It's a Monday night, and Michael Acton Smith is hosting a party at his three-story home in London's Soho district. Far below the flat's high ceilings, techies and artists navigate mismatched furniture and strewn-about gadgets, talking over one another and partaking in spirits. Unnoticed amid the revelry is a slender woman in a Vivienne Westwood cape. She steps into the living room, lifts a ukulele, and thumbs a couple chords. A few people gasp. "Funny how the noises that I'm making," she sings over the hushing room, "can't drown the sound of my heart breaking." Acton Smith gets goose bumps as the partygoers recognize popular British musician Martina Topley Bird.
"I tweeted at her earlier," he says later, "and asked, 'Would you come perform for us?' " Later, Acton Smith introduces a pair of buskers he discovered delighting a crowd in front of a Soho sex shop the day before. That is as Michael Acton Smith does. He observes. He absorbs. And he brings things he thinks people will like to the people he thinks will like them.
Bill Gates once said he wanted to put a computer in every home. Michael Acton Smith wants to put a monster in every computer. His East London company, Mind Candy, runs Moshimonsters.com, a world where children adopt, name, and color an animated creature selected from a cast painstakingly assembled by Acton Smith and his team. They take it for walks, tickle it with the mouse to boost its happiness, and play games to earn "rox" they can spend on food for it at the "Gross-ery Store."
This concept may sound familiar.
"It's an updated Tamagotchi, really," acknowledges Acton Smith. It's also a fresh take on Disney's Club Penguin, the global leader in virtual worlds for kids with more than 150 million users. "I felt like we could create something better," he says. "It's not about who gets there first or who spends the most on marketing. It's about who creates the best stories, characters, and experience for kids."
Acton Smith doesn't look like the type of person you'd expect to run a site used by one out of every two U.K. children. He doesn't even look like someone parents would want around their kids. With his leather pants, tangle of bracelets, tousled hair, and snakeskin boots, the 37-year-old is more rocker than Mr. Rogers. "I'm very immature, as many of my ex-girlfriends might tell you," he says.
His first entrepreneurial breakthrough was in the late 1990s with online novelty retailer Firebox.com. Bolstered by the success of its Thinking Man's Drinking Game, a chess set comprised of shot glasses, Acton Smith was able to secure financing for Mind Candy—a company that first focused on developing an alternate-reality game called Perplex City. Effectively a real-life treasure hunt, it captured a modest but passionate audience. Nevertheless, Acton Smith realized its potential was limited. In 2007, he laid off all but a few employees and started up Moshi Monsters.
A year later, the company was in a bind. Mind Candy was rapidly running out of cash, and the financial crisis made investors skittish. Acton Smith desperately appealed to a London hedge-fund contact. "Look, I don't get it," the guy responded, "but my kids are playing Moshi nonstop. So I'll give you a couple hundred thousand pounds, and we'll see what happens."
Four years later, they're enjoying the view. Moshimonsters.com has more than 50 million registered users globally, with one-third in the U.S., and has grown into a full-fledged social network. Users can interact as they navigate their pets through a virtual land, friending one another and sharing tips on how to boost their monsters' health and happiness meters. More than half a billion messages have been sent to date.
Though the site is free to use, a small percentage of subscribers pay 5 pounds ($6) monthly for a passport that enables monsters to access exclusive areas on the site. It's enough to have earned the company a $200 million valuation—and, more important, recognition as a bankable retail property.
Now, much like Rovio has done with its Angry Birds franchise, Mind Candy is aggressively bringing its characters out of the game: It signed more than 100 licensing deals in 2011; launched Moshi Monster Music, a label aimed at kids; and began printing Moshi Monsters Magazine—which quickly became the top-selling children's magazine in Great Britain, prompting Disney to respond with Club Penguin Magazine. The newest Mind Candy offering is Moshi TV, a web-video hub intended to serve as an age-appropriate YouTube. A beta version of the site went up in late December.
"One of the great things about having a digital heart for your intellectual properties," Acton Smith says, "is that it's easier to evolve them with changing fashions." In the past, entertainment companies had to invest heavily to introduce new characters on high-profile platforms such as TV or film, then wait and see if there was enough traction for retail extensions. The feedback to roster additions on Moshimonsters.com is immediate, and Mind Candy is nimble enough to capitalize on clear fan favorites.
If the company moves slowly in any way, it's with regard to acquisition. Club Penguin was once a startup, but sold out when the getting was good. Acton Smith is taking a longer view. "There are some eye-popping numbers that we could sell the business for, but the world needs more entrepreneurs who are willing to keep their chips on the table," he says. "I'd love to have a multibillion-dollar business that transforms what it is to be an entertainment company. I know, it's ambitious." Sure, but so is inviting a pop star to a party via Twitter.
A version of this article appeared in the May 2012 issue of Fast Company magazine.