Gaia Online raises $11 million to finance massively multiplayer online game

Gaia Online has raised $11 million in a third round of funding to complete its massively multiplayer online game as a supplement to its “hangout” site for teens and young adults.

Institutional Venture Partners led the round. In the past five years, the San Jose, Calif., company has built one of the largest worlds where teens can talk to each other via animated characters, or avatars, in a kind of virtual shopping mall. The company has more than 5.9 million active monthly users and Gaia Online is building a new massively multiplayer online PC game where those members can play starting late this summer.

The money will come  in handy as the company battles its newest competitor, Lively by Google, as well as its traditional “virtual room” rivals Habbo, IMVU and WeeWorld. Each of these rivals shares a common design. While Linden Labs’ has built a fully interconnected virtual world, these companies allow their members to create and decorate their own rooms and characters.

Gaia Online is in the midst of expanding its virtual hangout into a full-fledged online game, complete with an integrated continent, combat system, storyline and a campaign full of missions. WeeWorld, whose characters were used mainly to chat, also made the move to creating its own virtual world.

About 15 game developers have been working on that project for the past year. After that, the company plans to add virtual pets to the features that its users can enjoy, said Craig Sherman, chief executive of Gaia Online.

Gaia ranks as the second-largest virtual world, just behind Webkinz in terms of share of the U.S. audience, according to Hitwise data from May. Habbo is stronger in Euope. Sherman said that Gaia Online will invest the money to keep adding new features that will keep its users engaged. Previously, Gaia raised a second round of funding from Time Warner in January. The amount wasn’t disclosed.