UPDATED: IMVU Picks Up $10M in Series D Led by Best Buy Capital

IMVU announced today that it has closed a $10 million Series D round of investment led by Best Buy Capital with participation from existing investors Menlo Ventures, Allegis Capital and Bridgescale Partners. IMVU says it will use the money to invest in continued development of its community, which has grown to more than 30 million registered users. The company monetizes off of a virtual goods catalog, which boasts over 2 million user-created items and is proving especially attractive to investors as the advertising market shrinks. IMVU says it currently generates over $1 million a month in revenue, 90% of which comes from the sale of credits for purchasing and selling virtual goods.

Along with the investment, Best Buy Capital's Kuk Yi will join IMVU's board of directors. I'm just waiting on a call from CEO Cary Rosenzweig, so I'll update with more information shortly. UPDATE: Rosenzweig says that approximately $30 million has been invested in IMVU since its inception and that this is the last round before profitability. A Q&A with Rosenzweig is below.

Virtual Worlds News: So what prompted this round of investment?

Cary Rosenzweig: It's always good to have a cushion in the bank, so call it caution and desire to continue to invest in the community. Despite the tough economic environment and tough investment environment, we were very pleased that a new investor as well as existing investors saw it as a worthwhile investment.

VWN: Were you seeking investment or were you approached by the investors?

CR: We were seeking it, but with the current investors we'd been talking about it for some time. It's really a question of timing. In retrospect, we could have guessed at better timing with the market. But at the end of the year we decided to go out for another round.  Who could have guessed it would have made things so tough.

VWN: Considering the problems of the economy overall and the steady decline of venture capital in particular, what's your pitch to investors on why IMVU should still be attractive?

CR: The investor environment is difficult, but investors and venture capitalists still have funds and they're looking for good deals, ones that will return and substantially for their investors. As in any environment, we had a good presentation. I think what reinforced that was that our growth was accelerating at the end of the calendar year.

I started to approach investors in September and within a week of the my first presentation the news started to get very bad and then on through October, but our performance was actually accelerating all through the time period. We were attracting more usres, we were attracting more paid users, and our revenue was going up month on month and through the last half of the year and still in January has gone up quite strongly.

We were able to make an example of how during the downturn our service provides a home-based way to meet new people—and meeting new people is timeless. We're also a type of home entertainment with our virtual goods that is very inexpensive. It's a value of the dollar issue.

VWN: That's something that you commented on in our Forecast as well as many other people. With the shrinking ad market, virtual goods and directly monetizing consumers seems to be more attractive. Is that something you were presenting as an investment strength?

CR: As you know IMVU has always focused primarily on digital goods over advertising for our revenue. Over 90% of our revenue comes from credits which are used to buy digital goods. Less than 10%  comes from advertising. So we were never dependent on advertising. In fact, because we do spend money on online advertising, the net effect to the company was positive. The cost of our marketing fell more than the impact on our advertising revenue. In fact our advertising revenue was not affected hardly at all throughout this. It was never a massive part of the revenue mix.

We and others continue to prove that there's tremendous value for digital goods for a wide range of consumers. Our mix continues to be 60% U.S. 40% international. We have a mix of over and under 18. We're getting close to 50/50 now and we're about 55% female.  So we have a very strong demographic and we're continuing to expand.

VWN: In the announcement you listed plans as building out the community, which is fairly broad. Is there anything more specific you can share?

CR: It's sort of in the category of broader plans. The focus is primarily on the product. Our focus is going to be continuing to be making the experience as great as possible. A great user experience is what we strive to deliver, particularly with a service like ours that is the freemium model. Continuing to earn the right to expect people to want to pay us money for credits means we need to continue to make it better.

We attract people, most of whom use our service for free, but we're going to continue to make the service more simple, more fun, more valuable so that people will say, "I'm going to reach into my pocket  and pull out my hard earned money."

VWN: Along those lines, one of the biggest changes and services you added last year was music as  another digital good. Has that been successful?

CR: The answer is yes. We've always known that music is an important service for our users. We're not yet reaching our very high internal goals, so we're still tweaking it to see how we can best meet our users needs. Music is important to people wherever they are, online or in the real world, and that's also important in a virtual world like IMUV. We're continuing to try and innovate to make it a compelling experience for users and to make it a revenue source.

VWN: can you share any numbers?

CR: Not yet.

VWN: Are you expecting that even with the low costs of digital goods, it'll be harder to sell them as those consumer dollars become even harder earned?

CR: I think we've never taken it for granted that people will pay us money. We have always seen that since the vast majority of users choose not to pay us money, we look at how we can facilitate our community to create value. Since we have this massive community who creates items—now we're at over 2 million items—the engine for our revenue is our users who choose to purchase digital items from other users and then come to IMVU to buy the credits to make that happen.

I don't think it's necessarily any harder to make that happen. We just have very high aspirations for ourselves and our community has high aspirations. Our vision is that using IMVU should be intuitive and it's the kind of things that within 10 minutes anyone interested in experimenting should be able to get up and running.

VWN: A few other companies, I'm thinking of Multiverse particularly, have taken investment in the last few weeks as sort of rainy day money to get them through to profitability. Is this your last round before profitability, a sort of rainy day investment to weather the economic storm?

CR: Absolutely. This is the last round that we will raise. At least, it's the last round we'll need to reach profitability, and if we raise any more it will be for some specific growth obective. Now we're focused on making the experience and the community even better.

VWN: Is there anything else I should know about the investment or your plans?

CR: I think the times are extraordinary and I was very pleased that we could attract Best Buy Capital and bring Kuk Yi  to join the board and see all of our existing investors continue on. I'm pleased that the people close to us continue to see that value as well as people from the outside.

I'm very happy both with the investment for us, but as part of the virtual worlds community. I think this is one of those investments that shows that this is a part of the Web experience that still has a lot of value and potential.

Join us for Digital Kids Conference – April 25-26, 2012 in Los Angeles