What happens when behavior catches up with a disruptive technology?

There are a lot of successful examples of behaviors that can be disintermediated with a technological solution, for the better. And then there are those ideas that become a technological solution in terms of a problem. And I guess some fall in between, so you have to wonder if you could get in and out before the market catches up with you, and does that justify a massive venture capital investment?

Such is the pondering today upon hearing that a local company called Raise has just “raised” a $56MM venture capital round. A two-year old company that acts as a marketplace for trading unwanted gift cards at below-face value, Raise is attracting a lot of attention. At first glance, it seems like another attempt to skim off of an existing transaction, although it actually does more than that (and the big difference from earlier attempts to create marketplaces for unused gift cards is that it is mobile and value moves electronically; earlier attempts like GiftSwap required mailing physical cards). But the deeper question is whether it is sustainable.

Let’s start with the first thought, how big the market is and how much money can they expect to earn. Cardhub.com provides some useful statistics: gift card sales are projected to grow at about 7-9% per year, and are expected to reach $134B in 2015. This report from ABC News from 2011 sheds light on how much goes unused, including the loss of stored value each year: there was $41B in unused value accumulated from 2005 through 2011, which represents almost 7% of the $618B in total sales during that period. There was also $8B in “spillage” in 2007, which represents loss of stored value due to fees and expirations. However, the CARD Act of 2009 (Card Accountability, Responsibility, and Disclosure Act) caused that number to drop to $2B by 2009, and more recent projections estimate it will be less than $1B by 2015.

So for ease of calculation, assume 10% of gift card sales each year are unused and eligible for the Raise marketplace. In 2015, the potential would therefore be $13.4B. According to this article about Raise’s funding round, cards sell on average for 85% of value, and Raise takes 15% of the value of each sale. If Raise was able to bring 100% of unused cards into its marketplace, it would realize revenue of ($13.4B * .85 * .15) = $170MM. That’s big money with a very efficient model, and you could see why they would be growing so quickly. But reality is they will never achieve that level of participation, so if they could even get to 50%, $85MM is still a big number.

But… that brings me back to my second thought. Is this sustainable, and not just because the CARD Act lengthens the time before the value of a card can be expired. If the percentage unused remains constant, and gift card sales grow consistently, the market for Raise will grow 7-9% per year. But I’m thinking more about rational behavior and people learning over time, so that they a) don’t buy gift cards for retailers they don’t frequent or for amounts in excess of what they can expect to spend; b) don’t buy gift cards for others at retailers they won’t frequent. That will drive down the percentage of cards that don’t get used and are eligible for the marketplace, even as the volume of gift cards continues to grow. And that would concern me if I was part of the venture round – meaning I’d hope to build quickly and get out, and let someone else figure out how to make it more sustainable for the long term.

Posted by jkeenan on 01/25