SAN FRANCISCO (Private Equity Week) - They say scandal is good for business - so long as it involves the competition.

San Francisco-based gWallet, a provider of advertising platform for the virtual goods and social media space, is counting on that axiom to boost its prospects in the fast-growing field. The company is ramping up in the wake of a firestorm of media criticism targeting so-called cost-per-acquisition, or CPA advertisers, which market to players of games on Facebook and other social networking sites.

GWallet announced last week that it raised $12.5 million in Series A venture funding in a round led by Adams Street Partners and Trinity Ventures.

Founder and CEO Gurbaksh Chahal says he launched the company with the idea of building an online coupon platform, but later decided the team's advertising industry expertise could be put to better use in the virtual currency space.

We knew this space could be grown better if we had more real offers from brand advertisers, said Chahal, who previously launched two advertising startups: ClickAgents, which he founded at age 16 and sold to ValueClick (VCLK.O) in 1999 for $40 million; and VC-backed BlueLithium, a provider of behavioral advertising solutions, which Yahoo bought in 2007 for $300 million.

Currently, gWallet faces a host of competitors. Rivals include Offerpal Media, a venture-backed provider of advertising-based offers; TrialPay, which advertises to casual gamers; and Super Rewards, a competitor acquired in the summer by ad network Adknowledge for an undisclosed sum.

Services by the various companies commonly work by providing users of social games a virtual currency reward for taking surveys or responding to trial offers. Respondents can then use that currency to buy in-game goods. For example, players of FarmVille, which ranks as the most popular social networking game and was created by VC-backed Zynga Game Network Inc., can use the currency to buy seeds or livestock to put in their virtual farms.

Indeed, the offers-based ad industry grew rapidly over the past year as social game adoption soared, but drew backlash in the fall following revelations that some advertisers profited by duping gamers into paying for services they did not want.

Advertisers, game publishers and social networks responded by promising to adhere to a stricter set of standards for promotions. Offerpal replaced its CEO and agreed to block scam offers. Mark Pincus, CEO of Zynga, promised to crack down on abuses. And Facebook took action as well, at one point blocking the Zynga aquarium game FishVille over concerns about scam advertising.

Given the industry's short-but-scandal-plagued history, Chahal said he sees advantages in being the newcomer. He said the company's model of working with advertisers directly, rather than through affiliate referrals, should also help avoid some of accountability issues that have plagued rivals.

GWallet launched its service in September and currently has about 20 employees.

Chahal said the plan is to roughly double in size over the next three to four months, expanding into New York and Europe. He estimates that the company is a quarter or two from profitability.

The focus on international expansion makes sense, Chahal says, given that about 70 percent of Facebook users, and a majority of those plays games on its platform, are outside the United States.

If you look at the more developed countries like Europe, people are buying in-game currency, so there is a big market for offers, he said. But if you look at the offers space today, nobody's really looking at it from a global perspective.

Advertising Software Space