Derrick Fung is the co-founder and CEO of Drop which is an intelligent mobile rewards platform for debit and credit cards. The company has raised over $70 million from investors such as NEA, ff Venture Capital, Sierra Ventures, CRCM Ventures, Rothenberg Ventures, Hedgewood, White Star Capital, HIGHLINEvc, and RBC Capital, to name a few.
In this episode you will learn:
- Derrick’s breakdown of their last four funding rounds
- Why Canadian entrepreneurs should launch in the US first
- How to survive countless investor rejections
- Leading with culture and core values
- What retailers are doing instead of paying for Facebook and Google Ads
- Who you need to hire first
- The multi-billion-dollar moves banks are making, and what’s coming next in fintech
For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
The Ultimate Guide To Pitch Decks
Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400 million (see it here).
Remember to unlock for free the pitch deck template that is being used by founders around the world to raise millions below.
About Derrick Fung:
Serial entrepreneur, Derrick Fung is CEO and Co-founder of Drop – an intelligent mobile rewards platform that curates personalized offers and rewards for everyday spending.
Derrick began his career in Sales and Trading where he left to start a social music platform Tunezy, which was the winner of the Billboard’s Innovator’s Showcase.
Tunezy was acquired by SFX Entertainment (NASDAQ: SFXE) in November 2013. Derrick stayed on as Vice President of Business Development where he helped the international expansion of large music festivals including Tomorrowland.
Derrick has been featured in Forbes, Business Insider, Fast Company, Fox News, Globe and Mail and The Huffington Post. He was awarded Forbes Top 30 Under 30, alongside Bruno Mars, Drake, Lady Gaga and Avicii.
Connect with Derrick Fung:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello everyone, and welcome to the DealMakers show. Today we have a founder from Canada, out of Toronto, that I think he’s going to be teaching us quite a bit on building and scaling. He’s done it a few times going through the full cycle. Also, growing up, his parents were entrepreneurs. It’s going to be interesting to hear of that transition and that journey. So without further ado, Derrick Fung, welcome to the show today.
Derrick Fung: Thanks for having me. I’m excited to be here.
Alejandro: Originally born and raised in Toronto. How was life there growing up and especially being in a family that was very much entrepreneurial?
Derrick Fung: Toronto’s a great place, especially more and more in recent times. It’s been getting on the radar with musicians like Drake and the Toronto Raptors recently winning the NBA Championships. Toronto’s a great city. Having lived in New York City, as well, Toronto is like a mini version of New York. It’s a very diverse community of really nice people here. It’s been a great city to me. We have great talent for tech with great schools. For anyone who’s listening who has never been to Toronto, I highly recommend that you make a trip out.
Alejandro: Yeah, and I’ll have to agree, especially because my wife is Canadian. Otherwise, she will get upset if she listens to this episode because she’s from Montreal. Good stuff. Derrick, I know that you are very much a finance and economics kind of guy. That’s actually also what you studied. How did you start to develop that love for numbers? Was that something that you saw growing up and your parents telling you how important it was for you to have a real grasp on the numbers? Or how did you develop the love for that and for business?
Derrick Fung: I’d say just growing up. I was big on the internet, and I’d say part of it was from my parents. My dad is in the medical field, where numbers are very important, but a lot of it was just growing up. Whether it was through video games or playing chess online, I’d say growing up with the internet at your fingertips was what helped me get better with numbers and also helped drive my fascination with the economy, economics, and finance. Wall Street — here in Canada, it’s called Bay Street. Plus, stock trading, computers, and all that kind of stuff. I think it is part of the environment I had while growing up. It was always something I was good at. Even as an entrepreneur and as a founder, numbers don’t disappear. I think it’s something that’s very important, whether you’re raising money or building a financial projection for your financial forecast. It’s the way I grew up that has led me to be fascinated with some of these things.
Alejandro: One of the things I saw is that you also did amazing internships, so once you were ready for the labor market, you were more than prepared. It’s typically not the case. How did that happen, and what did you learn from that?
Derrick Fung: Yeah. I’d say my program at the University of Toronto had a co-op program that allowed you to do internships throughout your four years of school. It was very interesting. I was very intrigued about the internet, and I had been building websites since I was young. My first internship was at Microsoft in 2006 during the whole Vista and Office blowup, where Microsoft, for the first time ever, started to struggle through not releasing a great operating system. From that, I went on to finance. My next couple of jobs were in sales and trading. I worked at BNP Paribas, the large French bank in equity and derivative sales. Then, I landed a job at Merrill Lynch, again, during a crazy time. When I was there that summer, the bank actually merged and collapsed with Bank of America. I was at Merrill Lynch during that whole fiasco. Then, the Clinton Foundation, in New York, where I worked for the Clinton Global Initiative, which is the annual conference that Bill Clinton hosts every year. After that, I landed fulltime on the trading floor at CIBC, one of the big Canadian banks. So, yeah, all types of different fields, and I’d say all of them, numbers being very important, but then, ultimately, I left finance soon after joining. The world was very different. The world had just recovered from a global financial collapse. This was 2011/2012. Finance was very different with a lot of young people coming out of schools during that time. It was a very different time, and it was when tech and startups started to pick up. This was 2012. Since then, I’ve been building and working for myself and on my own companies.
Alejandro: That’s really interesting because you literally went from working at big banks and the traditional journey of everything being stable. But it seems like the economic crisis and that market correction, perhaps, shook everything up and also shook you, too, because you literally went from banking and all the traditional journey to going at it as an entrepreneur. And, more than anything, going at it with something completely different, which was entertainment and music. What happened?
Derrick Fung: Yeah. One of the key traits of being successful as an entrepreneur is being able to adapt. My first company was in the music entertainment industry, and it was tough to raise money. It was tough to even attract talent unless you were attracting talent and were passionate about music because there wasn’t a lot of money in the music industry back then. Of course, the music industry now is at its all-time peak. It’s higher than it was prior to Napster, MP3s, and piracy. The challenge back then was investors didn’t want to invest in the space that they thought was dying because people didn’t want to buy music. But we made it work. We built a company and sold it to a company that ended up going public called SFX Entertainment. They IPO’d on the Nasdaq in 2013. I stayed on for about a year. It was there that I got the idea for Drop. The name Drop comes from the term bass drop from trance dance music. The idea came about through the CEO of SFX, saying, “What do you think about building a loyalty program for music festivals?” I started looking into the loyalty space and realized how old, archaic, and outdated the industry was. That’s how I started digging into the whole industry and realized after something bigger and beyond the music festivals. This was 2014. By then, I had convinced my brother, Darin, who was in San Francisco, to come join me and start the company. We did that and started operating in January 2016. It’s been wild, fun, and exciting, but challenging the last couple of years, but I think that there really isn’t a direct, clear tie-in to music and rewards. But I will say the one similarity that I think is important is, they both involve building products that are fun and rewarding for consumers, things that are entertaining, and they’re both industries that evolve and change very quickly. Yeah, that’s how it all got started.
Alejandro: That’s amazing, and especially the fact that you got your brother because you also had your brother on Tunezy. After that experience, it seems that he went at it a little bit more on the safe side, working with companies like Amazon or Eventbrite. How did you convince him to go at it again and start putting fires out?
Derrick Fung: Believe it or not, the first idea and concept for Drop was actually going to be an event-ticketing loyalty-type of product where we would take your tickets, whether it’s a music festival, shows, or whatever, and through your email, scrape your email and consolidated all your tickets onto an app and then give you points for going to shows and spending money. That was the original idea. He got it, and he had that experience. So, that’s how it all started. I pitched him a ton of ideas like crypto and payments, but it didn’t get him excited. However, Drop and rewards and making consumers happy and giving them ways to save money was super exciting, and that’s how I convinced him to join me with Drop.
Alejandro: Very cool. Tell us about the process of putting something out there, something that you could start to get some data points and to get to that promised land of product/market fit. What did that look like?
Derrick Fung: At the end of the day — and that’s a great question — consumers have so much choice and so many options. The product/market fit has evolved so much. When you look at 2012, when I first started in tech, product/market fit was about growth. It was about how many users are using your product, and are they downloading your app? That was at a time when there weren’t as many apps out there. It was much easier to get consumers’ attention, and it was much easier to get them to use your app. In today’s day and age on product/market fit, it’s gone beyond just growth and vanity metrics and numbers like downloads installed or even metrics like active users. Product/market fit, truly now, is if you poll your consumer and ask them, “If Drop disappeared or if my product disappeared tomorrow, would you be upset?” That is a more accurate way to measure product/market fit is in a world where consumers have so many apps, and there’s so much stuff going on, are you able to be on their home screen of their app versus how many people are downloading your product. Especially in a world where there are so many companies are raising money, and it’s easier than ever before to drive installs or registrations, it’s deeper now in the funnel beyond just topline metrics like that.
Alejandro: That’s very interesting that you mentioned that because that’s also something that I have typically done as an operator. Basically, that question where you asked them, “How disappointed would you be if you could no longer use this?” And you give them three answers like not disappointed at all, or super, extremely disappointed, or somehow disappointed. If you don’t get the super, extremely disappointed to be, let’s say over 60%, you need to go back to the drawing board. But in your guys’ case, what did it take in order to get to that 60+ percent of people being super disappointed?
Derrick Fung: I’d say making the product super seamless was probably the biggest thing we could do. With the product, we were giving away points to consumers. I think it’s having relevancy, so having the relevant brands, and making it super seamless. Plus, it’s customer support and customer service. Consumers, these days, expect a lot. Ensuring that all those things were working was very important for us as we got to product/market fit.
Alejandro: Got it. So that the people that are listening will get it, what is the business model of Drop? How do you guys make money?
Derrick Fung: We drive value to both our members and our partners. Members being users like yourself and myself. Those users come onto the platform and save money through spending with our many retailers and brands. Then the brands and the partners that we work with, many of the top brands that you’ll recognize like Uber, Walmart, Sephora, Instacart, for example. We help them drive sales. We help them acquire users, and they pay us for that. That’s how the product works. It’s quite simple. They view Drop as a platform like Facebook and Google, where they can advertise. But where we’re very different is because we have payment data, we can prove to them that we’re driving the incrementality or the sales that we say we do.
Alejandro: It’s funny that you say it’s quite simple, but reaching that simplicity is so complicated, and especially to do it in a way in which you also get investors excited. Especially from a company that is based in Canada, in Toronto, it is definitely an ecosystem that is booming now. Some years ago, when you guys got started in 2015, it was, obviously, not nearly as developed as it is today. Can you walk us through that fundraising journey and how that has been for you guys? Also, let’s start with how much capital have you guys raised to date?
Derrick Fung: To date, we’ve raised around 70 million U.S. through our Series B company. We did our first pre-seed round — again, we were then in the world where there were pre-seed rounds. We did $750,000 pre-seed, 4 million seed. We did a 21 million Series A, and then the 44 million Series B. Those numbers include mostly equity but have some debt, as well. When you add up, it’s somewhere around 70 million dollars for the company. It’s evolved quite a lot. Our first round was done off of an idea in a PowerPoint deck. This is not something that happened often. As a second-time entrepreneur and having an exit under my belt, it was a lot easier to do it off of an idea. Our seed round was done to raise money to fund our expansion into the U.S. market. Our Series A, of course, was to grow the company in U.S./Canada. Our Series B was to continue to fund that growth in both the U.S. and Canada and the international market. That’s been the number of rounds that we’ve raised and the amounts.
Alejandro: In your case, it seems that you got a few rejections, especially being in Toronto, and then pitching some investors in New York, on the East Coast that wanted to see some operations or something going on. How was that process for you guys, and how did it all come together?
Derrick Fung: I’d say that with regards to fundraising, it’s pretty simple how you think about it and how I think about it. There are three Ps of fundraising: product, progress, and people. In the early days, if you have one, it’s great. Typically, in the early days, it’s about the people. So, in our pre-seed round, we had a great idea. We had a big market, and we had a team of three, two of them being myself and my brother and one of them being a design co-founder, Cameron. We had great design. Our deck was very tight. We raised our first round off of that. The seed round was probably one of our tougher rounds, that being the fact that we were only live in Canada. We had maybe 30,000 or 40,000 users. We had not yet launched in the U.S. The story was to raise money to launch the U.S. market. Every VC we talked to, all the ones that said, “No,” essentially said, “Well, why don’t you launch in the U.S. and come back.” Funny enough, I said to them, “I need your money to launch in the U.S. so I can.” Probably that round, we talked to maybe 30 to 40 investors. The vast majority, around 95%, said, “No.” I probably had to do 20-25 pitches before we got our first, “Okay. This is interesting. Let’s dig a bit deeper.” It was tough because it was a bit of a chicken-and-the-egg, but I would say in that case, perseverance paid off. And storytelling is very important, as well. In the early days, we didn’t have the numbers, but you can tell a great story. That was our seed round. Our Series A was pretty nuts. We launched in the U.S. in October 2017. We hit #2 in the App Store. We were adding more users in one month than all of the prior year. So, that was a different time, where we had investors competing to invest money into Drop. When you think about the three Ps, the first round, we had people. In the second round, we had the products. The third round, the Series A, we had progress. Then comes the Series B. The Series B continues to become very tough for entrepreneurs and founders because not only do you need to have the right growth and metrics, but it has to work. Your business model has to work. You need to show that you can make money. You need economics, payback, all these fun concepts that investors ask you. They will typically ask you in earlier rounds, as well, but the Series B is typically where the rubber hits the road. So, we’re very happy and also lucky to have raised our Series B, especially in a world where post, we work, meltdown. It’s only going to get tougher to raise money for entrepreneurs and founders.
Alejandro: Absolutely. In this case, when you guys were dealing with your earlier round, obviously, it was the challenging phase. On one end, you were running out of money, but then also needing the money. How do you go about it where you’re not sounding desperate, and you’re continuing to be strategic, while at the same time, you’re seeing that bank account going down?
Derrick Fung: It’s hard. To be honest, there’s no playbook. There’s no one thing to do. If I were to summarize it to one thing, I think you have to be passionate, believe in yourself, and believe in your company. Everyone has to be in early startups. If you’re not, you won’t get through those days when you look at your bank account and have no money or the days where your top employee leaves or your top investor decides not to invest in your next round. The only way to get through some of those tough, tough times is just being passionate about what you’re doing because it will be tough. There will be a lot of ups and downs. To me, that’s how I got through it is just believing in yourself and being passionate about what you’re doing.
Alejandro: It’s very interesting here, Derrick, that you were mentioning about the rejections that you got, like 40 or so rejections. For anyone, that’s tough to swallow. I find that definitely, entrepreneurship is a mental challenge, especially when you’re on the downs, and let’s say when you’re receiving all these rejections. Obviously, you questioned yourself, and you asked yourself whether you needed to continue or whether you were being crazy. How do you keep it moving when you’re dealing with a situation like that of the downs?
Derrick Fung: I’d say the one big theme for me this year is work-life harmony. At the end of the day, having other things going on, and recognizing that it’s not the end of the world and that the world will move on. There are also people out there that are dealing with more challenging things. Whether it’s finding outlets, finding balance, mindfulness, meditation, and being healthy are all great things. It is hard. A lot of entrepreneurs I’ve seen do well. I’ve seen some burnout. For those who burn out, I think they just don’t find ways to have that work-life harmony. They overwork themselves, or they try to control things that are out of their control. It’s having a more holistic approach and dealing with life and problems with that same mentality.
Alejandro: Got it. You were talking about the financing cycle, and how you guys have jumped from one to the other. It seems that you guys did an interesting transition from early-stage to growth and scale. When you are in that transition or perhaps added, it’s also interesting how you are able to scale the most important thing, which you also alluded to it, which are the people that are helping you to push things forward. When you’re at the level of scale and growth, how do you make sure that culture still has the pillars and the founding building blocks, let’s say when you were at an early stage, and it was easier to keep things intact? Now, you guys have been growing very rapidly. I see it’s closing in at 100 employees. How do you go about that?
Derrick Fung: First, it starts from the top, the founder living the values and living what you want your employees and team to live, yourself. It’s recognizing that is very important. Once we got to 30-40+ employees, that’s when I started feeling the challenges of having a bigger team and scaling and not being able to talk to everyone all the time. And town halls and all hands and these meetings becoming not only bigger but more important for me as a founder CEO to make sure I say the right things and communicate the right things. In the early days, you talk, and everyone knows what’s going on, but as a company gets bigger, there’s so much going on. The second thing is having the values laid out. We laid out our company’s core values early on in the first year. We were a 5, 6% company, but understanding early on. Then institutionalizing it as you grow and scale everywhere from interviews to laying it out more formerly through documents as simple as reiterating it and repeating it at meetings. Again, I think it all starts from hiring and ensuring that every person that is interviewing knows what the core values are and knows what it actually means, knows how they look in real life and then knows how to ask and interview candidates based on those core values.
Alejandro: What are your core values, and how did you come up with them?
Derrick Fung: How I came up with it — at the time, to be honest, when we were a tiny team, thinking through, “How did I get to where I am today? What do I think is important, and what do I think is important for this company to succeed specifically?” Hustle, grit, humility, and passion. 1) Hustle is very important. In the early days, I had to hustle to get all the deals done. When you have no users on your platform, and you have to go pitch your retailer to pay you money just to be on your platform, it’s not easy. It took a lot of hustle. I had to find ways to executives at companies through a lot of very creative means. So, hustle is important. 2) Grit. When I say grit, that eludes to the whole fundraising story. Had I given up at the 24th investor, I would not have met #25, and that was the investor that first started digging in. If I had given up on #30, I would have missed out on #31, who may have been the investor who ultimately would write the check. So, grit is very important. 3) Humility is very important because the moment you think everything is perfect, and there’s no need for innovation, or no need to be different or no need to reinvent or to make yourself better is the moment that you become obsolete and complacent as either a person or a company. We saw that in the loyalty world. I said to myself, “I never want us or myself to ever be like that.” 4) The last one is passion. That’s where, as I mentioned in those dark, dark days, passion gets you through it. In those moments where, whether you’re a founder or employee, where the company is running out of money or the company loses someone, I think it’s that belief and passion that gets people through it. Those are our core values. It just happened very organically, which I think is awesome and important as people think through these for their own companies.
Alejandro: Very profound. Derrick, where do you think fintech and commerce are going as a whole?
Derrick Fung: Great question. I think over the last couple of months, there has been a lot happening in our space. So, Drop is a mobile-rewards app. You link your payment cards to get points for spending on Drop at large retailers like Uber, Whole Foods, Amazon, etc. PayPal, in December, acquired a company called Honey for 4 billion. Visa just acquired a company called Plaid for 5.3 billion. These are both, to me, big data points for our space. It shows that a lot of financial services companies like PayPal and Visa, whether it’s a payment network or a bank, they’re all looking to build more direct relationships with consumers. They think it’s important for them to be able to influence consumers and how they think about payments before checkout. So, I think that’s going to be a big theme. We’re going to see more and more financial service companies partnering or acquiring commerce companies. I do think that within the next five years, there’s going to be what people call the re-bundling of the bank. The last five years, fintech has been about the unbundling. Every startup is going after a particular product to compete with the bank whether it’s a checking account, savings, credit card, debit, lending. Over the next five to ten years, I think that there’s going to be a lot of consolidation. A lot of companies will realize that as a standalone company that only targets and is building a checking account, that’s not big enough as a business. Either they have to roll out new products and services, or they’re going to have to get acquired. So, I think we’re going to see a lot of that happening over the next five to ten years. I also think there’s going to be a lot more companies out there that will allow new companies and founders to create products a lot quicker. For example, companies that are either APIs or companies that will allow you to launch a credit card in six months, for example. The speed to market is a lot quicker now for companies to launch fintech products. Regulation has been looser, as well. So, I think these are all some of the things that we’re going to see. The big one for us is going to be more and more retailers and marketers looking to spend outside of Google and Facebook because Google and Facebook are becoming very expensive. Instead of paying for eyeballs or paying for clicks, I think the future is going to be paying for dollars, paying for sales, and paying for guaranteed sales. That’s what we do. That’s where we think the world is going, and we’re excited to be in the midst of all of these trends that all seem to be working in our favor.
Alejandro: Very nice. One of the questions that I typically ask the folks that come on the show is — here you are. You’ve already done an exit. Now, you’ve built a business that is bringing value, and the investor community has seen that because you’ve raised over 70 million. It’s really exciting stuff; also, fintech and commerce. If you had the opportunity to go back in time and you had the chance of speaking to your younger self, what would be that one piece of business advice that you would give to yourself before launching a company and why?
Derrick Fung: That’s a great question. Wow! I’ll list some things that are specific to Drop. I’ll list some things that I think are also for those listening and new entrepreneurs, I think, would be super helpful. Often, when you start companies, you get very excited. We did, for sure. We launched. We quit our jobs, and we did a lot of things quickly. But what I wish we had solved for or thought through quicker were things that we think a lot about now: business models, defensibility, and how will the math work? I think a lot of founders just get really excited and dive in, and a lot of them don’t think through some of those things. Another big one is, launching in Canada versus launching in the U.S. We launched Canada first and then launched the U.S. What I tell entrepreneurs, here, in Canada is specifically when they’re in early stages is just launch in the U.S. When you’re launch in Canada, you can do some testing, but ultimately, launch the U.S. That’s where the market is. A lot of founders here, whether it’s Canada or in other smaller markets, they don’t think big enough sometimes. They also don’t realize how a lot of capital, a lot of money, it’s bidding on larger markets. That’s another one that is important. The last one is not focusing on hiring and setting the bar high enough earlier on. Early on, a lot of people just want people to help them. We definitely brought on a lot of great support and help in the early days. But now, looking back, and looking at Drop and startups and success, ultimately comes down to people in the team. We’re not a construction company where you need the best machines or a real estate company where you need the best location. In the world of startups, it’s about the best people, the best engineers, the best salespeople, marketers. Early on, when you raise money, and you raise capital, in a world where you have the ability to spend money on different things, I’d say that spending money on a recruiter in the early days and just saying to that recruiter, “Hire me the best, these types of people.” It will go a long, long way, and having that top talent early on will attract more and more top talent as well.
Alejandro: Love it. Very cool. So, Derrick, for the folks that are listening, what is the best way for them to reach out and say hi?
Derrick Fung: You can use Twitter. My handle is @fungmoney. It’s a catchy one that hopefully people won’t forget. My email is out there. I’m sure, for those who can hustle, will find their way to get to me through email. Twitter and LinkedIn are two great ways to connect.
Alejandro: Amazing. Well, Derrick, thank you so much for being on the DealMakers show today.
Derrick Fung: Awesome. Thanks for having me.
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