How VCs are like Gift Card Businesses

5 days ago was Black Friday, a global retail holiday with no obvious connections to startup fundraising insights.

Leave it to me to find one.

Planning presents for my niece and nephew had me thinking about one of the most popular holiday gifts in the US and its connection to an important lesson for dealing with VCs.

The item?

Gift cards.

The Gift Card model in Venture Capital

To understand the connection to VCs you have to understand the gift card business model.

How do companies make money selling gift cards? It’s somewhat confusing because a $10 gift card has zero inherent margin. The company who issued the gift card has to deliver $10 of value to the person who paid $10 to receive it. In other words the COGS of the product is 100% of the retail price.

So why and how does this work? The answer is something called “breakage.”

Breakage

Breakage is the value of a gift card that is never redeemed. Breakage creates margin for the selling company and is why gift cards work as an actual profit-driving product.

Companies sell gift cards assuming a portion of people will lose or otherwise never get around to redeeming them.

So how does this relate to VCs? There is a similar dynamic as it relates to a VC’s effort to generate deal flow.

VCs create deal flow in a number of ways:

If you notice the purple stars on the diagram above, many are reliant on the help that VCs provide the ecosystem. The more help a VC offers, the more reciprocity they will leverage to have good deals sent their way. And the more a VC is thought of someone that is helpful, the more good deal flow sources will want to spend time with them.

A key distinction, VC Breakage

A key distinction is that a VC doesn’t need to fully deliver the help they offer to capture goodwill. Their offer on its own boosts their reputation.

In some ways, VCs not only know this but depend on it to maintain their approach to business. It’s their own version of breakage. They offer WAY more help than they’re able to deliver on.

By offering to help, a VC gets their name in the good graces of the people they offer the help to. This creates a virtuous circle of more and more introductions to entrepreneurs looking for help.

What to do with this…

Now I know what you’re saying. “Interesting analogy, Jason, but how does that impact me?”

Here’s the trick. The same way I’d encourage you to keep track of those gift cards you get for Christmas, you should take note of all the gift cards VCs give you when you meet with them.

The same way I’d tell you “go spend that Best Buy gift card right away so you don’t forget it,” I’m also telling you "they offered to connect you to that valuable contact – make sure you follow up and remind them!”

Cash in your VC gift cards

Make sure when people offer to make connections for you or help you in any way, politely follow up after the meeting to remind them. If they didn’t want to help you, they shouldn’t have offered. 

The best method is to send an email right after your meeting thanking them for their time AND for the generous offer to do X, Y, and Z. You’ll not only remind them and graciously accept their offer in this post-meeting recap email but you’ll can also softly nudge them with a “hey just a quick check – were you able to…” if they don’t follow through on their offer within a week 😇

A final thought

While I am calling this situation out as “VC gift cards,” if you work in the startup ecosystem you will realize that many players besides VCs also rely on “gift card” offers and breakage.

In any similar situations, you should remember my advice and proactively follow up to cash in those gift cards!

Who knows what those offers will lead to…