Folsom-based venture capitalist Lokesh Sikaria initially passed up an investment in a startup pitching a promising mobile app that was inducing college students to turn off their smartphones in class.
Why? He wasn’t certain the inventors of the Chico-based Pocket Points would be able to monetize the technology.
“We need businesses that very quickly have the ability to generate cash and thrive,” said Sikaria, the managing director at Moneta Ventures. “When we first met with them, we told them to come back in six months. ... Surprisingly, four to five months down the road, they called us and said, ‘Well, we hit the $40,000 mark.’ ”
Moneta Ventures invested $600,000 in the young company in April. Pocket Points creators Mitch Gardner and Rob Richardson launched their app in the winter of 2014 at Chico State, where Gardner was a senior business marketing major and Richardson was a junior computer science student. They have since taken leaves of absence from school to expand their mobile app business.
“In the spring of 2014, Rob and I were both students at Chico State University, and we were in class, and it was so obvious that there was a major problem,” Gardner told me. “While a teacher was giving a lecture, no one was paying attention. They were on Facebook or Instagram. They were literally looking at their phones with their heads down. They were paying to go to class, and they should probably be paying attention to the content that is being delivered.”
Gardner said he and Richardson were far from the model students, and that made them the perfect students to try to develop a solution. They came up with Pocket Points, a mobile app that students open when they arrive in class and then lock their cellphones. The app tracks the amount of time the phone is locked, and students start accruing points that they can later redeem at local or online businesses.
“Rob started creating the app, and I was going around signing up local businesses to offer discounts and incentives for students,” Gardner said. “Then in the fall of 2014, we launched at Chico State, and within a couple weeks, we saw 30 percent of the students on the app. It was pretty crazy. The next school that we went to was Penn State … and there were like 40,000 students there. Within a couple weeks, we had like 40 percent of the students on the app. It was pretty remarkable. Now we’re live in over 65 cities and over 100 schools. It’s been a pretty good ride.”
The two students had limited capital, but they were fortunate enough to have founded their business in the same city where Chico State grad Chris Friedland has grown build.com into an online home-improvement powerhouse and has become an angel investor. He read about their viral success with Chico State students, invited them to lunch and told them that he would invest $50,000 to see if they could repeat their success at five other schools.
Pocket Points has since secured roughly $1.5 million in investments. Gardner, Richardson and their financial backers continue to cultivate new investors to expand their share of a market that, by one count, numbers roughly 4,000 potential institutions and 17.5 million students.
Right now, Sikaria said, Pocket Points is probably burning through about $50,000 in investor funds each month, but that doesn’t surprise or upset him.
“They’re gaining so much traction. They could get profitable if they wanted,” Sikaria said. “But our position is that it’s OK if they’re not profitable. Essentially, what they’re doing is re-investing all their revenue dollars and venture money into growing the market. The key here is to have that first-mover advantage of being the app of choice for thousands of people. That creates a barrier for anyone else to come in. ... Our thought process is to help them raise even more money, so they can increase their spend and accelerate their growth into these colleges and schools.”
Gardner noted that Pocket Points has gone from zero to $60,000 in monthly recurring revenue in less than 10 months. The app is now available to 2 million potential students – including those at Sacramento State and UC Davis – and a quarter of them have downloaded it.
About 2,000 merchants offer deals through the app. They pay either a subscription or redemption fee to Pocket Points.
The mobile app relies upon geo-fencing technology, the practice of using either the Global Positioning System or radio frequency identification to create geographical boundaries. Dorm buildings are not included within the fence, Gardner said, but the rest of campuses are. So, students may not necessarily be in a classroom when they are toting up points, Gardner acknowledged, but he figures they will be in places where they feel it’s important not to be distracted by their phones.
Restaurateur Peter Horylev, co-owner of Brooklyn Bridge Bagel Works in downtown Chico, was one of the first merchants to agree to sign on with Pocket Points. Horylev, who’s 61, said the technology didn’t really appeal to him personally, but many of his customers were Chico State students and he’d observed how much they used their smartphones. He liked the idea that they would be able to access his coupons on a device they always had with them.
Horylev said he loves the dashboard that Richardson and his team have devised for merchants because it allows him to change the deal whenever he wants and he can monitor how deals are doing. Every year, Horylev said, there’s a group of incoming freshmen that he has to entice to try his food.
“What’s great about this app is that I have complete control of what the deal is and the number of points they have to accumulate to get that deal,” Horylev said. “So, for example, at the beginning of the semester, I’ll give something totally away for free. There is no obligation. They can just walk in the door and get a free bagel with cream cheese. ... Then as the year progresses, I might say buy one, get one free, or I might increase the number of points it takes to get something, so it makes it a little more difficult.”
As a venture capitalist, Sikaria said, he frequently hears entrepreneurs making outsized projections on revenue growth, but that has never been the case with Gardner, 23, and Richardson, 22. The app has been so successful in colleges, Sikaria said, that the company has been contacted by high school administrators who want to use a carrot approach to get their students to turn off their smartphones. And, he said, because it is a mobile app, there’s the potential to develop technology to reward motorists for turning off their smartphones while driving.
“That’s a future market space that they could go after,” Sikaria said. “Just between colleges and high schools, it’s a vast enough market that they could be incredibly successful. They’re going after a demographic that is very highly sought after. When you look at the ages that advertisers and everybody wants to engage, the 18-30 group, that demographic is a huge part of their base.”