Out of stealth: Insights from Melio Payments
Designing a solution for small businesses
Our portfolio company, Melio Payments, emerged from stealth today, 30 months after founding with an accounts payable (AP) solution tailored for small businesses. These small businesses lack an internal accounting and finance function and have distinct needs centered around the business’s monthly cash flow that are not satisfied by existing AP solutions, which focus primarily on payment automation. The company launched its product over a year ago and is now announcing it has raised $144 million in several rounds of financing. A big reason behind the big financing numbers is the opportunity for Melio to also provide B2B payment functionality to third parties, mirroring a development the tech industry has seen with B2C payments.
In 2017, the three founders of Melio, Matan Bar, Ilan Atias, and Ziv Paz, came to the idea for Melio by initially contemplating some of the payment challenges still faced by the US consumer. Quickly they realized they were focused on the wrong customer. While the US consumer has considerable flexibility in how and when they pay for the goods and services, small businesses had no such flexibility. These business owners also found themselves at the mercy of larger vendors’ payment terms, which all but dictated how and when they must be paid for their goods and services. Additionally, these small businesses continue to be the most vulnerable businesses in the economy, as they are more likely to experience monthly fluctuations in their sales, and with much less access to capital from investors and banks.
Before the company’s founding, Matan, the former Head of Consumer P2P Products at Paypal, wrote to me about the challenges facing small businesses:
“Various service providers only accept ACH payments or checks from customers, forcing them to pay using an inconvenient payment method with ZERO flexibility to pay over time.”
Melio set out on a mission to build an application and service that would ameliorate this frustrating and unfair situation confronting so many small business owners.
Melio’s product value crystalized around helping small businesses manage their cash flow by giving them the power to pay how and when is best for them. This is easier said than done as Melio needed to ensure that their customer’s vendors would still receive payment how and when they require it. Melio declared itself clearly on the side of every small business owner, providing its service for free, careful not to push any particular means of payment that might ever drive a wedge between Melio and its users. Melio built a transparent and open platform that could handle different payment types, and not only those that serve Melio’s business interests.
Melio helps small businesses manage their cash flow by giving them the power to pay how and when is best for them.
In crafting a solution to this problem, the Melio team knew small business owners tended to use their personal digital payment accounts for business purposes, despite its unsuitability to managing a business. This observation not only substantiated the lack of options for business owners, but also highlighted the fact that business owners and managers are also consumers well versed in online consumer payment applications.
Given their prior experience developing consumer payments solutions, Melio sought out to develop a B2B payments app with consumer design principles ensuring that every business owner would find their app easy and simple to use.
The early stage of a new venture is much like childhood; rapid growth and change, excitement, and wonder. I’d rather accept early retirement than be prevented from investing at the seed stage, when everything is still a dream and the value is in the team. It’s fraught with risk, self-doubt, and indecision, but the pace is exhilarating, and you are close enough to witness the real-time creation of something from nothing, including a product, a team, and a culture.
We began to court and engage with the Melio team more than six months prior to the company’s formation. This is the proverbial “ugly baby” stage when we can all look back and get a laugh at our collective naivete. This brainstorming stage not only yields consensus on the company’s direction and goals but generates a flurry of interactions that reveals the underlying chemistry and relationships between the founders, and between the founder and investors.
As compelling as the vision described above, a startup becomes successful because of its core team, not because it settled on the right business plan. While the three Melio founders have different backgrounds, from the start it was clear that there was an alignment in vision and values that allowed each to complete the sentence of his fellow co-founder.
As a second-time entrepreneur who most recently led PayPal global P2P payments product, Matan possessed the requisite domain expertise to move quickly with confidence, and yet wouldn’t hesitate to break house rules to realize the startup’s goals. This, combined with his transparent leadership style and strong communication skills convinced me he would easily win over employees, customers, and partners alike. I may still be proven wrong about the market and product vision, but I’m most certain about the team.
With our commitment to the team and their vision, we recognized there would be two primary challenges that would accompany the company on its mission.
The first was delivering a straightforward product that any business owner could instantly grasp, but also a feature-rich product that professionals would find powerful. This harkened back to 2007, when I first backed Wix with a remarkably similar product challenge and a very similar customer base of small business owners.
The second challenge is something many investors and entrepreneurs tend to overlook: the slippery slope of pushing a product that may not always be in the customer’s interest. Whether it’s trading apps that turn investing one’s savings into a game or online lenders that encourage more loans, the dirty secret of many fintech companies is that they generate a disproportionate share of their revenues from customers consuming too much of the product for their own good. Unlike many other fintech platforms, Melio’s revenue model kicks in only when the customer decides that optimizing their cash flow with a certain payment type is worth the small fee, something that only works for Melio across a high aggregate volume of payment transactions.
Melio has had a tremendous start with customers embracing the product across multiple verticals propelling the company to its multi-billion processing run rate. It has not escaped our attention that Melio’s growth comes during an immensely challenging period for small business owners across the country. By smoothing out the volatility businesses are experiencing, Melio is being put to the test daily as it helps businesses stay in the black and avoid predatory loans.
Melio will soon launch an API platform for B2B marketplaces, vertical SaaS products and others, to facilitate new revenue models for these businesses and enhanced functionality for their end-customers. Melio's announced partnership with Intuit, where it now powers Quickbook’s “pay now” button, is a sign of what to expect from the team.
To accomplish what it has so far, Melio has assembled a remarkable team of individuals in New York and Tel Aviv. It’s never easy to predict where a company will end up several years from now, but regardless of the journey this should still be enjoyable and rewarding. This is true of founders, employees, and investors. I know how excited Melio’s employees are about their company’s mission and culture, and I couldn’t be more proud to be a part of that.