Digging Deeper with First Data Ventures: How a Payment Processing King Measures Startup Success
Andrew Barnes’ series, “Digging Deeper” is based in Silicon Valley and focuses on key startups and innovators, and how they are disrupting digital payments and commerce.
If there were a king in the world of payments processing, First Data would certainly be a candidate for the crown. In 2013 it was the #1 processor for U.S. merchant acquirers and the #1 processor in international markets. It has 23,000 employees, 6 MM merchant locations, and 3,500 financial institutions as clients. 2013 revenues were $10.8 billion on 59 billon transactions.
First Data, like all processors, is in a scramble to stay relevant and profitable in an increasingly commoditized business. So where else to drive for innovation but Silicon Valley where in 2013 First Data launched its Ventures group, which is investing in and partnering with innovators in a number of areas, such as payments, marketing, customer loyalty, security, mobile and solutions that support the next generation of commerce.
Pete Donat is senior vice president of First Data Ventures and helped open First Data’s Palo Alto office in 2013.
“I have seen massive exaggeration of market size, customer interest, and value creation – especially in payments. That tends to be a turnoff. If you haven’t assessed your market, you don’t know what the customers think.
So what’s the going on here? Andrew sits down with Pete Donat, Head of First Data Ventures to get some straight talk. They talk about market challenges unique to being a payments startup, leading indicators for startup success, and the areas that he sees as “hot.”
Andrew Barnes: Hi Peter, great to talk with you today. And by the way, these new First Data Ventures digs in Palo Alto are quite nice… thanks for the tour. Ok, lots to talk about, lots going on. Let’s jump in. To start things off, can you tell me what “venture” means to First Data Ventures?
Pete Donat: Great to see you and talk with you again Andrew. It’s always good to talk shop and yes, lots going on. To your question, to us a venture can be a new or an existing enterprise. First Data’s intent behind this Ventures group is to connect the scale, capabilities, and assets of First Data across the millions of merchants and thousands of financial institutions with whom we work. The goal is to bring those assets and capabilities together with the innovation and disruption that the Silicon Valley entrepreneurial community brings.
Is it an acquisition strategy? A partner funding strategy? What’s your charter?
We’re here to find the disruptive partners. We have the ability to do acquisitions and we have the ability to do commercial partnerships. I’d say it’s a whole range of corporate structures and investments that we could do with any of these partners. That said, my team will focus on equity investment-based work. We want to use a number of different levers to get access to deal flow, to create awareness. Using investment dollars is one of those that make a lot of sense.
If a company is aligned with our business strategies, for instance growing Clover, that’s helpful. If it’s aligned with certain product gaps, features, or functions that we may not have considered, or that our customers would value, an investment could help accelerate their growth and integration. Those are examples of things we think about as we look at the disruptive partners who are out here.
Clover was one of your early fintech acquisitions. How did that take shape?
I met the cofounders, Leonard and Mark Schulze, 2 years ago at Finovate. First Data took a look at it and said, “Gee, there’s something cool going on here.” As Todd McGuire and our Corporate Development team started to evaluate it, all of the possibilities got exciting – the hardware play, the platform play, and the ability to be an app marketplace of the future. We felt that really complemented our desire to transform First Data to be more innovative and collaborative.
Are startups banging down your door to get noticed?
It’s a great question. We’ll connect with a couple hundred startups this year. We will have found them, or they will have found us. I’m not sure the ratio of reach-outs versus somebody reaching out to us.
As a company, we want to make sure that First Data has access to the best and most innovative deals that would be relevant for us – that we’re aware of them, we’ve seen them, and we’ve talked to them. We want to figure out if there’s a way for our companies to work together.
I think we’ve gotten much better visibility, but we still aren’t where we want to be. First Data Ventures is relatively unknown. As a corporate venture arm, we want to grow our brand, grow awareness, and do more deals and investments. Ultimately, we’re out to prove out that we’re a great partner.
To date, I think the companies who are working with us, such as LocalVox or Gyft, would say that we are a great partner. That really helps our visibility and ensures that more and more entrepreneurs want to find a way to connect with First Data.
Are you getting calls from the venture guys saying, “Hey look, you’ve got to talk to my portfolio company”?
We do get the inbound happening weekly. Somebody at Matrix Partners or Andreesen Horowitz or another venture firm saying, “Take a look, I’m brokering an intro on a startup that’s in our portfolio.” That happens a lot, I would like it to happen more.
Is the quality of the introduction better than trawling out in the open ocean?
The companies who have top tier venture backing have clearly been through some screening to help establish some validity to the business. They wouldn’t have invested if they didn’t think there was something there. Many venture capitalists want to prove that they’re adding value to their portfolio companies. Finding a way to introduce them to us is helpful to them.
I think those introductions matter. We’ve found some very interesting companies through those types of introductions. That said, as a relatively new voice in town, I’d still like to have a broader ecosystem awareness of First Data Ventures than we have today.
Are your term sheets pretty competitive? Would you say you’re more or less aggressive than other corporate venture groups?
I don’t know, but I’ll say we’re different. There’s a benefit of partnering with First Data that goes beyond the capital that gets put into the deal. We could put money in, $1 million, $2 million, whatever that amount is, at a rate anybody else can. Whether we’re competitive or not, it’s hard to say. I think the difference for us, and usually the types of things we’re negotiating, is around something beyond the money that makes us a different play.
Usually that means huge benefits for the entrepreneur who wants to work with us. Those benefits are the ability to access the thousands of people who are out there selling our solutions, the merchant base, the processing power, the 99.999% uptime that we have. It’s really hard for an entrepreneur to try and sell something to a banker, to a merchant, unless you’ve got somebody like First Data who is really behind you and supportive – someone who can help you work through the regulatory and compliance headaches of executing payments and commerce at massive scale.
Okay, so I’m a startup and I’ve got a solution. I need to bring to you something that’s going to be scalable, but I also have to build something that is unique and distinguishable. What do you say to a startup about how to serve both masters?
In some ways, what you’re getting to is the synergy First Data is trying to create with the Ventures unit. It’s taking the innovation and creativity of the startups and partnering with all the assets we have. The merchants. The sales force. The bank relationships. The processing power. The knowledge of how to get to a restaurant channel versus a petrol channel versus a small business channel. We can bring that knowledge to bear for startups
If it was as easy as pushing F9 they would have done it themselves. By partnering with us, we have the ability to take what they have, help them refine it, figure a way to productize it, work on the messaging, then distribute through a lot of different channels that can get up there very effectively.
When you look to areas for your investment dollars, where do you see opportunities for disruption, and for profits? What are the juicy parts in the payments system?
I’ll tell you two things. One, we’ve got some themes that we’re pursuing. Two, we also don’t know enough. Part of the reason we have this office, and why I’m in this role is to make sure we’re paying attention to things that we didn’t see coming. We’re a bit of a listening post, making sure we’re aware of the innovation. I love meeting with the startups that make me go, “Wow, I never thought of disrupting or connecting the dots in the payments industry with this, and this, and this, in the way you just talked about.”
There are a couple themes that we tend to think are hot from a First Data Ventures perspective. One of those is utilizing our information and analytics to find ways of proving that the action turned into a result. Our information and analytics products are very good at saying how’s your spending, where are your customers coming from – great insights around your business.
Can we do something that pairs with that? Those are the kind of great solutions that we see as truly disruptive.
For you and your SMB clients, are your efforts about finding new technology to disrupt, or finding ways to drive better adoption?
In some ways, I’m not sure. Some of the solutions we look at have pretty unique technological innovations. I don’t know whether we’ll invest in or partner with some of these. I’m seeing some unique innovations in the sensors, beacons and other types of categories that might link with our analytics product. That would be really cool. Those would be, in my view, technologically cutting edge.
Other things, maybe they were technologically cutting edge five, ten years ago – but never took off. Today they are a packaging of that older technology, but with some better blocking and tackling – and some really good user interfaces. We’ve seen a number of companies like that. It doesn’t have to be that cutting edge. It just has to work really well for somebody, a small business owner who wants to spend the vast majority of his or her time not worrying about payments and commerce. They want to spend their time growing their business.
Can you tell me a little bit about your story and how it ties into your work with startups in a venture capacity?
I got into the space and spent seven years at MasterCard. During that time, I’ve seen success and failure in innovation. Some of the things we pursued at MasterCard were very successful, some were horrific failures. I also spent five years at Visa International and Visa, Inc. in strategy, planning and other roles.
At First Data, I spent a couple years in business development, e-commerce, and co-heading our Durbin SWAT team around regulatory reform issues. I think the reason I’m in the chair I am now relates to the experience of knowing how the payments industry works, knowing what’s likely to lead to success or failure, knowing how to work across the First Data ecosystem.
As First Data Ventures, I need to make sure I’ve secured business unit support for something that we want to do as an investment. In our LocalVox investment, we’ve worked very closely with key business unit executives and product managers. Krish Mantripragada, who heads up the analytics team, and I were tied at the hip in terms of moving this forward. Joe Plumeri – Senior Advisor to the CEO – and, Guy Chiarello, the President of First Data, were involved in approving the deal and how it is going to integrate with our sales force.
You referenced your time at MasterCard your feel for what drives success and failures. Can you deconstruct that and give me your thoughts on the leading indicators for success?
It’s a complicated question. How do we evaluate companies and whether they’re likely to be successful for us? We do a little scorecard that we use as we assess companies. Some of those criteria are going to be things you would expect to see. Are they addressing a big market? Do they have a fit with what First Data would be doing? Do they align with the business strategy that we would be pursuing? Then we’ll assess other things Is their team great? Is their product good? Is it unique?
The answer to those tend to vary a lot, vertical by vertical. Our assessment of a new payment network solution would be one way, versus how we assess a security solution. Those dynamics tend to be very, very different. There are a couple things that tend to be turn-ons and turn-offs when we look at companies.
Can you talk more about the start-up turn-ons and turn-offs?
Companies that are entering into the payment space and the ecosystem must have thought through, realistically, the value proposition. We’re talking about some complicated chicken and egg issues of dealing with a two-sided market.
I have seen massive exaggeration of market size, customer interest, and value creation – especially in the payment space. That tends to be a turnoff. If you haven’t assessed your market, you don’t know what the customers think.
I often refer to my eight rules of payments. In payments, getting one or two things right is not enough – you need to address all eight of these criteria. For example, can you get to a critical mass of consumers? Can you get to a critical mass of merchants? Can you manage fraud? Can you deal with disputes and things when they go wrong? These and a few other rules. If you don’t deal with all of them, usually you’re doomed to failure. The good news is that First Data’s capabilities can often help a startup address some gaps it may have in achieving commercial success.
Payments isn’t a swing for the fence and hope you get there type of industry. There is plenty of blocking and tackling, from regulatory to compliance and all along the stack. It’s a mix of swashbuckling and diligence to get all the Ps and the Qs handled isn’t it?
I like it. Can I quote you on that? Swashbuckling and diligence. There’s a GE phrase that goes back a decade or two that was “loose — tight”. Can you be really creative at some stage and then rigorously assess what you’ve creatively innovated? I think you need to have a bit of both. All swashbuckling and no diligence, that is problematic. But if you don’t have any swashbuckling, then it’s not that exciting either. It has to be both in our minds.
I think that sums things up, swashbuckle and diligence, the mojo of payments and commerce startups. It has been great to get your view of venture’s role in payments and commerce disruption. Thanks for talking shop with me.
As always, great to talk with you as well Andrew.
About First Data Ventures
First Data Ventures is responsible for leading First Data’s efforts to harness innovation by partnering with small innovative companies who can leverage First Data’s processing assets and unmatched distribution to drive solutions that delight customers and materially grow long-term revenue.
Pete Donat, Head of First Data Ventures
In addition to his role as Head of First Data Ventures, Pete is also responsible for network business development, responses to major regulatory events (e.g. Durbin I & II), managing several of the company’s non-traditional partnerships.. From 2004-09 he was VP of Enterprise Planning & Corporate Strategy at Visa. From 1997-2004 he held a variety of senior management roles at MasterCard. Prior to MasterCard he was a management consultant at Marakon Associates. He has an MBA from Wharton, a Masters in International Economics and American Foreign Policy from Johns Hopkins SAIS, and a BA from Dartmouth.
Barnes is a self-confessed payments “geek” and entrepreneur working in Silicon Valley. He leverages his business development track record and network in startups, retail, and FI’s to solve tough revenue problems in digital payments and mobile commerce. Barnes has held executive positions internationally with Sprint, Global One, and 2Roam Mobile. He founded the National NNN Investment Group, and is an Advisor to the Electronic Transactions Association (ETA). Barnes has an MBA from WASEDA in Tokyo 早稲田大学大学院 and a BA from Penn State. He launched the widely sourced Digging Deeper series and can be reached at @AndrewinSV and Linkedin.