Pocket Gems fills its pockets with $5M from Sequoia for iPhone games

Pocket Gems has raised $5 million in funding from Sequoia Capital and other Silicon Valley luminaries as it competes in the crowded iPhone game market.

The small San Francisco company has had five major hits on the iPhone, even though its founders were still in university when they launched their first game a year ago. The funding from venerable venture capital firm Sequoia is a testament to the rapid growth of the iPhone as a viable platform for making money with games. The funding also included Michael Dearing, an eBay veteran and associate professor at the Stanford University Institute of Design, Jeff Fluhr, co-founder and former chief executives of StubHub, and Omar Hamoui, founder of AdMob. Sequoia partner Jim Goetz will join Pocket Gems’ board.

That’s rarified company for an independent maker of iPhone games with only 11 employees. But Pocket Gems has seen all five of its games hit the top 10 list on the iPhone and have been downloaded more than 15 million times. Daniel Terry, chief executive, and Harlan Crystal, chief technology officer, founded Pocket Gems in 2009 while Terry was still an MBA student at Stanford University. Their first game was Tap Farm for the iPhone, and they’ve followed it up with Tap Store, Tap Jungle, Tap Zoo and Tap Zoo Christmas.

In an interview, Terry said they were in the right place at the right time to take advantage of the emerging virtual goods business model on the iPhone. Just a year ago, Apple launched its in-app purchases, which allowed gamers to buy virtual goods within a game. That turned out to be a much more lucrative business opportunity for many game makers, including Ngmoco, which was acquired for $403 million by Japan’s DeNA. All of Pocket Gems games are free-to-play, where users play for free and pay real money for virtual goods via the in-app purchases.

Goetz said in an interview that Sequoia — which has funded lots of blockbusters from Apple to Electronic Arts — was interested in Pocket Gems because the team was so skillful at building hit games and the technology to go with them. Many game developers outsource the social networking in their games to companies such as OpenFeint. But Terry said that Pocket Gems uses Facebook Connect and has built its own platform for encouraging gamers to share games with their friends.

In the past, venture capital firms focused on Facebook game companies rather than iPhone game companies. But Facebook is now the domain of big companies such as Zynga, CrowdStar, EA Playfish, Disney-Playdom and others. With the Ngmoco purchase, mobile gaming is getting a lot more attention. Smartphones are gaining traction and the overall mobile gaming market could almost double from $6 billion in 2009 to $11 billion in 2015, according to Juniper Research. Much of the increase could come from virtual goods sales.

Terry said the company was profitable within weeks after its founding and remains so today. He also said that revenues are now above a million dollars a month, though he declined to be more specific. The company’s games are available on iOS (iPhone, iPod Touch, iPad) devices and will expand to Android soon. Terry said the company will hire new developers to increase its pace of development.

“The App Store ecosystem has democratized mobile game development,” said Terry, who got his MBA four months ago.”If you have a good game, you can get it in front of tens of millions of players.”