The Art Of Raising Money

Victor Ho, the CEO of 3-year-old loyalty firm FiveStars, has become a veteran of the capital-raising game as he has built his firm to support more than 5,500 merchants and about 4 million cardholding shoppers.

Beyond learning that it’s true that one can’t raise money in August—too many European vacations—he figured out the strategic difference in raising money at different stages.

“When we were raising our seed round, that’s much more about the idea, the team and the market size. And you’re just kind of getting people excited about the concept of what you’re doing,” Ho said in a podcast conversation with MPD CEO Karen Webster about the strategy of raising funds.”When you go to the Series A, at that point, it was really proving that we had a product market fit, that we had a good product that people really wanted and the market was big and growing and that we had a core piece of technology that was really defensible. When we got to Series B, that’s a lot bigger. The pitch becomes completely different. Of course you still have to outline the idea and the team and get people excited about the problem you’re solving, but now it becomes a lot more about brass tacks. What are the operational issues of the business? How are things actually going? Is it really scalable? You have investors deep-diving into our numbers.”

But Ho tells Webster that Five Stars also benefitted from some very painful discipline during the firm’s first year. At that time, the loyalty space was ultra-crowded—he estimates that they were fighting against about 60 other loyalty firms—and many of those rivals were aggressively spending their investments, creating huge salesforces that Ho thought would be unsustainable at that stage. Indeed, most of those firms eventually either disappeared or they struggled to raise cash, he said.

Part of maintaining a healthy profit margin was the company’s focus on building its loyalty program into a small business’s POS—any POS.”For us, we have a platform that basically integrates on any point of sale on the market, which is revolutionary,” he said. “Because today you would have to go one by one to integrate with the APIs of 300-plus systems out there. Our technology enables us, within 10 minutes, to set up any Point Of Sale.”

The other company focus was on where the business value existed.

“Think about loyalty programs, but just the reward part, the buy one, get one free part. Those are very powerful because they do drive a lot of customer stickiness and they do effect customer behavior, but the real meat on that bone is what you can do with all that data that comes from being able to now track those customers,” Ho said. “Once you know what they’re buying, what their behavior is, that allows you to do so much more in terms of personalizing their experience, sending them targeted offers and promotions, getting them to refer friends, things like that. That’s where the real value comes from.”

That gets us back to FiveStars’ margin.

“We are now at a point where we’re delivering materially more value to our merchants so our average price point is three times higher than the next closest player. We are able to do it with no hardware costs because we’re on the Point of Sale,” he said. “You can see how that might affect the business if you’re the third of the price and you have a bunch of hardware costs for your tablet or your phone you’re giving out or whatever it is. That has been an important part of our discipline.”

Ho told Webster that the early sales lines from their rivals touted the very elements that would later hurt their own margins. “There were all these other guys who were trying to get around the POS. They’re saying ‘The POS is not relevant. This whole industry is really old. And we’re just going to push out an iPad on the side or a mobile app or whatever it is.’ Well, we said ‘The point of sale is critical, the heartbeat of these businesses. It’s where all the data lies, where the real value comes from.'”

Ho’s latest investment round pulled in about $26 million, making it one of the largest last week in Fintech. For all of the payments-related investment activity, check out this week’s Investor Tracker from PYMNTS.com. To listen to the full conversation with Victor Ho, click here.