Twofish raises $4.5M to create economies for virtual worlds

Twofish has raised $4.5 million in a second round of funding for its business of creating the economic infrastructure behind virtual worlds. The deal is another indication that the virtual goods economy is heating up, even as the real world economy spirals downward.

The Palo Alto, Calif. company made the announcement at The Virtual Goods Summit, a packed conference in San Francisco attended by several hundred people this morning. Twofish creates a “digital resources planning solution,” sort of like enterprise resource planning (ERP) for virtual worlds. The Twofish Elements solution is an economic infrastructure that allows virtual world creators to run virtual banks, track inventory, and set up an e-commerce system.

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The company essentially outsources the process of setting up the system so that the game creators can focus on building a quality virtual world. Twofish can increase profits, better engage customers and reduce fraud. Its primary competition comes from game companies that wants to do this kind of work internally, but I’ll mention a few others in a second.

The whole virtual goods movement, popularized in Asia, offers an alternative business model to online game subscriptions. Strategy Analytics says virtual goods already make up a $1.5 billion industry. We’ve covered the topic, particularly on Facebook apps, previously. That makes it a viable alternative business model, along with advertising or “try before you buy” downloadable games. Virtual goods and ad models allow game companies to offer “free to play” games. Again, those are popular in Asia and that model is migrating to the United States. Here, we have yet to see a gigantic hit.

If you’re playing a fantasy game, for instance, you might not mind paying 50 cents for a better sword so that you can take on the ogres. The Twofish technology handles the transaction in real time. The investors include Triplepoint Capital, Rustic Canyon Ventures, and Venrock.

Lee Crawford, chief executive of Twofish, is up on stage right now. A couple of his competitors, Dan Kolkowitz, head of Playspan, and Chris Donahue, of Live Gamer, are also on the same panel. All of them can create a secondary market for gamers, who sometimes want to create their own virtual items and sell them. Donahue says that Live Gamer acquired the secondary market for Sony’s online games this year.

Crawford said the company’s solution gives real-time data so game-makers can monitor just how much money is coming in from virtual goods. One of the tricky things to balance is pricing, since users may balk at high-priced items that don’t do much for them in the game.

Susan Choe, chief executive of online games company Outspark, says that you need $200,000 in revenue a month before you consider adding the secondary market, which comes with costs. Choe noted that one company on the stage promised her that a secondary market could triple the virtual goods revenues, but she isn’t quite convinced that it is happening yet.