Scaling to a $1.3Bn Valuation While in Stealth

Thanks so much for having me.

That’s a great story that I like reminding of. I know Michael for a while. I remember meeting him during my PayPal days. Before starting Melio, I was with PayPal, leading its consumer payments business globally. Basically, everything related to paying friends and family using the PayPal app. Some parts of Venmo were also owned by my team. But whether it’s paying back for coffee using the PayPal app or sending money to your family abroad, this was part of my team. I was super passionate about consumer payments and was experiencing the digitization of how consumers pay other consumers. consumers. around the world were shifting from cash to mobile payments.

We were at the right time, at the right place with PayPal and my teams across San Jose and Tel Aviv, and we saw this crazy growth. And so after learning a bit about how small businesses pay other businesses, or how a business pays its suppliers, I was shocked to discover that the digitization that I’ve experienced between consumers hasn’t happened yet in terms of how a business pays another business or how B2B payments are being done. And I remember this one number that I shared with Michael that I read the Federal Reserve research that indicated that there are around 18 trillion of payments that are still transferred through paper checks between businesses in the US.

And that was, I think, the trigger for me to start thinking about Melio and the trigger for my conversations with Michael. The fact that B2B is still very much based on paper, paper, invoices, paper checks. And that was very different than the world that I’ve lived in, which is consumer to consumer payments.

Yeah. So I’m lucky to have chosen great co-founders, Ilan and Ziv. I think we’ve decided to work together in terms of our shared values. We decided to work together before we had a specific concept in mind. We, I think, like to work with one another. We got along well, and I’ve seen incredible traits with these partners, like resilience, like our ability to manage a debate, which similar to maybe a good marriage, when you have shared values, marriage is easier and same for choosing partners to start a new company.

So we definitely decided to work together based on shared values. And luckily, these two are the smartest people that I know. So that also helps. In terms of the concept itself, we just thought about different directions, mostly within fintech, because that’s, you know, the world that I came from and I learned the importance of money to people and businesses. So our focus was mostly around fintech, but there wasn’t a specific idea in mind.

That’s a great question. One thing is hard to pick. There are two things that I think are top of mind for me. One is ubiquity. Any successful payment system is one that can be used by as many people as possible anywhere, anytime. So if you think about, by the way, a paper check, one of the great things about a paper check is that anyone can write a check and anyone can accept the check. Even if you don’t have a bank account in the US, you can still accept a check. it’s the most ubiquitous payment element and ubiquity wins.

Venmo, PayPal, Zelle, Square Cash, all these payment networks, they became ubiquitous around the US as more and more people started using them. And that’s how it’s winner takes all or winner takes most, I guess, with these types of payment networks. And it’s due to the importance of ubiquity. The second thing that I’ll say that is like, I would say, competing with ubiquity is choice. choice. is critical for any payment system. Consumers and business owners both like having choice in terms of how to pay and when to pay.

People like paying with a debit card, credit card, bank transfer, wire, paper check, virtual cards, real time payments. There are so many types of payment methods that you can use, and each has its own disadvantages and advantages. And so providing choice is super important for any payment system, whether it’s PayPal, whether it’s Melio, and whether it’s other payment solutions out there.

It’s a strategic question that we keep revisiting or debating every once in a while, as it really determines the product roadmap, it determines the type of people that we hire, it determines everything. And I think for us or for a company, a young company like Melio, growth is definitely the number one priority. We’re obviously a business that aspires to have great returns for all shareholders and investors. obviously revenue is top of mind. But the strategy to become a very successful business is to think growth first.

And the reason is actually a little bit related to the network effect that I was referring to with Zelle and Venmo and Square Cash. I think when you build a payment system accurately, you can actually grow at a super fast pace, Usually within payment systems, when both sides are within the network, the value increases for each of these sides. And so I think enabling or focusing on growth, expanding the network, leveraging or doubling down on the network effect efforts are just, I would say, more important at a phase like ours compared to finding another revenue source.

We do have strategy around our revenue sources and the different values that we can provide our users to also monetize the business. But I think there’s a very clear set of revenue opportunities that are shared across payment systems. The growth element is unique to Melio compared to other products.

Yeah. So it’s interesting because with PayPal or Zelle or Venmo, usually the network effect is driven by acceptance. meaning if I want to pay a friend using Venmo, in order for my friend to accept the $50 the friend needs to sign up to Venmo to accept the the $50. So it’s a closed network. Once you make a payment to a friend, the friend needs to sign up to accept the payment. That’s, I would say, the most natural basic element for virality for these P2P apps and for many other payment systems in general.

With B2B payments and with Melio, it was interesting because we could not force a closed network. So when a restaurant owner is paying its, I don’t know, 15 suppliers, electricity company, the fish supplier. We need to make sure that the restaurant owner can pay each of the 15 suppliers even if they don’t want to sign up to Melio. So we need to make sure restaurant can pay the fish supplier even if the fish supplier only accepts a check and doesn’t want to sign up to Melio.

Otherwise, the value for the restaurant owner that is paying wouldn’t be so high if we only force sign up on vendors in order to accept payments from that restaurant owner. And so we had to act in a different way. We had to make sure we leverage cash flow to encourage network effects, meaning that when we send the money or send the funds to the fish supplier, we encourage the fish supplier to sign up to the network, but we don’t force them. So they can either receive the check and, you know, not sign up to Melio ever, or we tell the fish supplier, hey, want to get paid faster, helping his or her cash flow?

Sign up to Melio and we’ll send you the funds faster. And we have like multiple examples like that. But cash flow is the main driver for network effect with an open network like the one Melio has built.

I think there’s an element of trust. Melio is still not a well known brand like PayPal. Hopefully we will be. But at the moment there’s definitely an element of trust that needs to be built between Melio and its customers. So we definitely see customers test us with few payments, seeing that the checks actually arrive or the bank transfer actually arrive no matter how they choose to pay their suppliers. And then when trust is formed, we see a significant increase in terms of the wallet share that goes through the Melio product.

So I guess we have like a couple of months where we build trusts with new customer, and then they shift all of their transactions to Melio.

Yeah, I think these are great companies that have been extremely successful during the past year. Bill.com, I think, existed for around years. So these are awesome companies. I think we decided to focus on a segment that is truly underserved. I would say these tools that you’re referring to are less suitable for the segment that we’ve selected. We basically said there are so many small businesses in the US. There are different numbers, but let’s say around 8 million small businesses that are eligible small businesses for our platform.

These businesses, they see the big fancy accounts payable automation solutions as overwhelming to use. As these tools, Bill.com, AvidXchange, Exchange, all these wonderful accounts payable automation solutions are mostly built for finance professionals like an accountant, a bookkeeper, a finance team. And Melio is targeting these owner operators, these small businesses that do not have an internal finance professional. It’s either the owner or a trusted employee that is making the payments. And so I think we found this market that is truly underserved. These owner operators, small business owners that are not finance professionals, they do not want to become finance professionals, and find these other tools to be overwhelming.

By the way, even the name of the category, accounts payable automation solutions, the category that we’re part of, that’s such a terrible name for a category if you think about it. Accounts payable is an accounting term, and automation is this value proposition that probably resonates really well with the CFO of Nike that manages tens of thousands of payments. And so automation equals operational excellence. However, a wine shop owner that manages, I don’t know, 100 payments a month, automation is not that big of a deal. It’s nice, but it’s not a value proposition that will make the wine shop owner shift from something that he or she are so used to to this new digital tool.

What these businesses care about is cash flow, not automation. That’s why I guess the simplicity that we’ve built combined with our focus on cash flow instead of automation is what resonated, I would say, well with this type of target audience.

Yeah, we keep thinking about the right approach for this, but definitely offering credit is extension for our payment system. PayPal offered PayPal credit and Square offered Square Capital. It is, I would say, a very integral part to a high engagement payment system. So we’re definitely thinking about it. I think we’re most likely going to partner with a company that is doing credit well in order to provide this service as our focus is to become the best B2B payments platform and user experience. And that’s a lot of work already.

So getting into credit underwriting and having funds on our balance sheet is something that is probably relatively complicated or defocusing in terms of our product strategy. So this is probably a partnership rather than a build decision, but definitely something that we’re aiming on building and have concrete plans on.

There are, I think, less of a strategy. If I’m being fully transparent, I can’t say that we had like a very consistent fundraising strategy, but more of setting goals and understanding the resources that we need to get to these goals and then deciding whether to fundraise or not. I think we grew a lot faster than we’ve expected over the last year. We realized that the goals that we’ve set beginning of are completely relevant, and we can do a lot more, can capture more of the market, but we would need more engineers, we would need more marketing, we would need more salespeople.

So we started, I remember, preparing this very simple model with the new goals that we’ve set, And we suddenly realized that we need a lot more funds in order to hire the team that we want to hire. And so that was a trigger for us to say, okay, we need to be or we can be more aggressive. And now is the right time to raise the funds. And that’s why we did it. That’s what happened in August when we raised our round C. But then we continued to accelerate our growth.

And then the goal that we’ve set back in July already seemed to moderate. And we thought to ourselves, hey, we can grow a lot faster. We can add a lot more value to our customers than what we do today. So we decided to raise money again in order to make sure that we can expand the team at the pace that we want to expand. We grew from 30 people in January 2020 to 200 this January. So that couldn’t have happened without the additional fundraising. I think we would be afraid to take this type of risk.

Yeah, it’s a crazy journey, which we love. The challenge is, I guess I won’t say anything unique, the challenge is to maintain the culture. When we were 30 people, I remember telling our team, guys, the culture of this team, of this company will be dictated by your personalities. The 30 people that joined us, their personalities are the core of the company’s personality. You know, it’s like taking a baby versus elderly men. I can easily affect my one year old baby’s personality. It will be very hard for me to affect my 82 years old father’s personality.

He’s already set in terms of his values. And I think it’s also true for companies like when you’re young, when you recruit the first the first the first 200, this is the time to shape the values and the norms that the company will have, whether it’s how you talk in meetings, whether you’re inclusive or not, whether you’re diverse or not. It’s very hard to change this when you’re 5,000. It’s possible, but it’s just a lot harder.

Luckily, I have a great leadership team. So I trust our leaders with many of their decisions and consult with them on an ongoing basis. So I think working as a team or having a strong leadership makes things easier. Again, it’s a very obvious insight, a very true insight. So I think my two co founders, Ilan and and Ziv, and the leadership that joined us, our VP product, VP business, VP growth, like all these wonderful folks that decided to join us. This makes the journey easier. I think without a strong leadership, we couldn’t have grown from 30 to 200.

And that’s a very important foundation that luckily we set at an early phase, but we’re still on it. we’re missing a lot of new leaders. So it’s an ongoing task, obviously. And so I think self doubt, having a strong team to consult with, we do have a naturally inclusive culture. So we do make decisions. We do have open, honest and direct conversations about different dilemmas. So that just helps with being fully aware and just feel comfortable with the different doubts that we have, obviously, a daily basis.

That’s one of these shifts that I think different scaling books talk about, right? whether blitzscaling, the hard thing about hard things. Like every book that talks about hyper growth companies, I think discusses, it always feels like these books were written about us. Like all the challenges of generalists that were good until a certain point, and then we need specialists to take us to the next level. Like all the points that are really mentioned in every book that is about hyper-growth companies, we’re there. We check the box on each of these challenges.

There isn’t like a one secret that worked well for us. I think when we scaled the team, we made sure that it is very much aligned with the company’s goals. And so we always based on need and not based on recipe. So we didn’t like follow a specific best practice, but we have different cadences to evaluate our organizational structure. We meet every month. We have an HR review to evaluate specific performance topics and just trying to understand whether the structure that we have is the right one for the goals that we’re trying to set.

And it’s not like every month we’re changing the structure, but it is a process and a conversation that this cadence allows and then helps us make decisions in a timely manner to change structures of engineering teams or growth teams to be ahead of the next step and not make the organizational change six months late. This cadence, I think, is one best practice that really helped us in doing that.

Yeah. So luckily we have a few incredible investors that are very different from one another. From our seed days to today, our investors are very different in terms of what they care about, what they focus on. I think with startups, everybody talks about all the right things all the time, but it’s very hard to get the external view on what are the key priorities, what is the most important thing at the moment. There are so many things happening at any given time.

And I think what we saw with our board of directors is that in terms of understanding focus areas or getting an external perspective from folks that are not in the day to day saying, hey, I think there isn’t enough focus on X or you’re putting too much focus on Y. I think these are great conversation starters. And then we up and we start thinking whether this is correct or not correct. But many times I can give you an example. We had one investor that told us, hey, you’re not diverse enough.

What’s going on? This is not a way to build the company. And we talked about the product and features and UI. We didn’t talk about diversity when we were 10 people. But that caught us and we said, what is going on today? We’re 200 people, 49 women, 51% men. This was the seed for us to become a truly diverse company. Most of our leadership are women. And so I really think that we call ourselves, we need to change this now. And we started creating equality of opportunity for women engineers that obviously then led to equality of outcome in terms of our actual headcount.

So I think it’s the board that gives you this external perspective. When you have the right board members, they usually give very good advices and very good pointers to what to focus on. And that has been super helpful.

Yeah, there are, I think, specific areas that we get more advice on than other areas, And it depends on the founding team. So, for example, we’re three founders that are very product oriented, Product, user experience design. And so I think we rarely hear feedback on product. The board is not interested to give us feedback on product. I think they feel confident and they are right. this is an area where we have enough resources that we consult with and we have enough experience to be good on product.

But for example, scaling a team or which leaders to hire or which type of CFO should I hire? This is not something that I had experience with, at PayPal or eBay or at my first startup that got acquired by eBay. So there are certain areas where our investors just have seen a lot. They’ve seen a lot of mistakes. And so there the feedback is priceless. But, you know, like any team, you need to make sure you have a good set of investors and they give good advices and not bad advices and their feedback is accurate.

So luckily for us, the feedback is accurate. But there are certain topics like which CFO to hire or when is the time to hire a CFO. You know, these are questions that I found super helpful to discuss with our board. Before

So first, we made a real effort. I think everybody talks about the importance of culture. Everybody talks about the importance of diversity. But diversity is very easy to measure. gender diversity and race diversity. And so we just worked hard to create a real equality of opportunity. So we didn’t aspire to get to 50/50. I don’t think that’s the right way to do that. I think the right way for us was to make sure that, for example, with engineering, women engineers can find Melio or be comfortable joining Melio, handling different concerns that might be relevant for female engineers that might not be relevant for male engineers.

For example, many young mothers after maternity leave are very concerned to go and start working at a startup because a startup is considered to be a hectic environment. And so a corporate might be a more comfortable environment for someone after maternity leave. And so we created programs to create a lot of flexibility for young mothers that came back after maternity leave so that they can actually have a very balanced graduation into back to work. And we did the same with paternity leave as well. But I think we found that especially women after maternity leave are super concerned about getting back to startup more than men.

And it’s true for Israel and also the US. So we created this program to encourage that. We also became very active in terms of different conferences and events that are oriented or organized for women engineers and introduced our company and the different traits and culture values that we have. And just being active led to having a more equal outcome than other companies maybe in our space or in general, but equality of opportunity, that’s the key.

I guess one of the books that influenced me most is The Unbanking of America by Lisa Servon. I think that’s one of the books that emphasizes in the clearest way the importance of financial inclusion and democratization of financial services. That greatly influenced me to work at fintech and making money better. As I understood from this book and from working at PayPal, that making money better really changes people’s lives, whether it’s making it faster, cheaper, more efficient, more accessible. It’s just crazy how many people are not having access to very basic financial services.

So fintech helps there.

Any senior leader is always hard, regardless of the profession itself, whether it’s marketing or product or sales. Like having a leader is someone that our team is going and following their values, following the way that they work. And so hiring great leaders is just scary. And that’s one of the biggest challenges for us and any other Startups, not because of the expertise and skills, but because of the values and the leadership style.

Yeah, it is a tough one. I think being humble, I think it’s something that is very important. Being honest, like real honest. honest. is not a yes or no. There’s a spectrum for honesty. So being like really honest and just being a learner, like, learn it all, not to know it all. I think these are three important traits.

There’s an athlete that I admire, Roger Federer, the tennis player. I just admire the guy and his style. I think his style is effortless. Like, for people that watch tennis, Federer seems like he’s never sweating, he’s never running, he’s never making an effort, but he’s always there reaching the ball on time. And it’s because he’s super accurate and super skilled. That’s the perfect execution style, effortless. When things look effortless, it means that you’re just you don’t need to work hard. You just need to be very accurate.

And reaching this level of execution is just incredible. He achieved that with tennis. Like, we try to achieve that with product, but I really admire that.

It’s hard for me to pick one. I think we prioritized the type of people that our investors are over valuations. We turned down higher valuations than the ones we took from our current investors on every round, really. Like on our A, we had a higher valuation from another VC, on our B, on our C, this last round as well, we always received higher valuations, but we picked the investor that we want to work most with. I’m just like to have, like, really good people around the table.

Hard for me to pick one, really. It’s a hard one.

Our mission is to keep small business in business And we do that with simple B2B payments that maximize cash flow and minimize busy work. And I think the next five years is when the 18 trillion or whatever number you choose of some research says $18 trillion of paper checks, they will decrease to zero. There’s no doubt about it. B2B will follow the digitization of C2C and online retail. It’s a matter of who will do that, like who will drive this digitization, whether it’s Melio, our competitors, new competitors that we don’t know of yet that haven’t started yet.

And so we’re working very hard to fulfill our mission to keep small business in business and become the leading B2B payments platform in the US. Digitization will happen, and Melio is there to work hard to accelerate that.

Of course. my pleasure. Thanks so much for the great conversation.