The following article by Stephanie Palmer-Derrien first appeared in SmartCompany, Startup News on Friday, 15 February, 2019. The article is reproduced here in full.
Rewards startup OpenSparkz has secured $1.5 million in an over-subscribed second seed-funding round, despite being pre-revenue.
Founded two years ago by chief executive Terry McMullen and co-founders Ian McKenzie, Debra Taylor and Nigel Lovell, OpenSparkz is a Platform-as-a-Service startup allowing consumers to consolidate multiple loyalty and points programs into one.
The investment was led by Louise Daley, deputy chief of Accor Hotels Asia Pacific, based in Singapore, who invested privately and will now sit on the OpenSparkz board.
The round also included additional contributions from the co-founders, as well as from existing backer and board member Andrew Lo, who is the founder and chief executive of Hong Kong-based EFT Payments.
Speaking to StartupSmart, McMullen explains there are 60 million loyalty memberships active in Australia alone — that’s an average of four for every adult.
However, the two-step process of finding the right card and scanning at the point of sale before paying is “a real engagement killer”, McMullen says.
OpenSparkz allows customers to register or link their existing loyalty schemes to a particular payment card. As long as they pay with that card, they will get the rewards.
“A two-step process becomes a one-step process,” he says.
For merchants, OpenSparkz is intended to remove the need to marry up transaction data, integrate with loyalty and offers hosts, and train staff in the programs, in a bid to “eliminate the cost, friction, frustration and disenchantment” in the process.
“A ringing endorsement”
OpenSparkz raised its first $1 million seed round in 2017, and has spent the past 12 months working on building the product and integrating with global payments schemes.
“It was a long process,” McMullen says.
The fintech also had to become certified for compliance with the Payment Card Industry Data Security Standard — a requirement for any company dealing with payment card data.
“It was a very intense, very rigorous three- to six-month process,” he says.
“But we got our certification.”
The startup is still pre-revenue, but for the past six months the founders have been looking for organisations to sign up to the platform, and they’ve been successful.
“We will bring the first programs to market in the middle of next year,” McMullen says.
The startup is on the verge of signing contracts with a “major shopping mall in Asia”, with some 12,000 merchant outlets, and there are “several other significant opportunities in the pipeline”, he adds.
“We’re really just moving from being a startup into being a scale-up — that’s why need needed the second raise.”
The funding will be used to continue this drive, and to work on further product development, McMullen says.
“We want to be at the forefront of creating new and better experiences for consumers and merchants.”
Once the startup is out in the market later this year, McMullen has plans for a Series A raise. This time, it will have a target of US$5 million ($7 million), to fuel further expansion throughout Asia.
Being oversubscribed for the latest round has given the OpenSparkz founders something of a confidence boost.
“It’s a great message to take out into the market”, McMullen says, especially given the “calibre” of the shareholders.
EFT is an “innovative successful payments company” in Hong Kong, while Accor’s loyalty program has more than 50 million members, he says.
In both Lo and Daley, OpenSparkz has secured investors who “really understand loyalty programs”, he says.
“That’s a ringing endorsement.”
The investors also give the startup a valuable presence in the Asian market.
“While the technology is cloud-based and can be deployed globally, “we’re really focused in Asia, because loyalty and offers are embedded throughout Asia”, McMullen says.
“To have the investor presence in Hong Kong and Singapore really helps us with our Asian expansion plan,” he adds.
“Tougher than you expect”
For OpenSparkz, it’s been a long road to get to the point where profitability is on the cards. But it’s nothing less than what the co-founders expected.
“We have all been in loyalty and payments for decades,” McMullen says.
“We’ve all been around the block.”
The founding team knew exactly what they were getting into, and so far the startup is “pretty much on track” with their expectations and timeline.
Also, McMullen suggests a little life experience goes a long way in the startup world.
“We don’t make as many mistakes now, because we’ve made a lot of mistakes before,” he says.
“We’re all really clear on the vision … we see an obvious gap in the market, and we’re focused on going for that. We’re not easily distracted by other things that pop up.”
However, McMullen also has some advice for other startups. Although the OpenSparkz founders were aligned in their thinking, it was still important to validate that in the market, he says.
That means talking to potential business partners and customers.
He also warns founders to be prepared for some big problems to come down the track.
“The journey is always tougher than you expect,” he says.
“Often the biggest problems are also the most unexpected,” he adds.
It’s also important to be realistic about whether these problems are something you can overcome, or whether “you should think about a pivot”.
OpenSparkz has faced significant unexpected issues, he says, but so far, nothing that has convinced them they’re not on the right track.
“Things can change very quickly,” he says.
“Be realistic about how you cope with that change.”
Finally, McMullen notes that as an early-stage, pre-revenue startup, in his experience it has been more fruitful looking for funding overseas.
“Australia is a tough market for a pre-revenue startup to raise money,” he says.
It’s essentially the same process, and the same amount of effort to look in Asia, he says.
“Money for pre-revenue startups seems to be more available in Asia,” he adds.
“Don’t be frightened or afraid to go offshore for funding.”