From digital to physical, Moshi is a monster hit

Meet the Moshi Monsters, the virtual pets created by internet entrepreneur Michael Acton Smith just three years ago. Since then, more than 33 million have signed up to his Moshi Monsters website, which offers free games, educational puzzles and social networking for four- to 12-year-olds.

Acton Smith's Battersea-based company, Mind Candy, makes money by charging kids for premium online services - special features for your personalised pet, extra rocks (Moshi currency), and so on. Both boys and girls like the unisex monsters, while the site has kept introducing new areas to stay fresh.

Now he is turning this digital brand into physical sales. He has just launched a range of merchandise, licensed by toy developer Vivid and on display at this week's London Toy Fair in Olympia. It includes everything from a pair of baby pets ("moshlings") for £1.99 to a big, cuddly talking Moshi for £24.99.

Many of the toys come with a secret code, which give the user extra powers when he or she types it into the website - a bonus for kids and a clever way to keep driving traffic back to the site.

The Mind Candy chief executive, a laidback 36-year-old with a mop of hair not unlike one of his monsters, reckons Moshi will generate $100 million from online and physical sales this year. "Our biggest market is now the United States and $100 million sounds better than
£60 million," he says, explaining why he uses dollars rather than pounds.

Moshi Top Trump playing cards were a big Christmas seller, third only to versions from mega-brands Dr Who and Top Gear. Little wonder that trade buyers were buzzing around the Moshi merchandise at Olympia.

The toys are being rolled out in South Africa, Australia and New Zealand in March, and then America. Meanwhile, two million new members a month are still joining online.

The ambition is to turn Moshi into a "trans-media" brand. "I hate the phrase but everyone in the toy industry uses trans-media. It means the brand doesn't just sit in one place. You can experience it via any medium - online, iPad, on the phone, a game, a toy, or whatever."

Acton Smith, who co-founded online electronics retailer Firebox in the 1990s, admits he had no masterplan. In fact, Moshi was born almost out of desperation. When he launched Mind Candy in 2003, he raised about £6 million, turning first to 15 private angel investors and then venture capitalists Index Ventures (who backed LoveFilm and last fm) and Accel Partners (a Facebook investor). But his first creation, an online game called Perplex City, didn't catch on.

By 2007, he had just £600,000 left. "I decided to have one last roll of the dice." That meant dropping Perplex City and switching to Moshi, an idea he had first sketched on a piece of paper a year earlier. His inspiration was Pet Rock, a simple US toy that was a hit in the 1970s, and Japanese cartoon characters such as Pokemon and Tamagotchi. "I realised kids loved virtual pets," recalls Acton Smith, who has no children himself.

Moshi launched as a free site in April 2008 but it was hard to gain momentum and "the business was on its last legs" as the banking crisis hit. So Acton Smith decided to charge for premium services at the start of 2009. Happily, lots of kids wanted the extras, and some parents were willing to pay the fee - now £4.99 a month. Mind Candy has been profitable ever since, although it doesn't disclose paying subscriber numbers.

At the same time, the website reached a tipping point. "Our 'penny-drop' moment was that kids loved chatting and showing off and communicating online just as much as growns-up do. We realised if we could create a safe community for the under-13s, we could build a site as big as Facebook for children. That's when we started adding social features."

With kids allowed to send messages to each other, the results were dramatic as 100,000 players a day were joining - by word of mouth.

There were still hiccups. An initial foray into toys failed because "no retailer knew about the brand". But publisher Penguin and toy firms were soon in touch. "We thought about making our own products but it's so much easier to go to the book expert or the toy expert and we collect the royalty."

Acton Smith, who is still Mind Candy's biggest shareholder, sees himself as a disruptive force for change: "We have shown that, with very little capital, it is possible to compete with the Disneys and Warner Brothers. I believe in future all successful properties will originate online."

That's bullish - imagine what Harry Potter author JK Rowling would say - but Acton Smith's point is traditional "gatekeepers" such as the broadcasters and the big kids' entertainment firms no longer have absolute power.

"The internet is enabling anyone with a brilliant idea to execute it," says Acton Smith, who praises Scandinavian start-up Rovio, creator of the hit iPhone game Angry Birds.

There is plenty on the Moshi agenda: a game for Nintendo DS, a movie, and an office move next month to the Tea Building, part of the new tech hub in Shoreditch. "We passionately believe we don't have to move to Silicon Valley. There's the talent here in London."

MIND CANDY

Launched: 2003
Turnover: Undisclosed. Moshi products are forecast to generate $100 million of sales in 2011
Staff: 45 and "recruiting like crazy"
Business idol: Steve Jobs of Apple. "He has revolutionised multiple industries from mobile phones to music to the personal computer. He loves design and puts the user first."
Toy story: Mind Candy chief executive Michael Acton Smith at London Toy Fair