It’s a huge market, one that’s remarkably underserved excepting older players like MoneyGram and Western Union. It’s also a lot of work to build, making it a fairly long-term bet, one into which investors like True Ventures, August Capital, and Khosla Ventures have already sunk $71 million, including a $14 million inside round earlier this year.
How does it work? Say a person needs to pay their rent or buy a bus ticket. PayNearMe has relationships with both brick-and-mortar stores –including, crucially, 7 Eleven, Ace Cash Express and Family Dollar — as well as businesses like property management software companies. Together, the companies make it possible for anyone to walk into one of more than 17,000 locations with cash, and walk out with a receipt for payment.
This week, we talked with PayNearMe founder and CEO Danny Shader – previously a CEO of Good Technology, an EIR at both Kleiner Perkins and Benchmark, and cofounder of Accept.com, an online consumer-to-consumer payments service that sold to Amazon for $175 million in stock in 1999 – to learn more about the gritty, complex business he’s been building.
PayNearMe doesn’t give out a lot of numbers, but you say that overall payment volume has more than tripled from this time last year.
Our business is growing five to 10 percent a month, which keeps compounding, so it’s getting to be a pretty sizable business. It’s extremely hard to build up an entirely new payment network, but we’ve done it, it’s working, it’s growing, and it’s incredibly defensive. But it’s not for the faint of heart.
You could boil the ocean, trying to go after everyone who’s unbanked. What’s your process like?
We pursue things vertical by vertical. So the biggest vertical is lending, then rent and municipal government payments, and now healthcare is driving a lot of new people into the insured ranks and they need to pay their premiums. Within a vertical, there’s a handful of software companies that are systems of record, whether it be for property management companies or government agencies, and we integrate into those software systems. For rents, for example, we integrate with AppFolio and ManageAmerica, a property management system for manufactured housing, meaning mobile homes.
We try to go after very large accounts directly or go downstream.
Going downstream [to smaller players] sounds like a lot of work. How do you do it? How many employees do you have altogether?
We have more than 50, roughly half of whom are in Sunnyvale, with the rest scattered [around the U.S.]. And it does take time to get going on a new vertical. Say we want to do something in health, in medical records. We’ll go to a trade show and call on [some of the vendors] , and they’ll typically say, “Go away, my customers aren’t asking for you.” So we’ll go to end customers and invest heavily in getting them to work with us, and they do, and they talk about it, and a year later, the software providers say, “We want to integrate with you.”
Processing rent payments is one of your biggest businesses, but we understand that Family Dollar will no longer be accepting rent payments, that it grew worried about safety issues around people walking in with large sums of cash. We’ve asked the company about it but they haven’t responded.
I can’t speak for Family Dollar, but rent is a big vertical and we’re processing rent at a ton of other locations. Other folks will be joining our network, too.
PayNearMe shares its economics with stores like Family Dollar and 7 Eleven. Do you discuss that split? Is it 50/50?
I can’t comment on [the percentage of transaction fees we pay out], but it’s [a good deal for them]. Imagine: Hey, our sales force will sign up big entities like municipalities that will include your logo [so people know where to pay their bills], and we’ll pay you a commission, and by the way, we’re sending you valuable foot traffic.
PayNearMe has a lot of stuff coming. Can you give readers a curtain raiser?
I can say that we now have a complete set of money transmitting licenses in the U.S. and Puerto Rico that we spent the last three years and millions of dollars [to obtain]. The licenses allow us to act as an agent of a consumer, taking their money and delivering it to some other location. It lets us enter adjacent markets. [But that’s all I can say.]
Do you anticipate these adjacent businesses will be larger than what you’ve already built?
I think we could build a big public company doing what we’re doing. It’s a massive market hidden in plain sight. Most people in the Valley are asking if cash is going away. Actually, the cash market is increasing, and the bifurcation between the 1 percent and everyone else is contributing to that.
Dan Levitan, the former investment banker who founded Maveron with Starbucks founder Howard Schultz, is having a pretty good run as a venture capitalist. His 16-year-old firm has backed a long line of consumer-facing startups that have become household brands, including eBay, Groupon, Cranium, Shutterfly and Zulily, the daily deals website for moms whose late 2013 IPO transformed an early, $5 million check from Maveron into a windfall for the firm and its investors (though Zulily’s stock has more recently been sinking).
That long string of winners has convinced Maveron’s institutional backers to provide it with nearly $1 billion over the years, including a $140 million fifth fund that the firm closed last year. Still, Levitan — who has a big personality and tells the sorts of unguarded personal anecdotes that readers love and public relations pros abhor – readily admits that Maveron has lost its way a couple of times before getting back on track.
StrictlyVC talked with him last week in a fun chat, shortened here for length (and per the request of his watchful communications advisor).
You’re in Seattle, but you’ve had a team in San Francisco for a few years. Do you spend time down here, too?
I’m down at least every two weeks. Increasingly, we’ll be down there more. We’ve had some successes up here in Seattle, but as we’ve moved to a more-focused consumer-only strategy, we realize we have to be more successful in San Francisco.
A “more-focused” consumer strategy? Maveron has always been focused on consumer startups, hasn’t it?
We’ve always been consumer only, but we kind of justified [a] business-to-business-to-consumer [strategy] for the first 10 years, [meaning we’d back] products and services that sell into consumer businesses. We called it “powering consumer services,” and it was a mockery of a parody of a tragedy of a sham, so we decided to focus on consumer very narrowly and invest only in end-user consumer brands. It’s worked much better, including because we’re presented with more [of these types of startups]; we have a greater pool of companies facing similar problems, which helps our entrepreneurs; and our LPs are getting more consistent returns.
Many people think of Maveron as a Series A investor, but it also makes seed-stage bets. How do you approach both types of investments, and what size investments are you making at these very different stages?
Our seed bets are small — $100,000 to $250,000 – and we make one to two a month. Our [San Francisco-based partner] Rebecca Kaden leads the seed effort, but it’s a completely different process than our core investment effort. There are six of us on the investment team and if any two of us wants to do a seed deal, we will. It’s designed to get to know entrepreneurs and spaces we might not be familiar with, so sometimes after a day or two, we’ll say, “Fine, we’re in for $100,000.”
If we make a core investment, it’s a more focused effort. We typically write checks of $2 million to $8 million for between 15 and 25 percent of the company. [Before we invest], basically one partner has to decide that they like it and want to champion it and they get the colleague who is most appropriate to work with them on it. Then everyone on our team meets every entrepreneur we’re going to back in a Series A deal.
Does majority rule?
[Not necessarily.] Someone might like [a deal] and, after issues are pointed out, says, “I can handle it.” Ultimately, I think something that’s obvious doesn’t particularly relate to great VC returns. There have been a few times in the last 16 years when we’ve funded something that was a no-brainer and it worked well for us. But most of the time, it’s not a no-brainer. Our goal is to give people the latitude to make some non-consensus bets.
A few of Maveron’s portfolio companies have gone public in the last 18 months or so, including the sandwich chain Potbelly, Zulily, and the pet health insurance company Trupanion. What do you think of the broader trend of entrepreneurs pushing out their IPOs and staying private longer?
I think entrepreneurs are being thoughtful that as long as late-stage [investors] value their companies at or above public market prices, why not take advantage of it? I don’t think the dichotomy between late-stage and public valuations is sustainable, though. Over some period of time, that [gap], which is so stark today, will close, either because public companies become more expensive or late-stage companies [grow less so].
What are you seeing in terms of valuations?
In general, it’s a good time to be an entrepreneur. We’ve seeing valuations based much more on greed than fear, which we’ve seen before.
I’m humbled by how much we all benefit by the up cycles, but I promise that everyone who says this time is different is wrong.
Photo by Gabriela Hasbun