Yesterday, TechCrunch broke the news that Sequoia, one of the best-known venture capital firms in the market today, had “parted ways with [Finix] over a purported conflict of interest and, almost more shockingly, handed back its board seat, its information rights, its shares and its full investment.”
Sequoia led the $35 million round into the payments infrastructure player, as I’d covered for TechCrunch a little over a month ago, and that is the source of conflict.
Sequoia also happens to be an investor in Stripe, a company worth around $35 billion. The firm led its Series A back in 2012, according to Crunchbase; therefore, Sequoia is not only a longtime Stripe associate, but a major shareholder as well.
You can see why, if Finix and Stripe are competing, Sequoia made a mistake. Before the Vision Fund era, it was considered not only stupid to fund competing companies (why pay for your own competition?), but, to some degree, unethical. Investors and founders love to talk up their long-term partnerships. The inverse of such a relationship is paying someone else to beat up your other portfolio company.
And as it turns out, we can learn more about the dynamics of this relationship from our interview with Finix CEO Richie Serna. Amidst our discussion about Finix’s business model, how the company thinks about itself and who its products are best for, Serna also talked about Stripe (he had nice things to say) and how its approach to payments is distinct from Stripe’s own.
With that interview in hand, let’s find out if there’s enough space between the two startups to absolve Sequoia of its faux pas.
TechCrunch: Finix charges per number of transactions, not based on a percentage of payments through any particular customer’s payment flow?
Richie Serna: That’s exactly right. That’s one of the key distinctions for Finix, right? That we’re not necessarily a payment company; we view ourselves as a payment infrastructure company. So we allow our partners to establish the relationships to start monetizing on those payments and pay us just more like an enterprise SaaS company.
So you’re a SaaS business that provides payment tech to other SaaS businesses to allow them to take payments? It almost feels meta.
The way that we like to think about it is that Stripe and Square were both new entrants into the space that really brought [the market] easier integration to start accepting payments. But as the change in distribution of payments moves to software, these vertical SaaS companies are looking at how they can directly embed and bake these payments capabilities into their platform. But to do so they have to build out all the same infrastructure over and over again. And so instead, they can just outsource that to us.
One thing we talked about the last time we spoke was companies that are making money twice. For example, companies that charge for their main service and make money off payments. So when Finix allows other companies to collect payments, do those businesses often charge a small surcharge on that to allow them to make profit off of payments running through their system, as well as collecting their service fee?
That’s exactly right. So basically, what these companies are doing is they’re taking the sort of historical payment processing fees and turning those into sort of a cost of goods sold [COGS], right? And then they tack on their own margin, and they take that cut. And that’s basically what most payment companies do today. That’s how Stripe and Square all make money. And so what we’re saying is, for your business, where transactional pricing is key to your business model, you should be making more of that margin.
So whenever a company does a lot of transactions, and they were previously paying a certain cut of that to a Stripe or whomever, they should be able to collect that money themselves essentially as gross profit.
A question about this because you’ve done all this work to get Finix to operate, why would anyone not use Finix and instead opt for Stripe or other similar companies? Because it sounds like your value proposition is pretty good unless I’m missing something. So I guess why is Stripe so huge when you’re in the market?
I think there’s a few parts to that. Number one, I think Stripe is a great option and we tell a number of our friends that they should go out and use Stripe, especially when they’re getting started, right?
I think between us and Stripe, we have two sort of fundamentally different views in the world. At Finix, we think that every software company should become a payment company and start to collect [payments] and basically add a new revenue stream to their platform. We think that in the near future, the bulk of software companies are going to be making the majority of their revenue from their payment services.
Whereas if you go with someone like a Stripe, that allows their customers to completely abstract away sort of the complexity of payments, but they end up paying a premium for that. And so, if payments end up being a core part of your business, you should work with someone like us. If it’s more of an afterthought, Stripe is a great option for you.
Transaction volume, then, would be an important [decision] metric. So if you don’t have that many transactions, you probably don’t care that much. If you are a high-transaction business, Finix becomes a more and more reasonable selection for what you’re doing?
Yeah, that’s definitely one of the ways that we like to look at it. And I think when we start to think about the payments market, it’s just such a massive opportunity. There’s going to be people who kind of take both approaches to the market — some who do want to own their payments and those who don’t. And we now allow those who want to own their payments and bring them in-house to do it in a way that doesn’t require hundreds of engineers and years of domain expertise. And just that ongoing cost that Uber and Airbnb are paying.
Settling the difference
The most important part of that script is Serna’s note that he thinks “Stripe is a great option” and that he tells “friends that they should go out and use Stripe, especially when they’re getting started.” The implication there being that once a company gets bigger, they should move payments in-house and use Finix to bring that margin they previously paid Stripe into their own gross margins (less Finix’s fee, of course).
It’s somewhat impossible to not view the firms as in competition with each other, then. And this came up during the call between myself, a brutally amateur mind when it comes to payments, and a CEO patiently answering my somewhat repetitive questions. The VCs had way more time for questions and diligence. How they missed the conflict is hard to grok.
Unless, of course, Sequoia thought they could get away with it and instead got caught. More when we have it, but by my read, Serna’s vision is clear and clearly a rival to Stripe’s own. That puts the onus of blame squarely on Sequoia for the public mess.