Silk Purse?

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For Jo Webber, the inspiration for Virtual Piggy Inc. didn’t come from her time as a software entrepreneur and certainly not from her background with a doctorate in quantum physics.

Instead, Webber pulled from her experience as a mom to build a fast-growing Hermosa Beach company that recently landed a multimillion-dollar investment from billionaire entrepreneur John Paul DeJoria.

The idea came to Webber one day when her kids wanted some money to buy a few things. She was happy to give, so long as they spent it in the right place. Plus, wouldn’t it be nice if they could also learn the value of saving up money to buy something on a wish list?

“There are prepaid debit cards for kids out there, but they were either too open and kids could spend the money anywhere, or it was too narrow and no merchants would accept them,” Webber said. “I wanted something that was kid empowered but parent enabled.”

The result of her vision is an online account and payment system where parents can give kids money to spend at kid-friendly online merchants. So far her site has partnered with more than 80 outlets, including clothing retailers such as O’Neill, popular girl’s jewelry store Claire’s and several makers of video games that sell virtual goods to kids.

Virtual Piggy works as a joint account that parents control by linking it to their PayPal accounts or credit cards. Parents then set spending limits and use the service as a monthly allowance for their kids. The shopping process for kids is the same as it would be for adults – they visit the site, add items to a shopping cart and check out when finished. But at the step where the site asks for address and payment information, a kid instead clicks on a Virtual Piggy button, which asks for an account holder’s name and password. Once that goes through, the store automatically deducts from the Virtual Piggy account and ships to the parents’ address.

Virtual Piggy transfers most personal information directly to the online retailers. It has had to walk a fine line in complying with U.S. online child privacy laws, which prevent sites from knowingly gathering most personal information from children.

The site also lets kids make a Pinterest-style wish list that parents and other relatives can view and make contributions toward.

When Webber approached DeJoria through a mutual contact about investing in the site, the ponytailed businessman from Echo Park who made his fortune with the Paul Mitchell shampoo line and Patrón Tequila was something of an odd fit. DeJoria has very few tech companies in his empire of holdings. But as a father of six, and a grandfather, he saw the value as a parent.

“One of the biggest challenges for younger people that are technologically smart is they’re getting on the Internet and being exposed to stuff young kids should not be exposed to,” he said. “When I heard through a friend about software that will eliminate that challenge, I thought this would be something I’d want for my children.”

Debit matters

If Virtual Piggy isn’t a prepaid debit card, it verges on a territory that banks and credit cards have tread on in the past – with mixed success. Three of the four major U.S. credit card companies offer a limited version of their service that’s aimed at teens. As a group, teenagers are projected to spend more than $200 billion this year, according to a study by Harris Interactive.

Meanwhile, some prepaid debit cards come loaded with usage fees that have been the source of many consumer gripes. Virtual Piggy is trying to position itself outside any backlash by avoiding consumer fees altogether. The service, which is free for users, derives revenue from the transaction fees it charges merchants. That rate is flexible though it generally starts at 1.5 percent of the transaction cost.

Even though the tactic might give Virtual Piggy better standing while selling its service to consumers, relying solely on transaction fees is also a slower way to make money.

“If you’re a startup trying to create a name, limiting the revenue is a tough way to go these days,” said Ron Shevlin, a financial analyst at Aite Group LLC in Boston. “But given the economy, it’s probably smarter for Virtual Piggy to stick the merchants with the fees rather than the consumers.”

Virtual Piggy, which is traded on the over-the-counter Bulletin Board, had a market value last week of $118 million. Since it only opened up to consumers last month, the company has had negligible revenue so far. Webber said she isn’t focused on revenue yet, and instead is working on building up the company’s online retail partners.

Virtual Piggy, which has 27 employees who work in a beachside office a half-block from the Hermosa Beach pier, still considers itself at the investment and growth stage. The recent DeJoria-led fundraising round brought in $5.6 million; he doesn’t expect to begin seeing a return on that investment until 2014 at the earliest.

That kind of breathing room from backers has been vital for Virtual Piggy while it tries to prove its business to merchants and consumers.

“When you get someone like a Claire’s to sign up with you, that’s far more valuable than revenue at this point,” Webber said. “Our investors understand that and they’re very excited by how quickly we’re bringing this technology to the market.”

Giving Tuesday

As the e-commerce community ramps up for what is projected to be a record-breaking holiday season for online shopping, Virtual Piggy has actually been promoting a different side to its business. Many retailers posted big sales on Cyber Monday – the online answer to Black Friday – but Virtual Piggy chose the time to launch its involvement in a lesser known spending event: Giving Tuesday. That’s the unofficial shopping holiday for non-profits when they encourage people to spend on charitable causes. Virtual Piggy is collaborating with the non-profit community to allow kids to make donations – its most recent partner is the Association for the Prevention of Cruelty to Animals; Webber said the company will soon be announcing more.

Non-profit donations weren’t something she originally planned for when conceiving the company. But after hearing about a friend’s daughter who asked classmates to make a donation to a charity in lieu of a birthday present, she knew Virtual Piggy needed to fill that niche, too.

She said charities along with the retail partners have been quick to get on board, and though she pitches Virtual Piggy as a way to tap into a market of young spenders, the strongest selling point to vendors is still appealing to them as a parent.

“As someone with kids, you get it,” Webber said. “And I know that other parents are going to embrace it as well.”

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