Outside the building where Michael Acton Smith is giving a talk about entrepreneurship there’s a blue plaque commemorating Richard Arkwright, inventor of the spinning frame and leading figure of the industrial revolution. Downstairs the room’s buzzing with a new generation of 21st century entrepreneurs hanging on Smith’s every word.

The 35-year-old looks more like a stand-up comedian than a businessman, dressed in t-shirt and jeans and sporting an expensively messy haircut. And he sounds like one too: ‘My first company was called Hotbox.com, but we had to change the name when I realised that was a porn site. My mum was telling all her friends to check it out, which led to a few heart attacks.’

But his is a serious success story, albeit one with plenty of reversals along the way. Smith’s 50-person internet gaming company Mind Candy has seen a robust 20 per cent month-on-month revenue growth over the last year. This is following the massive success of its kids’ gaming site Moshi Monsters.

After just turning cash positive last year, its projected sales for 2010 are set to exceed £10 million. But only four years ago the company was on the brink of liquidation, having burned a total of $9 million (£6.2 million) in venture capital (VC) backing.

Setting up the Firebox.com business

After studying geography at Birmingham University, a subject he ‘chose for no particular reason’, Smith and his friend decided to set up a business selling gadgets. ‘I was unemployed and reading a lot of lads’ gadget magazines back then. I think we wanted to play with products and have fun all the time.’

Unfortunately the banks didn’t see it that way and with no cash and mounting debts, there was only one option left: ‘We decided to sell our bodies to medical science.’ One week and 32 injections later they had enough money to get started and their breakthrough idea soon followed. ‘We were in the bar and started looking at how many drinks we’d had and came up with the idea of shot glass chess, which has a wonderful in-built handicap as you drink the shot when you capture a piece. We concocted a press release, which had no double spacing and ran on for four pages and to our amazement we got loads of coverage.’

They launched gadgets website Firebox.com, moved to London, and secured £500,000 in angel funding. But Smith admits to getting caught up in the recklessness of the dotcom boom. ‘We expanded too quickly. For some bizarre reason we set up an office in Sweden, we’d also hired an expensive head of marketing person, who didn’t know anything about the internet. Suddenly the music stopped and the bubble burst in a very painful way. We found ourselves on the brink of bankruptcy.’

By scaling the business down from 20 people to six, moving to a tiny office and forgoing his own salary, Smith saved the company by the skin of his teeth. Business picked up and in 2004 an older and wiser internet entrepreneur left Firebox.com to set up Mind Candy, although he is still involved as a non-executive director.

Games master

An avid video games enthusiast, Smith saw an opportunity in the market for an alternative reality game. So he launched a new company and began developing Perplex City. The concept came from the 1970s book Masquerade, which contained clues to a real life treasure hidden in the UK, but with a modern twist. Players hunt a virtual treasure for a real life reward of £100,000.

The investors were sold and he secured $10 million from two European VCs, Index Ventures and Accel Partners. But despite gaining a lot of media attention, Perplex City failed to generate enough user interest. ‘It was a good idea, but overcomplicated in the way it was executed,’ he says.

Most of the money had disappeared and Smith was about to throw in the towel when he had one last idea to create kids’ gaming site Moshi Monsters. ‘We still had £1 million left in the bank, and I decided to give it one more roll of the dice.’ He describes the site as a cross between Facebook and Tamagotchis. Children adopt a monster, which they feed and buy things for and interact with other monsters in the virtual world.

‘I’m not sure we would have been able to raise that amount of money if [the original pitch] was for Moshi Monsters rather than Perplex City. We certainly wouldn’t have raised as much as $10 million as there’s already a lot of VCs in this space.’

But Smith is a firm believer in the power of venture capital. ‘Investment is a double-edged sword as the business is forever transformed by it, but I do believe if you want a world-changing product in almost all instances you will need outside investment.’

Child’s play equals stealth education

The global success of Moshi Monsters seems to lie in its appeal to teachers, parents and children alike. ‘Originally we wanted to call it Puzzle Monsters, but kids didn’t like to feel they were learning outside of school. Instead, there’s a stealth education element to the game, as users gain Rox [the Moshi Monsters currency] by solving puzzles, which they can then use to buy things for their pets.’

And when it comes to generating cash, getting the parents on board is crucial as the game’s only revenue stream comes from paying subscribers, with no advertising on the site. Smith describes the potential for growth under the “freemium” model as ‘awesome’. However, he remains cagey about putting a precise figure on the number of paying subscribers: ‘We’ve got so many subscribers that just a little shift in the percentage [of paying customers] will make some massive returns.’

As with every successful children’s brand, a barrage of spin-off merchandise is set to follow: ‘We have huge ambitions and want to take it offline too and create a music album, book deal, toys and trading cards.’

With so much in the pipeline, selling the business is simply not an option at this point. ‘At the moment we’re riding a lot of momentum, now would be far too early to sell. We’re shooting for a massive exit. I’d rather do that and risk the whole thing, than opt for an early one. We’ll be looking for an exit on the scale of what you see in Silicon Valley and rarely get in London.’

But despite such grand ambitions, Smith’s demeanour remains that of someone still ‘playing with products and having fun all the time’. He’s just happened to get near hitting the jackpot. ‘I believe whatever feels right: do it. Partying and meeting people has been where some of my best ideas have come from.’

Michael Acton Smith’s Vital statistics

Film: Napoleon Dynamite
Superpower: Rewind time ten seconds to stop stupid things happening
Pet hate: Hypocrisy
Philosophy: Have fun, think big
Business hero: Steve Jobs. He’s transformed multiple industries and doesn’t give a damn about how things should be done