Deals & More

It’s pretty rare that venture capitalists will bet on a company that shows a hint of impropriety. Yet happens occasionally, for companies that don’t push the envelope too far.

In March, for instance, soft-porn site Zivity got $7 million from two prominent firms. The latest is PurePlay, a poker and proto-gambling site that today announces $15 million in funding from Bay Partners and prominent investors including Ron Conway, Peter Thiel and Owen Van Natta.

PurePlay doesn’t do much to distinguish itself in terms of game play: Like Yahoo Games and many other sites, it uses standard poker variants like Texas Hold’em and Omaha Hi-Lo.

What distinguishes the site is that you can actually play for, and win, money in your poker games. That makes it almost unique in the aftermath of recent legislation. Recent laws like the Unlawful Interent Gambling Act, passed in 2005 to limit online gambling, drove the betting sections of huge poker sites like PartyPoker.com out of the United States.

That initial description makes it sound like PurePlay was started to capitalize off the UIGEA. The law has been murky, and so open to infringement. Congress stopped short of defining it clearly in the 2006 law, directing the federal government instead to enforce state laws restricting such activities.

But the site was planned out and started well in advance of those laws, says CEO Jason Kellerman. The trick to PurePlay is that it works off a subscription model, with users paying set monthly fees to play, but gaining the potential to win large sums if they’re good enough to win tournaments.

That general scheme also applies to other sites, like skill-gaming portal King.com, but PurePlay caters exclusively to poker players. And the market is huge: 50 million players, of whom 40 million don’t gamble for money anyway, according to Kellerman.

For that 80 percent of the group who apparently don’t want to pay, though, there’s a hidden motivation to shell out for a subscription fee. In free games, bad play reigns — when the money is entirely virtual, players have no motivation to do well, and make stupid moves that detract from the game. With a subscription fee, players are simultaneously assured that any losses will be small, while also given a better standard of gameplay.

Of that sizable pool of gamers, PurePlay has captured about a million people. It doesn’t disclose how many are paying, but some extrapolation is possible. The company says it pays out over $125,000 each month in prizes. Subscriptions are $20 a month, so if PurePlay gives back 25 percent of its subscription fees, it has around 25,000 paying subscribers; if it gives back 50 percent, then only 12,500 subscribers, and so forth.

For the (likely) vast majority who still prefer to play for free, PurePlay runs its own ad business, which Kellerman says does quite well, generating “hundreds and hundreds of millions” of ad impressions each month. In addition, he says, user growth has been strong, with adoption rates by new visitors “fantastic.”

So if the online poker business can still be so profitable, why isn’t everyone and their brother jumping in? For starters, Kellerman says, the business of growing a poker portal isn’t easy. “It turns out the infrastructure is pretty expensive,” he told me, noting that the majority of initial investment went toward scaling up to meet demand.

Now the “vast majority” of the company’s money is pushed back into advertising. Kellerman, as well as other members of the executive team, have backgrounds in search engine optimization, meaning they pour most of their effort into low-CPA schemes like Google ads.

Of the $15 million invested into PurePlay, the company isn’t disclosing how much went into each round. It’s based in San Francisco.

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Tags: co:pureplay, deal, inv:Bay-Partners, people:owen-van-natta, people:Peter-Thiel, people:Ron-Conway