As senior executives at ad firm McCann Worldgroup in 2003, Justin Townsend and Christian Vry and knew they were onto something big when clients kept asking to place spots in video games. It was a natural. Young people increasingly favored gaming (and the Internet) to TV, offering a rapt audience for ads, and as an entertainment medium, the field was largely clear of competitors.

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It was such a great idea for a new business that McCann, a division of media services giant Interpublic Group of Cos., had to take a pass. "It was something incredibly hard to make happen inside a traditional media agency," Townsend recalls, echoing a familiar refrain among entrepreneurs locked up within hidebound organizations.

So the two took a chance. Leaving behind the relative security, and timidity, of a top ad firm, Townsend and Vry bolted McCann in 2004 to form IGA Worldwide Inc. In less than three years, the startup has become one of the top providers of ad placement in video games.

Old media, meet new.

Not that this outcome was inevitable. The potential for in-game advertising was there for anyone to see in the demographic trends. By 2003, males in the 18- to 34-year-old segment were watching 12% less prime time TV and spending 20% more time playing video games, according to Nielsen Media Research.

Townsend and Vry also realized that developing the technology for producing in-game ads would be no easy feat and that game publishers, once they settled on an ad provider, rarely switch. In short, moving early would confer huge advantages to the company that could crack open the new ad market.

"One of the reasons we chose this market was because we recognized that the barriers to entry were very high, and we pretty much predicted there would not be a huge proliferation of players," Townsend says.

Their instincts were dead-on. Today New York-based IGA vies with only two other major players to place ads in video games, Microsoft Corp.-owned Massive Inc. and rival startup Double Fusion Inc. of San Francisco. The market today is small, with advertisers spending only $77.7 million on in-game adds in 2006, according to Yankee Group Research Inc. Yet the research firm estimates that total will reach nearly $1 billion by 2011, underscoring the business potential.

IGA and its rivals all provide networks that allow advertisers to put both static ads onto billboards or backgrounds in game scenescapes. Within online games, they also offer dynamic ads, which can be altered to fit the time of day or a player's geographical location, allowing advertisers to place a spot promoting an upcoming movie launch, among other uses.

British-born Townsend, 35, and German-bred Vry, 33, each have experience with startups. Townsend helped establish Europe's first digital Internet radio station, called Storm Live, while Vry founded "expert portal" network meOme AG, the German version of About.com that was sold to German Internet provider Freenet AG in 2000.

Yet while they had the digital advertising experience to launch IGA, the pair lacked a technology platform to deliver ads. To acquire one, they merged IGA with a company that did, inGamePartners LLC, in early 2005.

The next step in building the company, raising venture capital, proved challenging. Because the two were initially based in Germany, having both worked in McCann's Berlin office, Townsend and Vry first approached local venture firms. German VCs were "very conservative," Townsend says.

But British and American VCs were more receptive, and valuations there were more to the duo's liking. After landing a $1.2 million seed round from London's DN Capital in 2005, IGA scored $17 million in Series A venture financing early in 2006 in a round co-led by Menlo Park, Calif.-based Morgenthaler Ventures and New York's Easton Capital Investment Group, with DN Capital also choosing to re-up.

Although many entrepreneurs resent having to give up a piece of their startups, and some control, to raise money, Townsend says finding the right backers has been key to IGA's success. It wasn't easy, he adds.

"We're very fortunate to have extremely talented and gifted VCs, but to get to that position, we had to interview many VCs who didn't have insight and couldn't add value," Townsend says. "Many people are intimidated by VCs, but often they know a lot less than the innovators themselves.

"We saw many VCs with Internet experience, or a focus on technology or a focus on software--what we didn't see at the time were many who could bridge those three areas," Townsend adds.

With investors beginning to see the opportunities in video-game advertising, IGA in July secured an additional $25 million in funding from backers that included another high-profile participant--Peacock Equity, a joint venture between GE Commercial Finance's Media, Communications & Entertainment unit and NBC Universal Inc. Peacock co-led the round with KTB Ventures of Palo Alto, Calif., with Morgenthaler, Easton and DN Capital all participating.

Greg Blonder, a partner at Morgenthaler who sits on IGA's board, says Townsend's and Vry's European backgrounds made it easier for the company to expand overseas. They uprooted their families to set up shop in New York and showed faith in the business, he says. "They're willing to be adaptable and change their business model as facts change," he says. "It's not easy for someone to merge a company and start to collaborate with other founders that were just as passionate about their companies and meld those cultures."

Besides the trials of moving from Germany to New York, finding office space in Manhattan that was "accessible, reasonably priced and fitted the image of a hot startup in the media space" proved an additional challenge, Townsend says.

He had expected to close on space in five months, but the process wound up taking over a year. IGA finally opened shop in the Wall Street area in 2006.

Today, IGA is focusing on building its revenue, which Townsend and Vry decline to disclose. A potential buyer has already approached the company.

If the firm does consider a sale, it's in a strong position. Microsoft's purchase of Massive for a reported $200 million to $400 million helped validate the in-game video business, while rapid consolidation of online ad companies, including Microsoft's $6 billion acquisition of aQuantive Inc. and Google Inc.'s pending $3.1 billion acquisition of DoubleClick Inc. of New York, have reduced the supply of digital advertising players.

"We really believe in the business, which doesn't mean if the right offer comes we wouldn't listen, but we're not chasing a deal right now," Vry says. "As long as we maintain significant growth and increase the valuation proportionally, we will be in harmony with our investors and our board.