The man who aims to hide a monster under every bed

Michael Acton Smith, 36, the founder of Moshi Monsters, looks more like a rock star than a businessman: a neater, more polite Bob Geldof, all tousled hair, black T-shirt and trousers set off by cool white shoes.

Maybe that's because every year or so, Acton Smith and his former partner, Tom Boardman, plus fellow tech entrepreneurs, run a music festival from his three-storey house in Berwick Street, Soho. It was called Berwickstock – a tongue-in-cheek tribute to the 1969 Woodstock festival – which took place five years before Acton Smith was born.

In his day job of internet entrepreneur, Acton Smith appears to be on the way to becoming the dominant global player in children's online space, with one child signing up to Moshi Monsters every second – a Neopets-meets-Facebook site.

In this safe, enclosed, but fun virtual world, children "adopt" one of six lovable monsters to nurture and with whom they play games, do competitions and complete "super Moshi missions". Crucially, they also talk to other children in the monster world.

"The real tipping point came in 2009 when we allowed kids to connect with each other and gave them a forum to discuss things," says Acton Smith, showing me the kind of upward-soaring chart most businesses can only dream of. "Until then, it had been a solo experience and we were on the edge of bankruptcy. It was when we added the social element that membership really took off."

To date, 50 million children around the world have signed up. Membership is free, but subscribing to certain games and challenges costs £5 a month. In the UK and Australia, one in two children between seven and 11 years old have adopted a monster – one in five in the US – and the team at the holding company, Mind Candy, are working at translating the site into Chinese, Japanese and Spanish to enter the Asian and South American markets.

"We have the opportunity to build one of the most successful entertainment brands ever for kids," he says with conviction. "And opportunities like this don't come along very often."

From being one of the 100 or so tech start-ups clustering around the east London "silicon roundabout" where Shoreditch High Street meets Old Street, Mind Candy is beginning to look like a serious business. Last month, when one of the original investors, Spark Ventures, sold half its stake, it put a value of $200m (£62m) on the company. Spark had made 14 times the money it invested in 2004> Its chief executive, Tom Teichman, remains on the board of Mind Candy.

Membership revenue is now flooding in, but Acton Smith has also been quick to seize terrestrial merchandising opportunities, signing partnership deals with Penguin, Topps Trading Cards and Scholastic, among others. The recently launched Moshi Monsters Magazine has already become the bestselling monthly children's magazine. Later this month, Mind Candy will be launching the sale of the soft-toy monsters along with figurines of their pets, called Moshlings, in 900 Toys "R" Us stores across America.

"I want the website to be the heart of the property, and around it are all these other windows on the world for kids," says Acton Smith. "Kids don't just want to experience a brand that they love as a book or a TV programme, but everywhere – it is hugely exciting."

We meet in Mind Candy's headquarters in an old tea warehouse in Shoreditch High Street, part of David Cameron's much vaunted vision for an east London tech city.

Up on the fourth floor, the place is buzzing with twentysomethings and it is hard to find a quiet place. The tree house looks possible, but a bunch of schoolchildren are in there, and eventually he asks a couple of his staff to vacate a tiny glass-sided meeting room.

Moshi Monsters is Acton Smith's third and most successful venture so far and it has been a hairy ride. The product of an American father and Irish mother, he and his sister were brought up in Marlow by the Thames. "I was quite shy and introverted, but my parents always encouraged me in whatever crazy ideas I had." He played chess, graduated to poker and watched a lot of kids TV in America on summer holidays. "I think the idea of the American dream rubbed off on me."

After leaving Birmingham University with a degree in geography in 1996, he briefly worked in Goldman Sach's human resources department before joining up with his university friend Tom Boardman, who had read artificial intelligence and computer science.

"Tom and I used to meet after work and talk about setting up our own business. I remember visiting him in Cardiff one weekend and finding this book about doing business on the internet which I devoured."

They came up with the idea of an online version of The Gadget Shop, quit their day jobs and moved into Boardman's parents' house in Cardiff. They called it Hotbox. Boardman designed the website but nothing much happened until they came up with the idea for the "Shot Glass Chess Set" in which each chess piece was a shot glass filled with liquor and every time a player took a piece he had to drink the shot. They got publicity in every lads' magazine for Christmas 1998 and sales just took off.

In 1999, with dot.com fever at its peak, they heard about First Tuesday – a sort of dating agency for tech entrepreneurs and investors – went along to an event and met some potential investors. "We bought our first suits and went along to a formal meeting."

They raised half a million pounds, changed the name to Firebox from Hotbox, after discovering it was the name of an American pornography site, and moved to London, expanding quickly.

"It was a crazy time. Every time you got into a taxi, the driver would be pitching an internet idea," recalls Acton Smith. "Then on 11 March 2000, it just stopped. Nobody wanted to know about the internet anymore."

They shrank the business, stopped taking salaries, hung on and survived. "It was a hugely valuable lesson because now I'm more careful with money. I never want to get back into that situation."

In 2003, Acton Smith left Firebox to start Mind Candy although he and Boardman remain friends. His first idea was for an online game called Perplex City based on Kit Williams's treasure hunt story, Masquerade.

He raised £6m and buried £100,000 in a virtual world, creating what he calls a "cross media adventure". "We won lots of awards, but commercially it was a disaster," he says ruefully.

So, in 2007, he went back to his investors, including Teichman. "I said I am really sorry about this, but it just isn't working. But I do have this one other idea I want to try." He wanted to create a site with the name Puzzle Monsters, but soon realised it was unsuitable for a global brand. So after three months' brainstorming he came up with Moshi Monsters.

By 2008, the site was up and running, but attracted little interest. For the second time in his career, he faced bankruptcy and then came the inspiration to make it a social network, and subscriptions took off.

He puts his success down to playfulness, luck and flexibility. "A lot of people launch a site and if it doesn't take off they assume it has failed. You have to continually tweak and change and polish until it finally snaps into place."

Boardman feels it has more to do with "ruthlessness and determination". Teichman puts it more diplomatically: "Michael had a vision and he has stuck to it."

The trick now is to keep the momentum going. "There are fads that burn very brightly, then fade away," he admits. "But there are other evergreen brands such as Barbie or Pokémon. You have to nurture them slowly and carefully."

He is constantly adding games and events and has recently launched a pop video starring "Lady Goo Goo", which gained a million viewers on YouTube in the first month.

He is well aware of the heat in the market – the shares of Linkedin doubled after the recent US float, while the British TweetDeck was acquired by Twitter in May for $40m.

He says he has no intention of selling, just yet. "We have had knocks on the door from all the major media companies and I have said 'No thank you' so far. I would rather build it and float it than sell it too early," he says.

"Too many tech entrepreneurs sell out too early, which is a shame because I would like to see some mass internet success stories in Europe."

That should be music to Mr Cameron's ears.

Curriculum Vitae

Hobbies: poker, drinking...and music festivals

1974: Born on 3 September, in London

1985: Attends the Sir William Borlase's Grammar School, in Marlow, Bucks

1996: Graduates from Birmingham University with a geography degree

1996: Joins the Goldman Sachs human resources department

1997: Starts an online version of The Gadget Shop, called Hotbox, with his university friend Tom Boardman. This is later renamed Firebox after Hotbox is discovered to be the name of a US pornography site

2003: Starts the online gaming company, Mind Candy

2004: Launches the online game Perplex City which wins lots of awards but is a commercial disaster

2008: Launches Moshi Monsters which becomes a commercial success after being turned into a children's social network site

Hobbies

Poker, drinking, music festivals, collecting cowboy boots

Next holiday

Santa Monica

Favourite film

Napoleon Dynamite

Favourite musician

Lady Goo Goo