Balderton Capital will return its 13 per cent stake in social gaming company Sulake at zero value after learning that one of the company’s products, Habbo, is to be engulfed in a child sex scandal by Channel 4.
Finnish social gaming company Sulake was engulfed in scandal today as it emerged that one of its products, Habbo, has been fingered as a hotbed of child grooming and teen sex chat. Allegations of grooming on Habbo are nothing new, though accusations have not previously come from reputable outlets.
According to Kernel sources, a Channel 4 News exposé is to be broadcast tonight at 7 p.m. revealing the extent of sexually explicit material on the social network. Additionally, we understand that at least one national newspaper plans to cover the story this week.
The last time Habbo hit the news was in 2010, when reports of “virtual goods theft” led to five homes being raided in Finland.
Channel 4 discovered sexually explicit messages on Habbo within minutes of logging on to the site. Among the messages discovered were: “Hey licky your v a g i n a. There you go darling. Sticks diick jn you. You’ve lost your virginity. Right NEXT”, “Hey do you have a webcam? You got msn or skype?.. you take off your clothes” and “I want some cute girls not gay faggots”.
Though the company has been informed by Channel 4 of the findings, messages such as “kill this dam [sic] jew” and “you desperate to get someone in your pants you want a threesome” were still appearing on the site this morning.
Habbo, formerly known as Habbo Hotel, is often – wrongly – thought of as a moribund property. But, according to Sulake, the site boasts 268 million registered users and 9 million unique visitors per month. It is available in 11 languages and claims customers in over 150 countries. Yet the company seems never to have addressed the material that floods its chatrooms and which, it is now alleged, is involved in the sexual grooming of children as young as 14.
Investors in Sulake now regard the company as sufficiently toxic to dump their shares. Balderton Capital, the second-largest shareholder in the company, is to return its 13 per cent stake at zero value and resign from the company’s board in an attempt to distance itself from the scandal.
There is no word on whether 3i, the largest shareholder in Sulake, will follow suit.
Sulake’s board will face some tough questions today: namely, why they allowed such activity, which The Kernel understands predated newly appointed chief executive Paul LaFontaine’s appointment by years, to go on for so long without taking decisive action, then brought in new management ten months ago only to cut their losses and run when the inevitable furore erupted.
A spokesperson for Balderton Capital told The Kernel this morning: ”This is a space we know very well, as investors in several other similar companies, for example Bebo and Weeworld.
“We were given some information a week ago that profoundly shocked us. We had to ask ourselves whether we were comfortable being investors in a business where children were not being adequately protected.
“We didn’t take this decision lightly, as we have been investors in Sulake for over 8 years, but the standards required to run a website that children have access to are very high. We felt the company was not meeting those standards.”
One London entrepreneur described the move today as “the most cowardly hand-washing act I’ve ever seen from an investor”.
Another told us: “Assigning culpability to Sulake for illegal activity on Habbo is something equivalent to blaming eBay for rogue sellers: Habbo is a platform business with some moral responsibility for activity on its network, but it cannot be expected to police every transaction. And the company has not broken any law.”
But a venture capitalist unconnected to the business told The Kernel: “I understand that this will be seen as another example of a VC not standing by their investment at a time of need, but you have to consider whether you would be comfortable in their position. They have people to answer to as well – for example, their own investors.”
“Reddit is still owned by Condé Nast,” pointed out one entrepreneur, “despite the foul material it hosts. So I guess it’s a decision for individual investors and shareholders to make.”
One former Sulake employee, who spoke on condition of anonymity, told The Kernel that the financial position of the company and the extent of the illicit activity on its networks was not properly explained to LaFontaine, a former Playdom and Ticketmaster executive who was brought in a year ago to arrest flatlining growth and revenues – a task at which he has reportedly excelled.
LaFontaine was appointed chief executive in September 2011. During his tenure, the company is reported to be approaching profitability once again, with morale at the company at an all-time high. According to the former Sulake employee we spoke to, responsiveness to reports of inappropriate material on Sulake’s websites has been “greatly improved” since he took the helm. So perhaps LaFontaine did not have time to properly address the problems he inherited since he was appointed, which insiders describe as “systemic”.
But questions will certainly be asked of the company’s board and former management. For how long were they aware of the child grooming and sexually explicit content occurring on Habbo? What measures were taken to stop children being sexually exploited on their networks, which appear to fall far short of the exhaustive precautions taken by websites such as Mind Candy’s Moshi Monsters?
Sulake has been operating for twelve years and has taken over $35 million in investment to date. The company’s largest investor, 3i, did not immediately return a request for comment as we went to press.
