The Finnish animated chat room developer hopes to take its environment to mobile phones and TV after its third round.

With visions of turning its virtual, animated chat room for teenagers, the Habbo Hotel, into a branded media franchise, Helsinki, Finland-based Sulake Corp. Oy has raised a $23.5 million third round led by Silicon Valley blue-chip Benchmark Capital's Benchmark Capital Europe fund.

Early investors 3i Group plc of London and Elisa Oyj, a telecommunications company based in Helsinki, also joined the round. Sulake received three unsolicited term sheets from U.S. and European investors but closed the deal with Benchmark because of its track record in building online "global brands," according to Sulake CEO Timo Soininen.

Sulake's founders, Sampo Kar-jalainen and Aapo Kyrole, have retained 26% of the company for management, founders and employees. Soininen said the new round provided a hefty post-money valuation of [Euro]65 million ($85 million).

Benchmark turned for legal advice on the Sulake financing to London-based Nabarro Nathanson. Sulake turned to Asianajotoimisto Krogerus & Co. Oy of Helsinki.

For Benchmark, Sulake fit the bill on a number of fronts. 'We like this space a lot,' said Johan Brenner, Benchmark Europe general partner. 'It's a combination of online community, simple gaming and social role playing. Our Silicon Valley team has already invested in Linden Lab [of San Francisco], whose Second Life site is similar but targeted at an older market segment.'

The business model for Sulake's Habbo Hotel eschews subscriptions. Rather, its users pay for virtual coins that they can use to purchase furniture, pets, TVs and the like. It seems there are plenty of young people around the world willing to spend real money on virtual sofas and chairs. Sulake says its sales in 2004 were $18 million, more than twice 2003's sales.

Payment modes depend on what kind of electronic and offline payment systems are available in the country where the user lives, such as money orders, billing to the phone, checks, cash through the mail and credit cards. It has built-in limits to make parents more comfortable with the scheme.

In the Habbo Hotel, users create Playmobil-like figures to represent themselves. The characters, or avatars, can move around within the hotel and can select partners for discussion by moving closer to them. This feature overcomes one of the problems in text-based chat rooms where everyone is basically talking at once. It is hard to single any one person out. 'It's the future of entertainment,' Brenner said. 'Plus these guys have a business model and payment system that works across borders.' Indeed, Sulake's Habbo Hotel is seen as a groundbreaker. "It's the definitive one," commented Philip Buxton, an editor at Revolution, a British magazine that covers Internet marketing. "Basically, it is a model for how to run that kind of online community."

Founded in 2000, Sulake raised [Euro]4 million in its second round in 2003 led by 3i, following a small undisclosed first round. With that money, it was able to launch the site in 16 countries and expand its staff to 160.

After achieving breakeven last year, investments in expanding the business this year are going to push back profitability, according to Brenner. Sulake will use the new capital to enter the Asian market, boost marketing efforts in Germany, the U.S. and Italy and build up the technical management team.

Soininen aims to build on the Habbo Hotel cachet, taking the environment onto the mobile-phone platform and into television through an animated series. Real-life product merchandising, such as T-shirt sales, is also part of the plan.

Certainly, the size of the round gives him that opportunity. The financing was the second-largest in Europe's Internet-related content sector in the past 12 months, according to Steve Harmston at the London office of database publisher VentureOne Corp. "Only mobile-gaming startup In-Fusio SA of Bordeaux, France, raised more money over the past 12 months," Harmston said, adding that In-Fusio raised $27 million. - http://www.TheDeal.com