. The firm now manages a $250 million fund, down from a whopping $1.2 billion fund they’d raised during the Internet bubble years. The team estimate they’ll do between 25 and 50 deals over the next three years.

Another advantage to seed/loan funding is that no public filing with the Securities and Exchange Commission is required. Entrepreneurs can thus stay in stealth mode longer, which can be an advantage.

There is almost no liability for the entrepreneurs, because the loan is made to a corporation formed around the entrepreneur. If the company fails, the company goes away, and the founders aren’t liable. “We’re all big boys,” says Tai, explaining that CRV doesn’t mind when this happens. “We go into this with eyes wide open.”

See CRV’s site for an example:

If CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.

UPDATE: Wonder if CRV’s move will make seed investors feel crowded. Already, early investor Josh Kopelman has responded, suggesting the economics of the move makes sense, but that there may be some conflicts in CRV’s model.