Newsmaker: Virtual magnate shares secrets of success

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What were some other challenges, and how did you overcome them?
Graef: The Second Life economy changed rapidly. In September 2004, about two and a half months after I had entered the land market, most of our business was still purely trading--buying and selling land, and providing some services associated with this, but not yet really developing land. We and others had invested in the Second Life land market at relatively high prices.

Suddenly, Linden Lab more than doubled the release rate of land. Overnight, the land prices dropped drastically, to less than half that of before. Most of my competitors made the big mistake of not wanting to sell land at a loss. So they sat on land they owned and did not sell it.

You don't go to Indonesia and say, "Here, I have a million dollars," and blindly invest.

At the same time, they had no money to buy new, cheaper land. I swallowed the bitter pill and followed (my husband's) advice to start selling land at a loss, but at the same time, I aggressively bought cheap land as it flooded into the market. This was a very big challenge because it entailed a very real risk of bankruptcy if it didn't work.

What challenges do you think someone would face in trying to start a business in Second Life today?
Graef: I think one challenge I faced when starting--and that people face now when starting--is to discover one niche that offers a good opportunity. When I started, most of the content market was already well-covered, so I only started becoming successful at targeting the new feature of (avatar) animations. After this, I developed the new service model for the land market.

Now, of course, Second Life is much bigger. I think the recent surge in population offers many opportunities in niche markets and products that were not viable when the number of potential customers was smaller. Ask yourself, "How can I make people happy?" Once you make people happy, it is not so hard to actually also profit from it.

What other advice would you give someone starting out a business now in Second Life, beyond finding a niche?
Graef: I would suggest careful optimism and avoiding the blindness of the hype about Second Life. It has very strong and solid growth, but I still think that people who invest $200,000 of their real-life savings now are risking too much. The first step to succeeding in a virtual world is not to invest huge sums of money but instead to become a resident of the world, learn how to live here, play in it, use it and do what everybody else does and more. You don't go to Indonesia and say, "Here, I have a million dollars," and blindly invest.

Once you got going with your business, what set you apart from your competitors? How did you manage to grow so much faster?
Graef: I generally did not set my pricing model at "How much can I make people pay?" I kept it at cost plus (a small) margin. And I always tried to scale up, to increase the volume of business with lower margins.

Why was it important to announce that you had a million dollars in assets?
Graef: My announcement was a pre-emptive strike. You need understand that I, in fact, surpassed that milestone much earlier this year. It might not have been quite as easy to prove, but I could have made the announcement in early summer or even spring.

But now there was all this hype from businesses who have not really been around Second Life very long or who have not really done much, so I decided to set the record straight and remind people of the substance of business in these platforms.

There were at least three groups whom I knew were going to make some "millionaire" announcement soon. None of them is even close to it, but with creative mathematics and hype, things can be sexed up.

There are plenty of skeptics about Second Life who simply can't accept that someone could have a million dollars' worth of virtual assets. So how do you come to that figure?
Graef: First, you need distinguish between three different things: real money in Ailin Graef's bank account. There's no million dollars in any bank account now. Second, the value of Anshe Chung Studios. That number was independently assessed in August by (some) investment firms and was already clearly more than $1 million.

The third thing is the value of what actually is owned by the avatar, which is 550 simulators--some unsold, some with profitable business tenants earning money every month--and the far more difficult, to assess value of content, content rights and stakes in other Second Life businesses.

To liquidate everything without leading to the price of Second Life land or the value of Linden dollars (the currency of Second Life) dropping by more than 10 percent would require up to eight weeks. I am very confident in saying this because in February and March, we cashed out $150,000 because of our investment in setting up shop in China, at the same time that IGE sold off about $100,000 Linden dollars.

At that time, the LindeX volume and the size of Second Life economy was much smaller. Yet even such large liquidations of Linden dollars did not lead to any serious issues. The Second Life economy is so large that I would not be surprised if, in two years, somebody has a net worth of $10 million.

Part two of this interview will run soon. Please stay tuned.  

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