Payments Network Dwolla Raises $16.5 Million Series C From Andreessen Horowitz & Others, Expands To San Francisco

Posted: May 7, 2013 in Finance, Funding & Exits, Startup, Technology
Tags: , , ,

20130507-230405.jpg Building new infrastructure for digital payments may
not sound sexy, but it’s an area that’s ripe for
innovation. The legacy payments networks in
existence today are bogged down with outdated
technology, slowing progress. Des Moines-based
Dwolla decided that the way to innovate in payments was to essentially blow up the
outdated infrastructure entirely and start over by
building out a new network from scratch. Today, that
work has scored the company $16.5 million in new
funding, in a Series C led by Andreessen Horowitz.
The company’s previous investors, Village Ventures, Thrive Capital, and Union Square Ventures also
participated in the round. Dwolla is sometimes confused as an alternative to
PayPal – and though it may compete with PayPal
more directly on some initiatives, like MassPay which
undercuts PayPal’s fees on a service business’ use
in lieu of writing checks – that’s only a result of the
new payments infrastructure the company has built, not the entire vision in and of itself. Last year, for instance, Dwolla launched a number of
new products that are helping propel the business to
the next level, including not only its own mass
payments service, but also FiSync, a real-time
alternative to ACH payments, plus a partnership with
the state of Iowa to process an initial $130 million in taxes, and a partnership with mobile banking and
payments service provider mFoundry, which put the
service in front of that company’s more than 800 bank
and credit union partners interested in offering real-
time, peer-to-peer payments to their own customers. Today, Dwolla’s annual transaction processing run
rate has topped a billion dollars; the company has
grown at 15 percent month-over-month to reach a
quarter-million account holders up from 80,000 in
early 2012, and it has brought on more than 100 large
customers, including both enterprise and government. But getting to this point was not easy. Explains CEO Ben Milne, the company found that
some things it tried worked better than others. For
example, trying to disrupt payments with a consumer-
facing product has been tough. “We found that retail is a really hard place to convert
users in terms of getting them to pay with another
payment form,” Milne admits. Along these lines, the
company had launched various efforts both online and
offline to encourage consumers to pay using Dwolla
instead of traditional means like cash, checks or credit cards. While Dwolla’s efforts here continue
today, they haven’t been the areas of growth which
led to this new investment. “A lot of the volume we’ve seen is in one-to-many
relationships, and basically those are more check
replacements than credit card or debit card
payments,” says Milne. On this front, the company
doesn’t have new relationships or partnerships to
announce today, but hints that there are several in the works as the additional funding has been earmarked
in particular to grow out the startup’s business
development and relationship teams to service larger
customers. “These deals take a long time, and they require a lot
of attention…they don’t work at the speed of small
startup companies. They’re big, established
companies,” Milne explains. “This round is about not
screwing up the opportunity that we have. It doesn’t
really matter if we were first to market with a lot of this new technology – it matters that we have the
opportunity to be the first to market and the first to
scale.” The startup is now working with payroll companies
and governments, among others — the latter initially
in its home state, where Iowa Governor Terry
Branstad announced in early 2013 that government
officials would explore ways to use the service to
collect property taxes, issue refunds, pay contractors, and renew vehicle registrations. But while Dwolla’s
system works well for these large customers, it also
works for smaller ones, too, including manufacturers
who need to pay vendors, an ad agency paying
consultants, or a micro-
consulting platform paying thousands of people, for example. “A16z makes bets on companies that change the
underlying fabric of their markets and, like Facebook,
Twitter, and GitHub, we think Dwolla is going to do it
in the banking world,” said Scott Weiss, Partner at
Andreessen Horowitz and new Dwolla board member,
in a statement about the investment. “The fact that Dwolla’s network can simultaneously meet the needs
of a complex enterprise or government, while allowing
a parent to pay the babysitter with her phone, reflects
just how simple and strikingly different this solution is
in the marketplace.” In addition to growing the engineering team, as well
as those needed to support its larger customers,
Dwolla is also expanding to its fifth office location,
San Francisco, where it has already been interviewing
and hiring ahead of the opening in June. (The
company already has staff in Des Moines, New York, Omaha, and Kansas City.) In the Bay Area, the team
will be led by Dwolla’s Chief Operating Officer,
Charise Flynn, and will be mainly focused on product
and business development and marketing. Milne says that there is still much that needs to be
done before Dwolla could really compete with a
legacy payments provider. For instance, while its
network supports payments now, a legacy provider
like Visa supports two other types of transactions, as
well: authorizations, which guarantee funds are there; and captures, which take the funds following an
authorization. Over time, Dwolla will build up support
for these types of transactions, which are still in
demand in the market. The company will also update
its mobile apps and do more to educate the
marketplace, too. But that “marketplace” may not mean consumers. “The reality is that our fundamental business is
allowing anybody with an Internet connection get
access to their money and exchange it with anybody
else they want to receive it,” Milne says. “A lot of that
adoption is going to come instead from third-party
platforms and products,” he adds. “I don’t see people going to Dwolla.com more and more – I see them
doing that less and less, while our software is
just facilitating the payments.”

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