This is the 2nd of a three-part post discussing Thinktiv's investing strategy, and the case study of our first lead investment in QuickGifts. Last week, I talked about G-50 Markets & Power Triangles. This week I'll tackle two more variables that make us happy when we are looking at venture acceleration opportunities, and how they are manifested in the QuickGifts business. First off, we at Thinktiv always enjoy ... Fun with math! As many world citizens realize, math can be fun. But those who have taken algebra know that it can sometimes be really freaking hard to do math when you don't have all the relevant variables at hand. While there are many factors that can combine to make a great venture acceleration opportunity, in general the variables we at Thinktiv really care about are:
- the size of the market (Samoa? Costa Rica? India?)
- the unit economics of a business - in other words, what economic value is created when the business acquires a customer, and at what cost?
- the lifetime value of a customer - how do those unit economics play out over time
QuickGifts has an excellent handle on the unit economics of its local merchant customers, and the value of those customers over a longer horizon. On average, a QuickGifts merchant client generates an additional $7,000 in gift card sales per year. The typical breakage rate on card sales is around 20%, meaning that $1,400 of that $7,000 is pure profit to the merchant. The remaining $5,600 in card sales are redeemed in-store, where recipients spend an additional 50% to 150% of the original card face value. That's $2,800 to $8,400 of full-margin sales on top of the original card value. So the total gross economic value to the average merchant (per year) is somewhere between $8,400 and $14,000 at full margin + $1,400 of pure profit from breakage.
When we look at the restaurant category on its own, the numbers are even better:
- $10,500 in gross new card sales
- 20% average breakage ($2,100 in pure profit)
- 100% to 150% of additional spend when the recipient redeems in-store (or $8,400 to $12,600 of full-margin add-on sales)
That makes a total gross economic value to the average merchant (per year) somewhere between $16,800 and $21,000 in full margin sales + $2,100 of pure profit from breakage. One single-location restaurant in Houston sold over $41,000 in gift cards last year, without cannibalizing its historical in-store sales. That is a lot of fancy cheese!
How does QuickGifts make money? They charge the merchant a nominal subscription fee ($10 - $100 per month depending on number of retail locations) + a 10% performance fee on the value of all cards sold. So on average, QuickGifts will collect around $950 per year in fees per merchant ($1,300 from a restaurant). Because the value proposition is so strong, the company sees merchant attrition rates well below 1%, so it is easy to project the "lifetime value" of a merchant client over 3-year, 5-year, and longer terms. We like math like this.
IMPORTANT NOTE: You've had to process a lot of numbers in order to make it this far. Before continuing, you may want to reward yourself with a trip to the Thinktiv Refreshment Stand.
Welcome back. Now onward...
The T-Bone Corollary The previous "power triangle" discussion and "unit economics" analysis above reveal another characteristic we like to see in venture acceleration opportunities. The "T-Bone Corollary" states that it is more capital efficient to intersect a white hot market with a complementary value proposition, than it is to simply chase that market with your version of the same value proposition. This rule is illustrated visually in this exciting video. If the value proposition creates additive revenue streams within the market, the effect is greater (as with a large truck or Humvee, for example). When we first invested in QuickGifts several months ago, we saw the opportunity to intersect the white hot local commerce market with the economic proposition outlined earlier. We saw the shortcomings of the daily deal value proposition to merchant customers, and felt the QuickGifts could create high velocity merchant acquisition as a complement to that type of program. We also saw entrenched players in the local search and merchant services markets looking hard for new revenue streams and more compelling value propositions for their merchant clients. This told us that QuickGifts could accelerate merchant acquisition even more aggressively, through revenue sharing partnerships that created profitable value for all parties.
So far the T-Bone Corollary has held true. Since November, QuickGifts merchant installed base has tripled, and that growth is accelerating. Through new partner relationships, the company now has external sales forces selling its solutions into a collective installed base of 25,000 merchant locations. It has an active pipeline of new partnerships in the works with reach into 300,000 more locations. That beats being the 23rd best daily deals site any day.
Up next in Part 3? "Social Multiplication & the Power of Intent".