About two and a half years ago, the entrepreneurs behind the start-up Melio - Matan Bar, Ziv Paz and Ilan Atias - decided to set up an accounting company in the United States. For several weeks they tried to find "crazies" as they put it who would agree to a group of unknown guys from Israel keeping their books. They sent out emails, searched Facebook groups, and even went door to door, until they found ten businesses - a juice stand in New Jersey, two restaurants in Manhattan, an irrigation systems company in Hawaii and a few other small businesses.
Their purpose, however, was not to set up an accounting firm, but to find out about business-to-business payments, and specifically one important factor: the volume of payments made by check in the US, amounting to $18 trillion a year. The entrepreneurs wanted to understand how it was that, in the world of e-payment services like Bit, Pepper, and Shopify, business to business (B2B) payments lagged so very far behind.
They decided to interview 100 small businesses to understand the challenges and difficulties they faced in paying suppliers, but concluded that this wasn't the way to understand the issue in depth, as they didn't even know the right questions to ask.
At that point, they decided to set up the accounting company. They entrusted Dafna Barkat, who actually came from the world of politics, with the task accounts management, which she learned on the job. For four months, Barkat managed customer accounts via WhatsApp, free-of-charge. Today, she is responsible for all of the company's customer support and customer success activities.
"We wanted to understand the nuances within the workflow. It helped us create a precise product much faster, and saved us a lot of time," say the three entrepreneurs, who developed a B2B payment system that is gaining momentum. The company has tens of thousands of customers, and within a year the volume of payments executed through it has ballooned from zero to billions of dollars on an annualized basis. "According to our investors, we're probably the fastest growing payments company in the US," they say. Today, the juice stand, restaurants and other businesses use the company's system.
Most transfers made through the company's systems are free-of-charge; the company makes money by helping some of its customers advance or defer payments (details below). The company did not wish to provide details about its revenue, but did say that it had reached the tens of millions of dollars. "The rapid growth required 100% of our resources - every available programmer or product manager was involved in supporting this growth and our infrastructure. Now, we're adding all kinds of features that will allow us to gain more revenue," says Bar.
Two rounds, four months
The three entrepreneurs founded Melio in early 2018. The oldest of them, Atias (41), has extensive experience in technology development and serves as VP of technology. While still in high school, he began a degree in computer science and physics, and served in an IDF technology unit for six years, where he dealt in machine learning and computer vision.
He then worked at PrimeSense, a developer of 3D sensors for detecting body movements that was sold to Apple ("Everything seemed like science fiction there"), after which he moved to digital advertising company Outbrain, and then to Windward, which developed a system for detecting risks at sea. He met Bar (36) through a mutual friend.
Paz (36), the only founder without a technological background, studied for a bachelor’s degree in law and accounting, after a lengthy military service in the IDF naval commando (Shayetet 13). For two and a half years, he worked as a VP at FIMI Opportunity Funds, which specializes in acquiring and improving companies, mainly industrial ones. Paz was supposed to move to one of the FIMI-invested companies, take a managerial role, and then return to the firm as a partner. Instead, he decided to leave the firm to establish a company with Bar, his childhood friend from school in Haifa.
Bar, who serves as the company's CEO, came from the fintech field. The first start-up he founded, The Gifts Project, was sold to eBay for a reported $20 million, after raising about $1 million. The Gifts Project, which he founded with Erez Dickman, Ron and Maya Gura, is a social ecommerce platform for "group gifting" whereby customers can share special occasions. After three and a half years at eBay, Bar moved to PayPal (owned by eBay), and managed a global group of 100 people and was responsible for P2P payments.
The app developed by his team generated $100 million a year in revenue for PayPal. "It was really fun, because everything grew like crazy. This was the first time I experienced what it's like 'to ride the wave'. It's perhaps the most important thing after a team," says Bar. "Those were the years when private consumers switched from cash payments to mobile payments. Even today, that is the focus, not B2B. At PayPal, we never discussed payments between businesses at all."
Since its inception, the company has raised $ 144 million, of which $128 million was through two funding rounds this year, in late April and in August. The company's initial investors were the Aleph and Bessemer funds; the latest round was led by Coatue, with the participation of General Catalyst.
"In March, we didn't know if the coronavirus would be good for us or not. Because we serve small businesses, we thought it would be more negative. We didn't expect that so many companies would move online. As with every startup, we have an aggressive plan and a more conservative plan. When we saw that there was a unique opportunity to grow, and that the transition to online had accelerated, we knew how to make greater investment. We knew what we would do with another 30 engineers or 100 sales people," says Bar. The company also grew rapidly, and in less than a year its workforce increased from 35 to 150. In January, for example, the company had only eight development workers.
Who cares about automation?
Industry insiders say that in recent months, fintech has boomed. The combination of the shift to digital payments, largely forced by the Covid-19 pandemic, along with an increase in online activity, the shift to remote working, and an overall change in attitude - have all led to greater openness to e-payments on the part of companies and consumers. However, according to the three entrepreneurs, the existing solutions for payments between businesses are more relevant to large businesses.
"It's easier to develop a solution for a company like Nike, and then you have 100,000 payments a month. A small business is like a private consumer, you can't deal with them one by one," explains Bar. "This is true in every field - small businesses get fewer tools, they are under-served. These solutions are too complex for a wine shop owner or a dentist. These businesses don't care about automation. It doesn't provide value, because they make 60-70 payments a month. What interests them is cash flow. "
In other words: a business wants to receive payments due to it as soon as possible, and defer the payments it makes as much as possible. Melio helps businesses with this, while not providing credit itself. One way is to be a middleman: allow the payer to use available credit (i.e. money is transferred immediately, but the amount is deducted from the bank account only after the credit card balance is paid), while Melio itself pays the provider by check - for many, checks are still the preferred form of payment as there is no commission.
Another example is relevant to the party receiving the money. Melio offers to transfer the money to the recipient's bank account immediately, thus saving the few days it takes for the check to be deposited and cleared.
The company says they send hundreds of thousands of emails to suppliers, and that response is great. "The US market has problems because there are over 8,000 different banks in the US. In Sweden, there are three banks and no checks, because the banks discussed it, and decided checks were bad. A 16-year-old Swede doesn't even know what a check is.
"In the US, any change has to come from below. Even a bank transfer takes three days in the US, while in most of Europe, it's executed immediately. Saving two or three days is a lot for a small business, and delays produce inefficiencies in the movement of money." At any rate, Melio does not use the money it has raised for itself to improve the cash flow of business owners and suppliers, so the risk to the company is relatively limited.
The company says it encourages businesses to use credit only when it makes sense, for example during the holidays, when they buy goods and sell them only after a few weeks. "They pay us 2.9%, but because they buy more goods they get a 2% discount from the supplier, if he receives the money within a certain time. We're satisfied that we're helping companies and not encouraging them to get into debt. We're a payments company, not a cash flow company."
Giving up the network effect
At the beginning, the company made an interesting decision: to not force both parties, payer and payee, to use the same system. This is in contrast to, for example, B2C e-payment applications like Pepper and Bit. This was because of Melio's desire for a faster adoption rate for its solutions, but it does prevent the company from creating a network effect.
"From our conversations with hundreds of customers we've learned that it wouldn't work for us to require both sides to use our product. When someone is exposed to the product and knows the other party is also using it, that increases usage. We do see that it generates virality - one person leads to more and more people using us.
"We focused on the wine market, where payments to suppliers are very old-fashioned, and there are lots of players. There are industries where the viral effect is less pronounced, like advertising agencies, where payments come from different industries."
Another way to reach customers is through collaborations, such as one done with Intuit, which provides accounting management software Quickbooks. "You'll be able to add the option to pay via Melio. Many potential partners contact us, and it's really exciting to create an API that others can use," they say.
The Startup of the Year rankings are part of the Enterprise Technology Summit held by "Globes" and JP Morgan.
Published by Globes, Israel business news - en.globes.co.il - on December 13, 2020
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