May 6, 1999 3:15 PM PDT

Starbucks, media firms fund Talk City

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Coffee shop chain Starbucks and several major media companies said today they invested $20 million in Internet chat company Talk City, which filed for an initial public offering earlier this week.

The investment sheds some light on Starbucks' online strategy. After the company reported a 29 percent increase in second-quarter earnings last month, CEO Howard Schultz said the company planned to create an online venture in a "multibillion-dollar" category and would promote the venture at the company's 2,200 cafes.

Speculation about Starbucks' plans have ranged from gourmet food sales to the creation of a portal that appeals to an upscale demographic--the same demographic to which Starbucks appeals.

"Talk City provides the perfect venue for Starbucks' online community," Schultz said in a statement.

Talk City, which is based in Campbell, California, creates chat rooms and online communities on its own site as well as for other sites. The start-up was founded by former Apple employees in 1996.

Joining Starbucks in this round of financing, called a "mezzanine" round because the company is about to go public, are investment firm The Yucaipa Companies, Sony Music Entertainment, Freedom Communications, Hearst Corporation, New York Life Insurance, and Softbank Ventures. Previous investors include NBC and Cox Interactive Media.

Talk City could raise as much as $50 million in its upcoming IPO, the date of which has not been set.

In its filing with the Securities and Exchange Commission, Talk City said it had more than 2 million registered users at the end of March and 2.6 million unique visitors to its Web sites that month. Each visitor spent an average of 2.5 hours a month on its sites, the company said.

Talk City generates most of its revenue from advertising and sponsorships on its sites. The company reported a net loss of $7 million for the first three months of this year on revenues of $980,000.


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