TECHNOLOGY:With the real world not looking so bright these days, Philip Rosedale's Second Lifeoffers an online escape

Every now and then, as Philip Rosedale is talking about Second Life, the virtual reality game he created, you have to stop yourself from shouting "What?" and then laughing in his face.

A woman who is making a million dollars a year selling virtual clothes? Successful businesses buying and selling real (or unreal) estate? A couple who divorced in real life because she came downstairs to find him watching his on-screen alter ego having sex with someone else? A crowd of avatars storming a virtual bank after they'd put their real money into phoney, virtual accounts, only to find they'd been scammed?

Come off it. This stuff is surely just nonsense, nobody could be that dumb? Who are these people spending 30 hours a week inhabiting a virtual world, creating avatars through which they live their lives?

This is not just a cynical hack's view, it was also how the venture capitalists responded to Rosedale's pitch for backing when he first brought Second Life to the market.

Rosedale, a Silicon Valley insider, left his job as chief technology officer at RealNetworks in the late 1990s to set up Linden Lab, with the aim of turning escapism into a multi-million dollar empire.

Second Life was a very difficult proposition to bring to market, he says, "a really dumb idea". What makes it interesting to its users - the power to do anything you want to do - was the major problem for investors.

The money men wanted it to have a purpose, be more like a computer game, where players go from a designated start point and move through worlds created for them by programmers, overcoming a series of challenges, until they reach a definite conclusion.

"It was a problem right from the get-go," says Rosedale. "I was a respected person in that market, RealNetworks was a fantastic superstar on the Internet. But still it was not a fundable idea from the beginning," he says.

Rosedale puts this down to the way venture capital operates, which is to build businesses once an idea has been tried and tested, usually after initial investment from an angel investor.

The barriers kept coming. The technology was not there to build the sort of life-like simulation required to allow users to suspend disbelief. Broadband was in its infancy and a host of technical issues meant the process of bringing his idea to market took the best part of a decade until, in 2004, Benchmark Capital came in.

"They were the first venture capitalists and they invested in part because they recognised the similarities between what we were doing and eBay, which was a very unusual connection," says Rosedale.

This proved to be the "eureka" moment in the business' development because for all the stories about avatars and online divorces, Second Life is about business. The virtual simulation is home to thousands of entrepreneurs selling things ranging from clothes, to office buildings, to body parts. It even has its own currency, the Linden dollar, which can be exchanged for real money at a current rate of €1 to 343 Linden dollars.

"If you are building a completely new category and have an unproven idea, it is difficult to raise venture capital. For a lot of new ideas, it is pretty much impossible," says Rosedale.

"It's the companies that are operating at a narrow loss with a revenue generating product that is selling into a marketplace where there is a risk of a downturn that are in big trouble, where they are trying to raise their 'b' and 'c' rounds. That's the picture we're seeing around our category - the virtual world category".

Meanwhile, the Second Life economy seems in rude health, its most recent millionaire is a woman who creates and sells clothing for other avatars, "she is creating real intellectual property by designing clothes, not aided by investment capital. She started with zero and is now making a huge amount of money," says Rosedale with a hint of pride.

He says the average age of a Second Life user is 32: "Surprisingly Second Life is more appealing to older people than it is to younger people. When we graph people's real age against usage hours, it goes up dramatically as they get older. The reason is because it's still in its early stages and demands a considerable amount of intensity to use successfully".

He says that you need to spend five hours in front of it to build competence and "be totally comfortable". Younger people he says, are not generally willing to give that sort of time.

"Older people also understand the social and entrepreneurial opportunities," he says.

The largest sector of business is in real estate, which is bought and sold without mortgages, making it a great deal more straightforward than its real life equivalent. "Without the long-term financial instruments and complexity, real estate in Second Life behaves quite differently than it does in the real world and we haven't seen a lot of impact on the value of real estate in the current (real world) crisis".

He thinks the financial horrors in the real world have actually driven a surge in usage as user hours in September and October, spiked higher than would have been expected.

"We've seen increases in usage of Second Life of around 5 per cent a month. But in September and October we were close to 10 per cent," he says.

However, in January last year, the real world impinged on its virtual imitator when there was a run on the banks in Second Life, creating a bizarre debate in cyberspace around the need for greater regulation. These virtual banks were operated by other players, who enticed deposits by offering attractive interest rates. They then used depositors' money for unsuccessful land and gambling deals.

A report in the Wall Street Journal suggested the losses incurred by some of the 12 million or so Second Life users amounted to $750,000 of real money. "Everyone thinks that because you're losing play money, it excuses everything, but it's convertible to real money," said one user.

The suspicion remains that users of Second Life, ought to get a real one. One blogger wrote: "I am amazed at the level of intellect of the people that put real dollars into an imaginary world, expecting imaginary returns. The people that play these games really should take their real money and go on a date".