FiveStars Gets $50M To Help Small Retailers Run Loyalty Programs Like Their Bigger Rivals

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FiveStars, a five year-old startup that has built a platform and app to run loyalty programs and shopping analytics for small brick-and-mortar retailers, has received a reward of its own: the company has raised a round of $50 million, funding that it plans to use to continue its focus on “mom and pop shops” and building its brand and business across the U.S., CEO and co-founder Victor Ho told me.

To date, some 10,000 merchants across the U.S. and Canada are using FiveStars’ loyalty services to track customer visits and give them incentives to come back for more in the form of discounts, coupons and other perks; 10 million consumers have used its apps; and FiveStars has logged more than 35 million visits to stores in the last year based on its messages and reward offers.

The Series C round was led by HarbourVest Partners. Previous investors Lightspeed Venture Partners, Menlo Ventures, and DCM Ventures also participated. This latest funding brings the total raised by FiveStars — which launched out of Y Combinator back in 2011 — to around $105 million.

(And in case you are wondering, FiveStars is not disclosing its valuation. Sources tell us that it’s in the hundreds of millions and “very solid”, but Ho refuses to be drawn out on the specifics. “We do not want to be a part of the whole stack ranking game,” he says.)

The company has come a long way from its origins.

Starting out as a basic rewards and loyalty service, the company has grown into a larger marketing and analytics platform over the years.

“The overarching goal is to bring the customers back in more often,” Ho said. “We do that by helping merchants collect data on things like what customers are ordering, and through our tools we have a CRM and marketing automation suite to reach out and engage customers.” (It also provides a pretty extensive privacy policy to explain how and what it does.)

Ho and co-founder Matt Doka first met each other working at McKinsey, where they were helping to build loyalty and reward products for the kinds of huge businesses — Fortune 50 brands, Ho calls them — that employ huge consultancy firms to do this.

“We thought to ourselves that the smaller businesses were missing out, and we wanted to try to fix that,” Ho said.

Why? He and Doka could see that smaller businesses were going out of business at a much higher rate, and made a guess that loyalty was one of the drivers. “There is no way that small businesses can compete on price against a company like, say, WalMart. But without better loyalty services, they couldn’t compete on personalization, either. And yet customer service is probably one of the only ways to help them win.” (I’d add product quality to that, of course.)

The company first started out a very low-tech approach: it integrated with merchant’s point-of-sale systems and customers used a FiveStars card that they swiped at participating merchants to gain loyalty points and other rewards, more or less an aggregated replacement for the paper punch-card. (The original URL for the company was actually “fivestarscard.com”.)

FiveStars eventually upgraded to a more tech-savvy system. Today, customer visits are marked either through the use of in-store beacons or an app-based check-in, if a customer has the FiveStars app installed.

The check-in has been much-maligned as a concept, with companies like Foursquare, which popularised the action, recently raising money in a down-round in part because it’s struggled to turn that feature, core to its location-based app, into a big business (although that’s changing now, it seems). Ho believes what FiveStars offers is different, however, since users have incentives to check in outside of any social game: because of the rewards they get in return (a concept that Foursquare has tried to capitalize on now, too).

The FiveStars system allows for retailer employees to be able to identify users, along with their purchasing preferences in order to better serve them once they enter the premises. Think of it as the physical equivalent of the personalization you have when you, for example, visit Amazon.com as a logged-in user.

Simply setting out to target much-overlooked and ignored small businesses, however, hasn’t exactly translated into instant business from them, Ho said.

“All of the difficulties of selling to small businesses are true,” he said with a little laugh. “It’s incredibly difficult. They will not find you, and you often can’t find them through Google. They are small retailers and the only way to get them is to get in front of them with a direct sales force.” He notes that this is one of the details that isn’t really talked about when discussing startups that target small businesses. “Even Square uses one,” he said. About half of FiveStars’ employees today are sales people.

But this doesn’t mean that everything that FiveStars does is analogue. Back in 2012 the company hired Chris Luo, who is now the startup’s VP of marketing. Before this, Luo had been head of global SMB marketing at Facebook, and before that head of acquisition marketing for Asia-Pacific for Google. Luo helped the company build a pretty impressive sounding algorithmic database that helps FiveStars identify and target retailers with their products, so that they’re not simply going out there with a spray-and-pray approach to find new customers.

Ho says the machine learning algorithms are able to look at, for example, whether a business is making regular updates to its Facebook page or whether it engages on Twitter, and whether and how it has built its website.

All of these are signals about whether the retailer in question is already considering ways of reaching out to new customers; or improving the relationship with existing customers; and even if they are the kind of business that is willing to dedicate budget to technology to improve business. Ho says FiveStars typically charges a $300/month fee for its full solution that includes the tablet and tablet-based software, the analytics and app integration.

As for the longer-term picture, FiveStars wants eventually to branch out beyond North America — the UK, being a nation of shopkeepers, is likely to be the first place FiveStars will go, said Ho. But for right now, the aim is to become a much bigger brand on its home turf.

What’s his definition of big enough? Hard to say exactly, Ho told me, but he did note that companies like Groupon and Yelp, which also target small businesses, each had around 20,000 merchants a year before they went public.

“Everyone was sharing offers with each other by that point, and everyone knew what they were,” he said. “They really started to take off.” It competes against other companies like Belly (backed by the likes of Andreessen Horowitz and also having raised around $25 million); Perkville (also VC backed) and Canada’s Sweet Tooth for targeting small businesses with rewards programs.

The spectre of Yelp and Groupon are interesting, given these seem like they would be obvious competitors or potentially acquirers, along with the likes of Amazon or even Facebook. Companies like these are always looking for ways to get closer to small businesses and extend the larger commercial relationships they may already have with them around other products like daily deals, point of sale systems, paid listings or advertising.

Ho says that FiveStars has been approached for acquisition several times already but without a deal that has tempted the team to make the leap instead of continuing to grow independently.

Updated with further pricing clarification and other details.