Silicon Prairie’s Dwolla Strikes Out West to Find $16.5 Million

Photograph by Steve Pope/Bloomberg

Dwolla plans to keep its headquarters in Iowa, a state known more for its pork than for tech startups.

In 2010, Ben Milne made a journey across the Silicon Prairie for his first taste from the big tech trough. Then a twenty-something founder of a two-person startup in Iowa, Milne arrived in San Francisco with no business connections but a burning desire to pitch his mobile-payments company Dwolla to anyone who would listen. I was one of them.

Joining Milne on the trip was Jordan Lampe, a public-relations consultant who Milne soon hired as the company’s director of communications. With time on their hands, they rented a car to do some sightseeing in Palo Alto, California, then home to Facebook, Hewlett-Packard and lots of suburban families. ”It was like our college visit,” Milne said.

Milne, now 30, doesn’t have to beg for meetings anymore. Dwolla has 40 employees, and is on track to process $1 billion a year in payments. The company said today that it raised $16.5 million from Menlo Park, California-based Andreessen Horowitz, along with Dwolla’s past investors including Union Square Ventures, Thrive Capital and Village Ventures. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

Despite attracting the attention of a prominent Silicon Valley venture-capital firm, the online-payments industry will be difficult for Dwolla to crack. It’s a crowded, low-margin, often-regulated market that the big banks are not eager to concede. PayPal and Square are the rare success stories of the last decade or so.

Dwolla aims to replace the middle men — in this case credit-card companies — in the payment process. By using the company’s homegrown network, it avoids fees from Visa or MasterCard that drive up the costs of transmitting money. Dwolla transactions under $10 are free, and anything above that costs the recipient 25 cents, unless the sender chooses to pay. Compare that to PayPal, which can cost 2.9 percent plus 30 cents per transaction. (Person-to-person exchanges using bank accounts connected to PayPal are free.)

“It’s amazing, when you don’t have other people in the process, how profitable a payments company can be,” said Scott Weiss, a partner at Andreessen Horowitz who is joining Dwolla’s board of directors. “The whole paradigm is completely turned on its head. Now it’s just a question of execution.”

To help execute, Dwolla is appealing to companies to use the service as a way to pay employees and business partners. Customers include Getaround, a San Francisco-based startup that uses Dwolla to remit payments to car owners who rent out their vehicles, and Flashnotes, which runs a marketplace for digital-learning tools. In January, Milne’s home state of Iowa said that some departments will start using Dwolla for electronic payments such as collecting property tax, issuing refunds and processing vehicle-registration payments.

Soon, Dwolla expects to plant a more permanent flag near Silicon Valley. Some of the new funding will go toward opening an office in San Francisco. The company will keep its headquarters in Des Moines, Iowa. The company plans to almost double in size in the next year, while bolstering its sales team to go after bigger brands, Milne said.

“It really allows us to serve the business-development pipeline, and build products that consumers want and need,” he said. “We never really had the resources to do that before.”

For a guy who three years ago had never been to Sand Hill Road, he’s really picking up the lingo.

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