Everyone loves free stuff, apparently including VC investors. Toronto-based Drop, whose app allows consumers to collect points for transactions they make and then receive reward offers, has secured a $21 million Series A round led by Rick Yang at NEA. The company has previously raised about $5 million in seed capital over the past year.
Drop’s concept is simple. Unlike traditional loyalty and rewards programs which are built around the retail point-of-sale system, Drop uses banking APIs to read your credit card transaction data directly, and gives you points for making purchases with partners in their program. These points can then be spent on personalized offers, such as a discount on coffee at Starbucks or a free ride on Uber.
Drop has reached as high as the second place in the lifestyle category of the Apple App Store, behind Tinder. Derrick Fung, CEO and co-founder, said the two apps are in many ways symmetrical. “We always joke that Tinder allows you to find love, and we allow you to find money,” he said. The app currently sits in the top five of the U.S. for lifestyle according to AppAnnie data. The company says that it has hit one million users late last year.
While the app may lack a brilliant twist on the loyalty concept, the real value here is in the execution. The on-boarding is simple, the rewards start immediately, and the number of brands users can gain points from is growing rapidly, and include companies as diverse as Costco, Starbucks, Forever 21, Lyft, Adidas, Casper, and Instacart.
Fung explained to me that there are three ingredients that made the app sticky for consumers. The first, was taking advantage of APIs like Plaid to connect directly to consumers rather than through retail stores. The second was to make the app, which targets a millennial demographic, more engaging. “We wanted to build something fun and that resonates with this young demographic,” Fung said. Finally, for partner companies, the app provides a channel by which marketers can understand whether their ad campaigns are resulting in actual sales.
Drop is Fung’s second stint as an entrepreneur. His first company, Tunezy, was an ecommerce and social platform for musicians to connect with their fans and receive payment for live experiences. He founded the startup in 2011, and it was acquired two years later by SFX Entertainment, which owns a portfolio of EDM festivals including Electric Zoo and Tomorrowland among other live experiences.
Fung said that one of the challenges he noticed with the music festival industry is that advertisers would sponsor these massive events, but have very little insight on the impact of their marketing dollar. Fung said, “The biggest challenge was always trying to understand spend incrementality. Can we prove that these fans are spending” more on the brands that sponsored an event? From those observations was born Drop, which is named for the bass drop common in EDM music.
Given that the company is headquartered in Toronto, the company first rolled out its app in Canada in 2016, and expanded to the U.S. last year.
The Canadian location has been a boon to Drop, according to the company. Many of the largest loyalty program operators around the world are based in the area, including Aimia, which runs the Nectar loyalty card and is based in Quebec, and LoyaltyOne, which is based in Toronto. That has allowed the company to build a team from a unique pool of specialized talent.
Toronto has also been beneficial for attracting talent to the company, especially for workers looking to start families. For instance, the company announced that Ian Logan, the former lead of Airbnb payments, has joined the team as VP of Engineering. Logan returns home to Toronto from Silicon Valley. Drop hopes to take advantage of local talent in the machine learning and artificial intelligence space to improve the matching of offers to users. Today the company is 25 people, and hopes to expand to 75 by the end of the year.
The company has set internal goals of reaching 5% of the millennial market within 12-18 months, and then 10% of the market within two years. At which point, Fung explained to me, the company will start to expand outside of North America to countries such as the United Kingdom, Australia, and Poland.
In addition to NEA, the Series A round had participation from Sierra Ventures, White Star Capital, ff Venture Capital, Portag3 Ventures, Silicon Valley Bank. Individual investors included Satish Kanwar of Shopify and Allen/Eva Lau of Wattpad, among others, The company did not disclose how many loyalty points would be received from $25 million in spend.
Updated to reflect actual seed fundraise of $5m rather than $10m.