Trouble At Habbo Hotel: Balderton Dumps Its 13% Stake Over Dodgy Child Content [Updated]

Top European VC firm Balderton today has confirmed to TechCrunch that it is ditching a 13 percent stake in Finnish social networking and virtual world company Sulake, creators of Habbo, after the youth-oriented site was exposed for hosting illicit content not appropriate for its intended users. Balderton had been an investor in Sulake for the past eight years and together with other backers had invested some $35 million in the site. This is the first time in Balderton’s history that it has exited an investment over a matter like this, we understand. Meanwhile, another investor, 3i, which owns 15 percent of the company, has told TechCrunch that it will “remain committed to Sulake.”

The story of the dodgy content was first brought to light as the UK broadcaster Channel 4 was investigating allegations over the content, for a program that is due to be aired tonight. That investigation was then picked up by the UK tech site The Kernel, which reported Balderton’s exit. TC understands from a source that Balderton is leaving behind its stake and not looking to recover any funds.

According to the source, Sulake had apparently known about the problem with some of the content last week, and possibly even earlier — but even as recently as this morning, there were still chat rooms on Habbo containing content of a sexual and illicit nature. Balderton’s decision to exit Habbo was made last week, we understand.

Habbo is theoretically designed for people aged 13 and older — it says 65 percent of its users are between the ages of 13 and 16 — but it’s relatively easy to fake an age through the sign-up page. Sulake says that to date, there have been more than 268 million Habbo users, and up to a further three million users join each month. ~~No indication of active monthly users from Habbo directly but~~ Compete notes that in April 2012 there were less than 20,000. Sulake cites stats from Quantcast that says it has 9 million unique users monthly.

Sulake’s CEO, Paul LaFontaine, has issued a statement on Sulake’s site today emphasizing the company’s commitment to child safety online — without directly addressing this current scandal.

“To keep users safe, we filter content and block inappropriate users. We also employ more than 225 moderators, tracking some 70 million lines of conversation globally every day on a 24/7 basis,” he writes. “We work with child safety organisations and local police forces to address inappropriate behaviour.”

He also notes that it has been recognized for its child safety procedures by different organizations. But if all of the above is true, it calls into question just how effective these vetting procedures really are.

While the Kernel post highlights the issue of a VC pulling out of a company just at its time of need, our source paints it in a different light: “This is not a question of rogue sellers on eBay. It’s child safety. Balderton has shareholders, institutions to answer to, and it was not comfortable being an investor.” The source said the material it had received from Channel 4 was “absolutely disgusting.” Balderton is also an investor in other youth-oriented social networking sites Bebo and Weeworld.

TechCrunch understands that even if Sulake cleaned up and changed the mechanics of the site, Balderton is finished with the investment. “It would be good for users, of course, but Balderton has made its decision.”

We have contacted LaFontaine with further questions and will update this post when he responds.

Update: His response, via email — which I have to say is at least commendable in its frank honesty: “I was incredibly concerned to see the findings of the Channel Four News investigation. My top priority has always been our user’s safety.

“I was sorry to hear of Balderton’s decision to withdraw its involvement, but my priority right now is to address the issues raised by the investigation. I remain committed to ensuring the right thing is done. I am encouraging anyone concerned to contact me on Twitter @PaulLaFo.”

Further answers to my specific questions:

What has Sulake done to remove the offending content? What is it doing to prevent this in future?

We have responded immediately to remove offending content. We already filter content and block inappropriate users. Since hearing about the findings of the investigation we have increased the number of active moderators at any given time and strengthened our automated filtering technology. We have also begun to undertake a comprehensive review of our practices to ensure that user safety is further strengthened in the future.

I understand that you were facing this problem at least a week ago, and possibly longer; what is your response to that?

We moderate 70 million lines of conversation every day and invest heavily in technology to filter inappropriate content. This is a critical element of our business. We have spent more time, effort, resource and attention on this topic in the past five months than any other single issue.

Will Balderton’s exit mean financial difficulties for your company? What do you plan to do?

Balderton’s decision is regrettable, but it will not impact the online community or the extent of our current investment in safeguarding our site users. We remain committed to continuing to manage Habbo with a focus on rectifying the current challenges to deliver a safe and secure user experience.