This article is courtesy of Amit Raizada who shares his experience growing a gift card genre that is instrumental in helping companies bring in capital during these difficult times.
The retail industry is currently undergoing one its most challenging periods in modern memory. Malls are closing. Stores are shutting their doors. And millions of retail workers are unemployed.
There’s no telling exactly what comes next for retail, but one thing is obvious: retail as we know is disrupted – and it’s going to keep changing.
As an investor with experience and understanding of how consumer habits change, I’m optimistic that this period will eventually yield new and innovative ventures that transform consumer behavior and retail for the better.
In reflecting on the various ways my investment have previously impacted retail, I’m reminded of my game-changing work funding the creation of a whole new gift card genre early on in my career.
It’s hard to understate just how drastically gift cards changed the retail industry. Portable, easy to mail, and easy to give, gift cards gave consumers an unprecedented level of flexibility. Once gift cards were introduced, shoppers no longer had to guess which shirt someone wants from Nordstrom or which handbag would be considered “perfect” from Bloomingdale’s. Gift-givers had to simply pick the store, buy the card, and voila: the perfect gift.
For consumers, it’s that simple. But for the businesses themselves, it’s a little more complicated.
When the gift card industry emerged in the early 90s, it brought a range of benefits to consumers and retailers alike: new shoppers, new marketing, flexibility, and a ton of cash. At first, customers were happy with store-specific gift cards. But like every industry, the gift card industry needed to evolve. That’s when Visa and other credit card providers jumped into the industry to provide widely accepted “gift cards” that looked like credit cards. While these cards provided the ultimate flexibility for shoppers, they also came with a significant drawback: exorbitant fees.
Around 2003, I was approached by an entrepreneur who had a novel idea. He suggested setting up a system in which gift cards could be used at any store within a given mall. That way, a recipient could choose a store from the dozens or hundreds of stores housed within a specific mall.
Intrigued by the entrepreneur’s Kansas City-based startup, Store Financial, I provided an early investment in the hopes of helping this start-up take-off. Quickly, an ace team of industry experts developed the necessary structure to allow individual malls to implement this kind of system, allowing stores at that location to accept both their own gift cards as well as mall-specific gift cards through the same credit card processing system.
Quickly after its launch, Store Financial became the largest mall gift-card provider in North America—eventually growing to several hundred mall locations in the United States, Canada, and Europe. Eventually, the Store Financial model evolved into a larger general purpose reloadable (GPR) prepaid card market, considerably increasing its market reach. The company was eventually acquired by another private equity group, which brought Store Financial’s business model to a broader global audience.
As an investor, I am always focused on how my dollars can make a lasting impact and help lift emerging markets off the ground. That was undoubtedly the case with Store Financial, which provided a substantial return and revolutionized the mall gift card industry, moving well beyond the mall paper gift-certificates that were cumbersome for everyone involved. My experience with the gift card market illuminates two principles that I urge aspiring venture capitalists to consider.
First, invest in emerging markets. Observe the products, experiences, and venues that interest young people and discover opportunities to monetize these interests.
Second, once you identify new markets, look for peripheral opportunities within these markets. My investment with Store Financial did not directly change the basic model of gift certificates. But it provided a novel service that the gift certificate industry needed to survive and thrive. While not directly at the center of the action, peripheral investments like Store Financial can create a ripple of changes across the industry, revolutionizing an industry and providing long-term returns on a risky investment.
Young investors today should look for these qualities in new markets. A venture that sounds outlandish today may very well create a change that echoes across generations.
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