Pocket Gems focuses on quality engagement as Zynga and others attack

The top grossing charts for the Apple App Store (s AAPL) are starting to see names familiar to Facebook gamers, with Zynga, Playdom, and Crowdstar among them. But the only iOS publisher with two titles in the top five is Pocket Gems, which believes it can hold its own by being a purely mobile-focused player with an eye on long-term quality and user retention.

The San Francisco start-up, which has raised $5 million from Sequoia, believes the mobile gaming market remains wide open, and actually favors upstarts like itself with smartphone gaming in their core DNA. The company was founded in the fall of 2009, and immediately found success with its first title, Tap Farm, which pushed the company into profitability after one week. Pocket Gems has put out six games overall, which have racked up nearly 40 million downloads.

It’s a far cry from the 100 million milestone trumpeted by some competitors. But it speaks to the deeper philosophy at Pocket Gems, which focuses on enduring user engagement, the secret to the company’s monetization success. Tap Pet Hotel debuted in April, and sat at the top of the highest grossing charts until it was pushed into second place recently by Crowdstar’s Top Girl. It also has a sleeper hit in Tap Zoo, which launched back in September, and still sits in the No. 5 position.

It’s unclear how much the free-to-play games are pulling, in and Pocket Gems isn’t sharing its financial data. But we’ve seen that freemium apps with in-app purchase are huge money makers, equal to paid download revenue at the end of last year, and likely higher now, six months later. And with Apple’s banning of incentivized pay-per-install marketing campaigns, the focus is increasingly turning away from download numbers to apps with deeper engagement.

CEO Daniel Terry, who founded the company with fellow Stanford grad Harlan Crystal, said Pocket Gems has found success building deep and detailed games that continue to evolve as players progress. That requires a lot of ongoing support and updates, which is why Pocket Gems hasn’t put out more games. The company has also homed in on how mobile users play, breaking down sessions into smaller units so people can get in and out quickly, more so than in traditional social games on Facebook. It’s that combination that has helped Pocket Gems onboard new users while keeping dedicated players involved.

“People are still playing games we put out nine months ago it. It’s about having an ongoing,  long-term relationship with our customers,” said Terry. “A lot of games are very casual; you play it three times and you don’t come back to it. It’s very hard to significantly monetize the relationship if that’s the case.”

Terry claims the young mobile market is also maturing, and as that happens, gamers are looking for increasing complexity and sophistication in their games. He said Pocket Gems is well positioned to fulfill that desire while still maintaining a low barrier to entry for new users.

The growing mobile market is attracting established players like Playdom, which recently launched City of Wonder and Crowdstar, which recently got $23 million from Intel (s intc). And there’s IPO darling Zynga, which has had slow success in mobile but is ramping up with acquisitions and homegrown titles. Zynga now has three top 20 grossing titles in Zynga Poker, Words with Friends and Hanging with Friends, the last two of which came out of its purchase of Newtoy.

Terry, however, isn’t concerned, saying that entrenched players don’t necessarily clean up on new platforms.  Just like Facebook gave rise to Zynga, smartphones can have their own powerhouses. He thinks Pocket Gems, which should double its 40 employees by the end of the year, can eventually build a $1 billion business.

It’s likely suitors like Zynga, EA (s erts) and Asian powerhouses like GREE or DeNA may come calling if Pocket Gems keeps up its string of success. With Ngmoco selling for $400 million last year, and OpenFeint being bought for $100 million in April, the market is certainly open to the next big player in mobile gaming. Pocket Gems may be that force, though Terry said he’s more concerned about taking it slow and getting it right. So far, so good.

“We have our eye on a long horizon, now just putting out games. It’s a very long-term focus but it’s already paying dividends,” he said.