GiftRocket Seeks to Take the Pain (and Loss) Out of Gift Cards

This is the fourth in a series of profiles of Y Combinator Winter 2011 (YC W11) startups.

Gift cards, also known as stored-value cards, may be one of the most popular types of gifts—Americans spend at least $80 billion on them every year. But let’s face it, the little plastic rectangles are so 1994. They’re impersonal, and you can only use one at the store that issued it. That inconvenience means that much of the value stored on the cards—an estimated 10 percent—never gets redeemed (to the obvious delight of retailers, who get to pocket billions of dollars in so-called “breakage” every year).

If a Mountain View, CA, startup called GiftRocket gets its way, the stored-value card will soon have a place in the trash heap, alongside the old paper gift certificate. The Y Combinator-backed startup, which introduced its service two weeks ago, has an alternative that relies on smartphones with mobile Web access to help people deliver cash gifts to friends or family based on their location. GiftRocket uses PayPal to deliver the actual money, and it works for any business location with a customer review on Yelp (which is a lot of locations, though Yelp doesn’t reveal hard numbers).

GiftRocket’s founders argue that their system has at least two big advantages over gift cards: It’s a friendly, low-friction way to encourage someone to check out a restaurant, retailer, or other location you think they’d like. Also, recipients get the whole cash amount when they check in at the suggested location, so none of the value disappears as breakage, as with gift cards.

And merchants get a bonus too: the gifts bring people into their locations, where they often “upspend” or shell out even more than the value of their gift. And by encouraging their own customers to use GiftRocket, businesses too small to issue their own gift cards can, in effect, set up an instant, no-hassle gift certificate program.

“We tried to replicate what people do with gift cards as closely as we could, and then make it frictionless,” says Kapil Kale, who co-founded GiftRocket with his Dartmouth College classmate Nick Baum and their Stanford University friend Jonathan Pines. “Our central belief is that a gift card is for a person, and the money should be going to the person, not directly to a retailer.”

Using GiftRocket is pretty simple for both the giver and the recipient, as Kale demonstrates in the video below. To use a personal example: I wanted to thank some friends in Medford, MA, for letting me sleep on their couch a few weeks ago while I was in Boston for an Xconomy conference. I went to and searched for Lyndell’s, an amazing 124-year-old bakery just down the street from my friends’ house. After finding it in Yelp’s listings, I entered the e-mail address for one of my friends, chose the gift amount ($25–enough for about 10 scrumptious Half Moons), wrote a personal message, and entered my credit-card info. That was it.

My friends will get an e-mail with my message and a link leading to a personalized, mobile-friendly GiftRocket Web page. The page is actually a sophisticated little mini-app that interacts with a smartphone’s GPS chip. When my friends click on the big red “Redeem” button on their iPhone, GiftRocket will check their latitude and longitude against Yelp’s location database to make sure they’re at Lyndell’s, and then it will release the $25 to the PayPal account associated with the e-mail address I used. (If a recipient doesn’t have a PayPal account under that address, or doesn’t have an account at all, that’s okay—PayPal has a way to get money to anyone with an e-mail address.)

It’s up to my friends whether they want to spend the whole $25 at Lyndell’s. If they wanted to spend $2.50 on doughnuts and use the rest to go to the movies, I’d be none the wiser (and I wouldn’t really object). Either way, says Kale, “You get back the full value of the gift into your PayPal account—which is the only way we could be merchant-free and have it work all over the place.”

(Story continues below video)

So far, people are sending GiftRocket gifts for “lots of different types of things—there hasn’t been one key use case,” Kale says. The most common scenario, he says, is someone sending cash for a birthday dinner at a nice restaurant—from a pub in a small town in Minnesota to the famous French Laundry in Yountville, CA. (Somewhat bizarrely, Kale says the most frequently gifted restaurant destination is Chipotle.) “People use their imaginations so much more than they would with a regular gift card,” he says. “We do see Macy’s and other stores that have traditional gift cards, but then we see people go and use them for small boutique gift shops where my guess is they do not even have gift certificates.”

GiftRocket earns revenue by adding 5 percent to the face value of each gift, mostly to cover its credit-card processing costs, Kale says—so my $25 gift for Lyndell’s actually cost me $27.25. The startup’s credit card payments are handled by PoundPay.

The outward simplicity of the GiftRocket system—which could be a big asset as the company strives to acquire more users—actually masks a lot of behind-the-scenes programming work and some deep user-experience thinking, Kale says.

“The most technologically difficult thing we built was our mobile site, which is compatible with every major smartphone out there right now,” he says. “That was Nick’s doing. It’s not a very straightforward process to get the device location from a Web app. But on iPhone and Android, it feels very close to a native app at this point. The amount of time it saves someone to not have to go to the App Store [to download a native GiftRocket app] is a huge advantage for us, in my opinion.” (The GiftRocket location detection system doesn’t yet work on Windows Phone 7 devices, Kale confesses, but he says “we’re working on a solution.”)

Kale says the team also spent a lot of time thinking about a seemingly mundane matter—the exact wording and appearance of the e-mail that GiftRocket sends to a gift recipient (see example at left). For one thing, they didn’t want the e-mail to be mistaken for spam. “If you write in your personal message ‘Happy Birthday, enjoy some cheesecake at The Cheesecake Factory on me,’ that is what will show up in the subject line, which is a lot better than ‘You’ve got a $20 GiftRocket,’ which fires off a flag in my head,” Kale says.

After the subject line, says Kale, “The only instructions the person really needs to get are ‘One, go to this place on the map,’ and ‘Two, click on this link in your e-mail,’ which takes you to the mobile app with a picture of a gift card.” This three-step process “simplifies everything compared to what it could have been,” he says. A typical mobile-based redemption experience might have required a recipient to “download this app, log in, confirm your e-mail address, do a dance—your head wants to explode.”

While it already feels pretty frictionless, the current GiftRocket system “is a very early version of our product,” Kale says. “As you know, the philosophy in Y Combinator is ‘release, release, release, launch, launch, launch.’ But the payments world is rapidly advancing.” Within a short time, as other forms of digital cash come online, there will probably be easier ways for GiftRocket users to buy and redeem gifts, he says.

On the business side, the company doesn’t really think the 5-percent fee will be its main revenue stream in the future, Kale says. There may be much more lucrative opportunities in dealing directly with merchants—perhaps by distributing discount offers that would entice gift recipients to upspend. After all, closing a sale puts GiftRocket in possession of the kind of data that’s considered golden in the era of mobile commerce: the startup knows to a high degree of certainty that a specific person with a known e-mail address and a location-aware smartphone will soon be spending a specific amount of money at a particular location. (The only thing it doesn’t know is when.)

“There are many interesting possibilities that we haven’t explored fully yet,” says Kale. “But one thing I would love to emphasize is that we already make it possible for merchants who don’t have a gift card program, like small restaurants or bars, to get a card at their business.” In just a few minutes, Kale explains, business owners can grab some code that puts a GiftRocket badge on their website, allowing customers to jump straight to a GiftRocket form prepopulated with the business’s name. (You can check out an example of such a badge at the website for Brennan’s, a famous Houston, TX, eatery.) “This solution gets them 80 percent of the way” to having a gift-card program, says Kale. “It works for anyone who has a smartphone, and it costs nothing.”

Of course, gift cards from large retail chains still have one advantage over GiftRocket’s system: you can use them at any store in the chain, whereas a GiftRocket gift, by definition, can only be redeemed at one specific place. But Kale says “keep your eyes peeled for new feature releases” that address that gap. “Right now a GiftRocket gift for the Gap works for only one location, but it’s not a structural problem to make it work at any Gap in the country.”

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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8 responses to “GiftRocket Seeks to Take the Pain (and Loss) Out of Gift Cards”

  1. Great find Wade…crazy about this idea and it is new to me. I appreciate the emphasis on simplicity in the user experience. It takes a lot of discipline. Kudos to the GiftRocket team.

  2. Steve V says:

    Incredible idea! I constantly find myself with plastic gift cards I never use entirely. The 100% emphasis on the consumer is refreshing.

  3. Marcia A says:

    I really like this idea. Giftcard effort (or less!) with unique-gift thoughtfulness. Can’t wait to have a reason to send one of these…

  4. chris says:

    Sounds like a lovely idea, but it doesn’t work in practice. The example you give in your article (Brennans in Houston) no longer supports GiftRocket. I was the unlucky recipient of a GiftRocket dinner from a friend there. He assumed that you just went there and they knocked $150 off dinner.

    But no. There are a number of hurdles.

    First you have to convince your iPhone you are at the location. That means you have to linger outside while picking up GPS. Do you really want to get out of the car and stand around outside a restaurant to do this? Well you’ll have to if it’s a basement bar.
    Oh and you have to go to the right branch of Brennan’s. Obviously.

    Next you have to redeem _at the restaurant_. So a fancy place like Brennan’s and you’re there tapping away on your phone trying to tease a weak signal into getting you onto the GiftRocket site to redeem the thing. Meanwhile everyone else is thinking “who is this idiot with a phone at a place like this?”

    So you spend some of your relaxing time redeeming, while everyone else looks at the menu and then… you’re at the mercy of PayPal. Nothing arrives. You wait. A week later you politely inquire, where’s my money? Ah, yes, my friend sent the ‘gift’ to an email address associated with a PayPal account in another country. Many emails back and forth and you finally get the money in the US after considerable delay.

    PayPal’s a menace at the best of times and there you are, with your friend’s gift sitting uselessly in a PayPal account. Tremendous.

    When I told my friend of the saga his wedding present caused he was mortified.

    This works IF you know the recipient can get to the exact location and IF it hasn’t moved and IF you have location services there and IF there’s 3G or Wifi there and IF they have a PayPal account and IF PayPal plays ball.
    A lot of IFs.

    Fall foul of any of that and GiftRocket gets to keep the money.

    • David Sehy says:

      Confirmed. This is true. Also, despite their exhorbitant fees, they also have the option of blocking a transaction. They questioned a transaction and wasted 2 hours of my time until I just gave up. Their Mission Statement must be so long that it is unintelligible.