Over the past few years, we've built the equivalent of a nice early-stage VC portfolio around the concept of "earned equity". In the most basic terms - this means using our human capital and acceleration expertise as a form of investment currency. In practice, we'll scope out a venture acceleration services project for a potential client, and if we think the company is an outstanding investment opportunity, we will seek to trade a substantial portion of our proposed services fees for equity. This investment program is called Thinktiv Ventures. It's my job to expand the scope of these non-traditional "investing" activities, to see just how much value we can create with this extreme form of "value-added capital".
A short time ago, we announced our first "lead" investment - in Austin-based QuickGifts. In his last post, @Berkokid talked about the acceleration of QuickGifts since we became involved several months ago, so I won't rehash that. I'll focus on the variables that make us love the company, and why we believe it is an emerging category leader in an enormous market. The good news is that there are several things to love about QuickGifts, which means I'm going to break this discussion into a few separate posts.
In a nutshell, QuickGifts provides solutions that allow the in-store gift currency of local merchants to be more broadly distributed to consumers and corporate clients. Since it's founding in 2002, the company has built its business around four key solutions that together create a "closed loop" that enables merchants to capitalize on this opportunity:
OneLink is a white label e-commerce solution that allows merchants to effectively offer their existing in-store gift cards or certificates through online, social and mobile channels.
The QuickGifts Card Mall is a destination shopping site, offering the broadest online selection of local, regional and national merchant gift cards and prepaid currency.
Dibbs is the company's proprietary, universal currency that can be used by recipients to purchase branded merchant gift cards on the Card Mall.
QuickGifts Corporate is a business incentives management solution that allows SMBs and corporations to manage diverse rewards and incentives programs built around Dibbs currency.
Just on a standalone basis, those are substantial commercial assets. However, QuickGifts possessed an abundance of other characteristics that we love to see in "acceleration investment" opportunities. Here are the first two:
A "G-50" Market The bigger the market a company serves, the bigger the potential to create a "great" company at scale. A corollary to this statement is that if a market is sufficiently big, it will have many more niches that a company can occupy to become really valuable (vs. "great"). If a market is smaller, you can still create substantial outcomes for founders and investors, but you need to have much more of a pure "greenfield" play on the opportunity, or some sort of unfair new advantage over incumbent market participants. One can think about the relative size of addressable markets the same way one thinks about world economies. Lots of investors would draw their Mendoza line for minimum market size at $1 billion, which based on this data corresponds to the GDP of Samoa. Things get much more compelling when markets approach the "shores of Malta" ($10B), the "Costa Rican frontier" ($50B) and then the golden "border of Tunisia" ($100B). QuickGifts is a pure play on two huge markets -- consumer gift cards (~$100B annual sales) and the corporate incentives sector (~$50B)... with strong alignment to other multi-billion dollar markets like Mobile Payments and Local Commerce. When you add those together, you get a market with "G-50" economic credentials -- comparable to countries like Ireland, Finland and Israel.
The "power triangle" We think that many great companies emerge when 3 or more parties receive substantial benefit from the business value proposition. While those benefits can be social or knowledge-based, explosive value creation is much more likely when the benefits are economic in nature. An example: In the early days of Google, the company was just a humble search engine creating benefit for two parties -- the searcher and itself. When Google optimized the concept of paid search, it delivered substantial economic benefit to an entirely new set of constituents (marketers) and shifted its own benefits from social ("Google is the most brilliantly constructed search engine!") to financial ("Google is an unstoppable economic juggernaut!"). Apple solidified its return from near oblivion when the iPod and iTunes marketplace created a great two-way relationship with consumers, centered on a new form of music consumption. However, Apple didn't become a deadly force until the iPhone (then iTouch and iPad) hit the market, and along with it a marketplace where armies of application developers could make a living selling their work to eager consumers. We call these "power triangles", and when they hit with well-balanced economic alignment for all participants, they turn good businesses into perpetual growth machines.
In the world of local commerce and the small-to-midsize merchant, we've seen over the past year the remarkable growth of "daily deals" leaders like Groupon and LivingSocial. On the surface, this looks like a power triangle phenomenon in majestic bloom: The consumer gets a fantastic deal on goods or services; Groupon takes a healthy cut of every daily deal transaction; and the local merchant sees an amazing increase in store traffic, revenues, profits, and loyal customers!
Uhhh... Whoops. Seems like the power triangle of the daily deal looks a lot more like a line segment to many merchants, since it basically allows a local merchant to conduct the worst possible economic transaction -- selling a dollar for 25 cents -- hundreds or even thousands of times.
On the other hand, the sale of a gift card represents the best possible transaction a local merchant can make. The full value of the card paid up front, then the merchant waits for recipients to redeem in-store. When they do, those recipients typically spend an additional 50% to 150% of the original face value of the card -- again all at full value. The problem is not whether to sell gift cards -- most local and regional merchants do. The problem is how to sell them efficiently in places other than inside the store. With few exceptions, local merchants typically sell 100% of their gift cards in-store. They struggle to offer their cards through online channels, due to cost, time and resource issues. Why does that matter? Chili's sells roughly $80M of gift cards each year, but only $20M are actually sold at a Chili's location. The rest? Online or at the end of the grocery store aisle. In a nutshell, QuickGifts allows smaller local merchants to finally compete with the big national brands for those dollars -- and substantially expand the volume of those valuable gift card sales. Let's look at what QuickGifts' merchant clients have to say.
We think that this value proposition earns QuickGifts the right to wear Thinktiv's official Power Triangle Amulet.