VCs fuel payment innovations at small businesses

Small businesses can no longer cling to paper billing out of inertia, opening a route for financial technology to reach a new audience of proprietors.

Investors like Rob Metzger are watching this trend to find — and fund — the companies that are are enabling businesses to migrate to digital payments.

"One of the main themes now in financial technology is the evolution and shift from paper to digital," said Rob Metzger, a partner at Philadelphia-based MissionOG. "Paper-based invoices are still a large part of what small businesses do so there's room for tech."

MissionOG served as lead on a $25 million infusion into Autobooks, a Detroit-based technology firm that connects small businesses to digital banking and payments. In January 2020, just before the world began going into lockdown, Autobooks was preparing technology designed to shorten the average payment time for small businesses from the typical month. This addressed a nascent fear at the time that many businesses would suffer liquidity problems if they stuck to that cadence.

The pandemic created demand for an entire category of technology firms that enable small businesses to pivot to digital commerce, but do so through existing channels such as community banks and credit unions — in rivalry with large fintechs or API firms.

Autobooks found demand in automating B2B payments for locally-owned businesses, contractors and churches, working through small banks and partnerships with bank technology sellers.

There's a need among small businesses to streamline accounts payable. Writing for PaymentsSource, Jussi Karjalinen, founder and managing partner of Valtatech, said most organizations recognize the problem of late payments and the impact on liquidity and supply chains, but are "hamstrung" by current systems, practices and processes — and often lack the data or access to quickly upgrade.

"These are the businesses with 15 to 20 employees, and they're the bread and butter for neobanks and fintechs are looking at to win share away from community banks," said Metzger, adding Autobooks has added 40 banks and 300 direct-to-small business clients in the past year, along with partnerships with bank technology companies Jack Henry, FIS and Fiserv.

MissionOG was founded by former Mastercard CEO Gene Lockhart in 2012. Its other portfolio companies include Bento, which enables small businesses to control employee spending at the point of sale before a purchase.

Bento shifted its focus during the pandemic to accommodate payment controls for an increase in e-commerce spending by its clients staff over in-person card speeding. Other investments include Syncapay, which acquires smaller payment developers to collaborate and share technology to manage a stack of technology for small business. Syncapay recently acquired Wirecard North America as part of Wirecard's breakup following the parent company's accounting scandal in Germany.

"Syncapay's business is focused on digitizing checks and paper-based processes," Metzger said. Another portfolio company, Infinicept, acts as a payment facilitator to provide flexible underwriting, merchant management and risk monitoring for software companies.

MissionOG is operating in a niche amid VCs and other investors that are making large investments in fintechs and payment technology companies. Stripe's valuation just passed $95 billion following a fresh $600 million, Affirm has gone public and several fintech companies have used SPACs as a faster route to go public.

"The coronavirus pandemic has accelerated a worldwide shift towards the most efficient digital payments systems," said Mark Webster, CEO of global payments app maker Bottlepay. "Stripe and its peers are changing the way people spend their money and I expect investment in digital payments companies to continue to go from strength to strength in the near future."

Fintech was a bright spot in an otherwise bleak 2020, with $42 billion raised in 2020, the second highest year ever, according to Pitchbook, adding 2021 has outpaced 2020 thus far.

"Funding for Fintechs has consistently done well the last few years, and even where the broader tech and investment space have had their own minor blips, fintech in general has been pretty resistant to that," said Gilles Ubaghs, a senior analyst at Aite Group. "There’s been quite a few fintech unicorns in the last few years that pretty notably are revenue positive from early on unlike so many tech models which I think helps the space overall."