How to Launch a Marketplace | Derrick Fung, Founder of Drop

Intro 0:00 It was contentious. We did get cease and desist letters. We called it conversation and discussion. And so, we said, "we know you sent us a cease and desist. Okay, we'll remove your logo, but hey, why don't we just do a deal? We're going to be driving you sales, so we can prove it." Pablo (Host) 0:15 Welcome to The Product Market Fit show brought to you by Mistral, a seed stage firm based in Canada. I'm Pablo, I'm a founder turned VC. My goal is to help early-stage founders like you find product-market fit. Today, we have Derrick, the co-founder and CEO of Drop, a mobile app that helps you earn rewards from all types of merchants. Drop is based in Toronto. They have about a hundred employees and have raised over $15 million . Derrick, it's a pleasure to have you here today. Derrick (Guest) 0:46 Hey Pablo, great to be on. Pablo (Host) 0:47 The topic of today's episode is how to launch a marketplace. And founders know that launching a marketplace is notoriously hard because you have that… launching any product is hard, but launching a marketplace, you have two sets of customers, and you have that classic chicken and egg problem. And you have to think about how do you get one side without getting the other, and how do you fake it until you are post-launch, and you have flywheel effects, and then things start to hopefully get a little easier. Let's start, maybe in the early days. As I understand it, you were an EIR at another VC firm, and you kind of came up with this idea of rewards platform. Let's touch on that a little bit. How you came up with the idea itself. Derrick (Guest) 1:29 Yeah, for sure. As of yesterday... yesterday was our five-year anniversary... Pablo (Host) 1:36 Nice, congratulations. Derrick (Guest) 1:36 Thank you, and to your point, actually, it does not mean it gets easier over time. I think the problem that you're really trying to solve evolves and potentially even changes. I'm a serial entrepreneur. Coming up with the idea Derrick (Guest) 1:56 My last company was exited in 2013, I believe, and the buyer, called SFX Entertainment, they IPO'd , we m oved to New York. The CEO of SFX started Live Nation. So, we owned and operated massive music festivals. And I then found myself in New York, a fter selling, thinking a lot about... because the CEO came up t o me and said, Hey, Derek, we have hundreds of thousands of young people coming to our music festivals. Tomorrowland was the big one that we owned in Belgium. It's great, but as you know, part of our business model is sponsorship, and we have a ton of big name sponsors, but the challenge is the fans are coming to our festivals when they leave, what happens? And how do we then prove that you came to our festival, you saw our sponsor's logo, and you actually went in store and started shopping and buying their product? And so, we started thinking a lot about, s h opping data. We st arted thinking a lot about interacting, engaging with consumers in those 360 days of the year when they're not at any of our music festivals. And then we just sta rt th inking a lot about loyalty and rewards, and that was, 2 0 13, 2014. A s a Canadian, we all know Air Miles, we all know, that if you walk into one of the few grocery stores, one of the few pharmacies, one of the few gas stations, you'll probably see Air Miles' sig nage. And, yo u probably are a member of Air Miles. I think something like one in three Canadians are a member of Air Miles. So, this concept of cross merchant loyalty rewards, I k n ew it wa s very big. But I started then play ing around with the products, and realized, wow, they're so outdated, they're archaic, you have to swipe a physical card at the checkout. The mobile experience wasn't great. The merchants on the platforms weren't great. So then I just started thinking beyond just music festivals and thought there was something much bigger, outside of that. That was five years ago and fast-forward to today, we've become one of the larg e st mobile rewards platforms in North America. Pablo (Host) 4:00 What were the pieces you needed for launch? First of all, in the marketplace side, what were the two sides? Obviously consumers on the side, I assume merchants on the other. And then, as you thought about MVP, what were some of the key things you knew needed to be in there? Derrick (Guest) 4:14 It's Fake it till you make it Derrick (Guest) 4:15 a good question. Marketplaces are notoriously hard to build , especially when you think about an Air Miles type of model where you actually need the merchant. They have to let you build into their point of sale terminals. We said if this works, we're going directly to consumer. They put in their banking information, we don't need to do any integrations with merchants. And so, instantly the consumer side is a lot easier… sorry, the merchant side is a lot easier because we then said to ourselves, could we not fake it till we make it? Could we not just put up logos because if the consumer is linking their bank account, we know already where they're shopping. And could we not just say, shop at these places, get points, and they do, and we see it without any merchant integration. And so, that was the big secret sauce, aha thing, kind of realization we had in early days. It's why we've had to raise the amount of money that we've had to , to essentially... Pablo (Host) 5:12 Was that contentious because first of all, you're faking it. And second of all, you are taking those points out of your bank account. Those points translate to dollars, right? You're effectively just putting that up. Derrick (Guest) 5:21 It was contentious, but we did get cease and desist letters. We called it communication and discussion, whereby we actually reached back out and said...sorry, conversation and discussion. And so, we said, "we know you sent us a cease and desist. Okay, we'll remove your logo, but why don't we just do a deal? We're going to be driving you sales, and we can prove it ." The thinking and strategy really is pretty simple. It's how do you keep this consumer engaged as much as possible, to open up the app as much as possible. When you really think about it, is having as many relevant offers. So, we knew everyone shops at and everyone loves Amazon. Everyone loves Starbucks. Everyone loves Metro in Canada for grocery. And because we launched Canada first, when we went to US, whatever the relevant U.S. Grocery is, and that's it. And then we said, Hey, this ball's simple, and all these other ones are the cherry on top for now because we just need to get enough users to then go pitch the actual merchants to do actual deals with them so that they would actually listen because we can then say we have users, and we have a product that works. And so, that was the big focus for, I'd say, the first year or so. Founders need to take risks Pablo (Host) 6:33 Let me just dive into that cease and assist for a second. In one sense, it's kind of an obvious thing to do, it just speeds up the flywheel so much, but how did you think through that? Because a lot of founders might look at that and say, what if. What if they would have not just sent cease and desist letters but. can they sue you, what can they do? And is t hat where you want to be stuck at? I think it's a hundred percent the right choice. And when you look at Uber and Airbnb and t he stuff they had to do... What's the thinking? You're talking about first time founder right now who has this kind of choice to maybe fake it and go into, let's say, a grey area. How do you think through that? Derrick (Guest) 7:06 I don't think there's much thinking other than founders that figure it out. And if you look at companies like, even Instacart. I've met , not too long ago, the early CFO of Instacart who, they would get the police called on them because shoppers a re illegally going into a grocery store without permission, and they would get kicked out of places. And so, I feel like it's really just the strength of the vision. I think there has to be true conviction, a hundred, 200% conviction to build these types of businesses. And if you don't have that level of conviction, don't do it because it's g oing t o be hard. And I think it's why V Cs, a c tually lik e th e fact that we were doing this to get to scale because a lot of companies maybe wouldn't have gone that far. Pablo (Host) 7:53 And leading up to the launch, what are you doing from a go-to-market marketing side? Are you doing anything up until the launch, or are you waiting until you launch and just putting it out there? What are those pre-steps that you're taking? Derrick (Guest) 8:07 Yeah. I'd say , having been a t this now, in s tartups, for almost a decade, I'd say, I've been... my view of like press and media has evolved and changed. I'd say even a lot of consumer companies launching at South by Southwest, it's so noisy. I think the big focus was just consumer value. It was just, hey... A n d I ran the Facebook ads in the early days, so I actually can talk a bit about what we thought that value was. And the value was t h e ads would say things like earn points at McDonald's, Amazon, Starbucks, brands that we knew that they would like, no-brainer, that would normally actually not pay out points. Like McDonald's, back then, didn't have a loyalty program. Amazon still doesn't really have a loyalty program. So, that was the focus. It was really just focused maniacally on how do we have a no-brainer value p rop t hat we can go to market with, and then we just essentially ran ads against that. Like an ad that looks like an ad, and it didn't really work. And then an ad that, literally, was a photo of a chick e n nugget and people just loved it, and they clicked it, they downloaded Drop . And so, they linked their card, and they were then seamlessly earning points . I think that... Pablo (Host) 9:20 This was before the launch or only after? Did you get a waitlist going or anything like that before? Derrick (Guest) 9:25 We did a waitlist, we did an event. I'd say all that was good hype. That hype though was to help us get merchants, not consumers. Pablo (Host) 9:32 I see. Derrick (Guest) 9:33 To make Drop a more real brand company. I remember we would take photos from our launch parties and whatnot, and just find ways to share them and have potential partners that w ere pitching, see them on our LinkedIn or meet just casually in conversation: oh yeah, we had a party, take a l ook, it's cool. That was really the point of... that's what we did on the merchant side because we didn't run any ads on the merchant side, we just tried to make us more real through events and that type of stuff. And then on the consumer side, just consumer value. Pablo (Host) 10:09 But when it comes to apps and digital products for consumers, do you feel you kind of have to wait until there's a launch in order to run the ads and see? Because maybe you launched when the cap was way higher than you expected it. Now, what do you do? How do you think through that? You did it a certain way. Is that the way you would do it or would you today say, you know what, let's launch ads at the beginning, see what the CAC is. Derrick (Guest) 10:32 Would I've done things differently? Maybe run ads before raising money and then use that. And maybe we would've raised more money or got a better valuation because we had more data. So maybe that, but I'd say we just had a really good gut. Why would a consumer not want this? And even to this day, Drop, the reason why we're top 20 in the app store i s because it's such a n o-brainer value prop . And the only thing really stopping consumers is friction or opportunity costs, are there other apps that are better or are they open to giving up banking data. Because that was a big part in the early days of Drop , you had to link your banking credentials to use the app. And so , I'd say I 'd still think that's the way to think about it. But it depends on the product, and for our product, I think that was the right way to think about it. I look bac k, I actually wish we just launched the U.S. r i g ht away. I do give founders now advice if they can launch the U.S. right away, just do it beca use I l ook bac k and th e r e was nothing... Canada, U.S., we l earne d there wasn't a big difference in the market. We had our gut. We should have trusted our gu t m ore and just launched the U.S. Launching in Canada vs US first Derrick (Guest) 11:46 first. Pablo (Host) 11:46 Why at the time did you decide to do Canada first? And why might you today just do it all at once? Derrick (Guest) 11:52 I think it was a combination of we were thinking about launching U.S. It's very scary, it's this massive market. Who knows what will happen. What if we get sued in the U.S., will that bring down a company quicker? U.S. i s more litigious. A lot of that stuff, we weren't really sure the regulatory and all of that. And also, we just had more relationships i n getting offers from our network in Canada. But when I think about it looking back, y e a h , definitely, should have just launched the U.S. and then, same playbook and maybe just not as quickly, slowed it a little bit, but, that w a s another... that was a big learning curve for me as I look ba ck int o the early days. Pablo (Host) 12:39 In a launch, what's the hardest parts of the launch? And I think driving traffic has to be at the top of that pyramid and driving quality traffic for an appropriate price. Just on social because I think it's a g o- to place. Today you're launching this new product, and you're probably thinking I'm going to run Facebook ads, pay -pe r-click, IG, whatever. Five years ago, that playbook versus today, how do you feel about it? Has th at ch anged or that's still the number one way to go for most consumer products. Derrick (Guest) 13:05 It's definitely changed, especially in our categories. It's gotten more crowded. It depends on your stage of company, but early days, focusing on number of installs , costs of installs is important. It shows consumers high-level want to use a product, download it, but you know, the average - t his is a crazy stat, and I'm pretty sure it s till applies - the average number of apps that consumer downloads a year i s zero. They del ete just as many apps as they download. So, it's gotten a lot more competitive to get consumer attention. There's a lot of apps. So, I'd say, fo r founders, I think early days for sure, that t he foc us still should be top of the funnel growth, but I would advise, what is that metric? Is it cost per install, but think, be thoughtful about that. What is that top-line metrics? So for Drop, early days, we would say, let's optimize the heck out of installs. But if I were to be really tough on myself, or ourselves, I would have said, no, the focus should be, you've downloaded the app, you've onboarded. If you want to take a step further, even more, you've downloaded the app, you've onboarded, and you've clicked on an offer. And if you want to take it even a step further, you clicked on the offer, and you actually completed it. And if you want to take it even a step further, and this is where now, many years in, this is what we're focused on. It's like you've gone, done all that, and y ou've redeemed for something. If you think about it, like that is ultimately when the consumer really gets value. What does it mean if a cons umer is o n your app for 20 minutes, or what does it really mean now when the y've downloaded an app? There's just so much noise out there that I think founders need to be very thoughtful about wh a t that should be. Pablo (Host) 14:48 The traffic itself, in all likelihood, for a consumer startup in the early days is coming from paid channels. Derrick (Guest) 14:55 We were doing a lot, we were doing paid, but I'd say these days... I remember when fundraising... especially at this stage, but I definitely would presume in early stages, investors will still ask what is your proprietary channel? What is something in wh a t yo u can get scale and us ers and what you're not paying. Because t here's that running joke, 50% of VC dollars go to Facebook ads and Google Ads. So, everyone... Pablo (Host) 15:18 That's where ClearBlanc was b orn. Derrick (Guest) 15:21 Exactly. I think everyone does it, but what is t hat one thing you know that others may not. And I think for us, it was, a value prop . I think it was just like really focusing on the va lue prop. Pablo (Host) 15:36 Did you go pretty heavy on either affiliate or influencer or especially referral and getting people to invite other people and build in vitality from day one, or was that a later thing? How much emphasis do you put on that? Derrick (Guest) 15:47 We did that when we launched the U.S. and looking back, it was both, it was a double-edged sword because I think it was a big part in helping us. We charted in the lifestyle category of the app store to number two under Tinder. We've since moved to shopping category where we're continuing to chart, but that helped us raise arou nd, tha t got us hundreds of thousands of users a month. By l e veraging referral, by leveraging a combination of, at t h e time Snap stories was just starting out, and so the costs were low the en g agement was insane, certain S napchat influencers, we found a way to them. And so, literally, over a weekend, we get 25,000 downloads from one influencer at a dollar CPI. And, how they would promote the product though was, download the Drop app, link your card , do a bunch of stuff that you're going to do anywa y , get free points, and you ca n redeem for, use my code, and you get a lot of top-line growth. But then, we bled money. And also a lot of those users just did that and disappeared. They're like, okay, well, this influence i s t elling me a t hing. I like this influencer, I'm go ing t o d o it and then churn. And so, again, it goes back to stage, it goes back to where you're at as a company. And I think for us, it did help raise our round, and it helped show top-line growth, but then it sort of, ultimately, b a c kfired a bit because, longer term, a lot of those users churned , an d our cohorts suffered as a result. Growth at all costs Pablo (Host) 17:19 That's just such a classic story in consumer startups that get crazy virality for whatever reason, a nd then it all kind of, not all comes crashing down, but it kind of c omes way back down once there's not many left to spread to. But in the early days, and thinking fake it till you make it and so on, what I'm hearing between the lines is that happened at D ro p to an extent, and yet it was still potentially positive, like net positive, right? How do you think abou t tha t? You' re an early, early founder and you have these growth hacks in mind. Do you leverage them in order to grow top line, in order to get to some next milestone, which will then help you, et cetera, et cetera, or do you do watch a lot of the retention and the true value super early on? Derrick (Guest) 18:03 If I had perfect information looking back, and for example, knew that there would be a VC that would just keep funding that all day long, funding the business at negative gross margin, as long as we keep growing, then sure. We would not have made some of those tough choices, but, we made them because, now it's 2019 and to fundraise, there was a big focus on unit economics and payback and all of that. And I think, it did n' t have to be fully solved, but we needed a story. And as we were operating in a v er y unideal state around cost margi ns and whatnot, we just said to ourselves, this is just the right thing to do because this business isn't sustainable becaus e we're just burning through investor money and not doing deals with merchants and partners and have them pay. So, I'd sa y t here's no playbook for sure, and t h e ma cro climate for sure was part of our decision-mak ing around some of these things. Pablo (Host) 19:00 When you look at something like B2B SaaS, on the other hand, the classic playbook is if you can worry about... you have growth on one side, you have retention on the other, how do you get to a hundred million dollars in ARR? Do you worry about growth first and then solve retention, or retention first and then solve growth. And it's kind of the standard answer that you should solve retention first, make sure you don't have a leaky bucket, make sure you really understand it , who gets true value and why. And then you can always figure out top line and start dialling for dollars and scale that side of the business later. What I'm not sure about, and maybe it's a bigger question mark for consumer. And that's what I'm trying to drive at, is that, is that even true in consumer? Because in consumer, you kind of need to get above the noise. You do need to be hot, right? You have to be top two or top three in order to really drive momentum. And maybe you got to get there in ways that aren't so scalable when you fix it later. So, how do you think through that? Derrick (Guest) 19:50 A hundred percent, you're correct when you say that. I'd say t h e challenge with marketplaces, and when I talk about Drop in ma rketplaces, I actually think it's a three-sided marketplace, there's consumer merchants, and then there's Drop. But Drop has to benefit Drop. It's important for us to have val ue to o . A nd I'd say, e a r l y days, it was very consu mer focused, and t h en it was, if we want Drop to be around, our business model has to make sense. And then, so we then focused on that, and the challenge is that it's very hard to keep everyone happy. In early days, consumers were winning because the y're g etting a ton of v alu e. Mer chants, for t h o se who were on Drop, t her e was no fee, there was n o set u p f ee. It was a no-brainer. It's like, yeah, I'd love to be on Drop. And you're going to drive new sales, and I'm going to pay you only when you drive me sales. So, they won but then Drop wasn't winning because w e 're j ust burning through money at a not ideal, f i n a ncial profile. And then we said, okay, we think the consumer side is now there. We think we have enough to then sell the merchants. Let's focus on us. And so for us, that was a foc u s on what metrics do we need to raise our next round and to be sustainable, gross margins, new economics, retention, retention, retention. And t h en we shifted that, and then in later rounds, the big focus was okay, well, it looks like consumers are using your product, it looks like you're in a much better spot now on the actual business. Hey, can you show that these merchants are not only retained, but they are increasing their budgets with you. They view you as a must-have versus a good to have. And so, then the shift becomes that, and so I feel like there's multi-sided things to focus on. And I think it's a matter of just knowing some of it's g ut. I t hink for us, as you said, if we launched Drop today, would it be as buzz worthy? Proba bly not, but wa s that important to get the buzz when we first launched to get investor money, to get merchants, to be aware of? Yeah. So then we said, okay, well, let's focus on that side of the marketplace first. Pablo (Host) 22:04 How ma ny installs, where did you get to when you went out and raised that seed round? Derrick (Guest) 22:08 I think tens of thousands of installs, and then we did the seed round and then hundreds of thousands when we did this series A. Pablo (Host) 22:15 Did you notice any meaningful differences in the U S versus - obviously you had more learnings - but us versus Canada launch? Derrick (Guest) 22:23 Everything was better. Consumers were more engaged, it was cheaper to acquire, they were more retentive on the product, everything was just better. And that's where I look ... and we actually, I think, got less cease and desist letters. A lot of the VCs who passed on our seed round, it was because we weren't in the U.S. yet as well. So if we just had launched in the U.S., would we have raised some more competitive seed round or A, or... So, I do think t hat was a big learning, looking backwards. Recap Pablo (Host) 22:52 All right, so we'll stop there. Maybe just to recap quickly , y ou had this idea for a rewards platform, yo u f ound a way to make it just a c rystal clear, very compelling value prop. An d t hat's at t he heart of all this because with a weak v alue prop, CAC g ets more expensive, installs don't happen. You really need that in there. And with that; you raised a pre-seed, you launched in Canada first; you got to a m e a ningful number of installs at a very reasonable CAC; you put in some kind of referral-based co m p o nents to the app; you worked with influencers to really grow it, to launch in the U.S. and; you kin d o f got to a place where you felt there w as PM F, even if you want to call it fake PMF, because you wer e g i ving out mo n ey, but it was still PMF with a clear path towards fixing whatever issues you had at the time. And now, when y o u 've continued to grow, as you mentioned early on, you're the top of the a p p store in the shop pi n g c ategory, which is awesome. So, look, Derrick, thanks a lot. I really appreciate you sharing all that with us. Derrick (Guest) 23:56 Great. Thanks again for having me. Pablo (Host) 23:58 Thank you so much for listening all the way through. It's been a pleasure having you here, make sure to subscribe, so you don't miss the next episode.