It all started with a gift box of chocolate that arrived with no card.

“I had no idea who it was from,” said Doron Friedman, an entrepreneur whoowned a chain of bagel cafes in California in 1999 when he received themysterious gift.

He finally found the gift giver’s name on the invoice and, in the process,discovered a business opportunity: With the growth of online shopping, theproblem of gifts arriving without proper greetings was likely to get worse.

So Friedman tapped several colleagues and launched Arroweye Solutions in2000, with a focus on customized greeting cards. As gift cards emerged in themarketplace, he saw a another opportunity.

Today, Arroweye is the company behind the personalized photo gift cardsoffered by Macys.com, ToysRUs.com, CircuitCity.com and some 40 othermerchants. Arroweye’s consumer Web site, Cardways.com, offers gift cards froma variety of retailers.

Friedman’s case illustrates a classic entrepreneurial truism: The bestbusiness opportunities often appear right before your eyes. Turning them intoreality requires hard work, the ability to adapt and conviction.

Friedman turned down $7 million in funds early on because the investorwanted Arroweye to offer its greeting cards in an electronic format for free,he said. His decision to stick to high-quality paper greeting cards made iteasier for the company to later tie them to personalized gift cards.

“The biggest problem with most gift cards is they’re impersonal. They’rejust money,” said Friedman, founder and chief executive of the 65-employeecompany that moved its headquarters to Chicago in 2005 to be closer to majormerchants and marketing talent.

Now, though, customers often put photos of their children or pets on thegift cards. It makes such a special gift that recipients tend to hold on tothe gift cards even after the monetary value is gone, he said.

Consumers download photos and drawings to be displayed on the gift cards,then select from 3,000 greeting cards and add their own message. It’s apowerful combination, said Jeff Keller, chief customer officer.

“We’re enabling that very relevant, almost inside joke between the giftrecipient and the gift giver,” he said.

Using a patented method, Arroweye matches the personalized gift card withthe custom greeting card and sends it to the recipient. Each gift card andgreeting combination is unique. The cost is the value of the gift card plus$4.50 and the price of a first-class stamp. Gift cards can be purchased in anydenomination.

Arroweye’s photo gift cards are gaining a following, Friedman said.

“Just this month, we took over 15 retailers live,” he said.

Strong growth projected
Arroweye handles the Web site development for participating merchants, aswell as fulfillment. The company expects to triple its revenue in 2008 fromthis year and plans to serve more than 200 merchant partners by the end of2008, up from more than 40.

While not in the black on an annual basis, the company is forecasting aprofitable fourth quarter, Friedman said.

“The good news is there is no lack of interest from retailers. Our issue isservicing the demand,” said Devin Mathews, partner at Baird Venture Partnersin Chicago, which with Adams Street Partners invested $14 million in Arroweyein May.

Before that investment, the company had raised about $20 million fromindividual investors, Friedman said.

When Arroweye morphed from a custom greeting-card supplier to a gift cardcompany, finding capital to expand the business become much easier, Friedmansaid.

“When we walked into a [venture capitalist’s] place and told them aboutgreeting cards, they said, ‘No way.’ They couldn’t associate with it,”Friedman said.

Once the company moved into gift cards, it was a different story. BairdVenture Partners, which focuses on financial services, saw the potential totap the $80 billion-plus gift card market, Mathews said.

“We scoured the universe of competitors and there’s nobody even close to asgood in the customization of gift cards as Arroweye, not even close,” he said.

Investors aren’t the only ones who understand the appeal. For merchants,Arroweye Solutions’ makes it painless to offer gift cards through the mail,said Jessica Harley, vice president of customer acquisition at Borders GroupInc., based in Ann Arbor, Mich., where gift cards are the biggest-selling itemfor the holidays.

“Gift cards have tremendously changed the retail business – period,”Harley said.

Consumers like the flexibility because they don’t have to worry aboutguessing wrong about someone’s taste in books or music or inadvertently buyinga title the recipient already owns, she said.

The impersonal nature has been the only drawback, but the custom approachchanges everything.

“We’ve seen the percentage of our gift cards that are personalizedincreasing. It’s a concept that people are really just grasping,” Harley said.

The timing is right this holiday season, she said. More consumers arefamiliar with downloading and e-mailing photos than in years past, and mostare willing to give the concept a try.

The custom gift card just makes a nicer gift, said Leslie Convey, generalmanager at 1800Greetings, a unit of 1800Flowers in New York.

“The recipient is not just getting a card, but is also getting the gift ofyour picture, artwork or design,” she said.

Higher spending
The personal touch is so powerful that the average dollar amount loadedonto gift cards generally increases by 20 percent or more when they arecustomized with a photo, according to Arroweye’ research.

Customization usually commands a premium, said Scott Davis, senior partnerat Prophet, a marketing firm with offices in Chicago.

“As consumers, we’re trying to figure out how to have our personal touch onall aspects of our life,” he said. “This whole idea of authenticity andgenuineness feels like it’s getting harder to bring to life in our day-to-daylives. When you have the opportunity to share something that feels customized, it makes you feel better as the giver and the receiver.”

The concept is so popular that Arroweye is finding it difficult to keep upwith demand.

“We’ve got more demand than we can handle in a short period of time .Everyone wants to be live for Christmas,” Mathews said.

Over time, the venture capital funds the company received will help it expand, Friedman said. “You always have challenges. You have hiccups all the time; that’s the fun of it,” he said. “If it’s easy, everyone would do it.”