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 GiftRocket.com 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 … Next Page »

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Wade Roush is a contributing editor at Xconomy. Follow @wroush

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