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.

Original post is Silicon Prairie’s Dwolla Strikes Out West to Find $16.5 Million by Tech Deals.

Courtesy Jemstep

Jemstep provides algorithm-driven advice on how to save for retirement.

Simon Roy prefers computers to professional money managers because machines don’t work on commission.

The dark truth about the financial services industry is that brokers such as those found at a big bank branch or a strip mall often receive a cut from mutual fund managers when they make a sale. Brokers tend to lean toward the funds offering higher commissions, regardless of their performance. And that bias can result in a bad buy for the average Joe investor.

Jemstep aims to remove the bias with its money-management website, which lets retail investors import their retirement-account data and get automated advice, said Roy, the startup’s president. Jemstep offers free advice on asset allocation and will charge a flat monthly fee, starting at $18 per month, based on the size of the user’s retirement portfolio in exchange for suggestions about specific funds to buy and sell. Because Jemstep doesn’t play the fund-commission game, the Los Altos, California-based startup typically recommends inexpensive index funds, instead of the pricier mutual funds that brokers seem to love.

“The incentive structure under which brokers operate is designed to serve the interests of institutions, not the interest of investors,” said Roy, 51, in an interview. “Our advice is objective and untainted by any third-party influence.”

Jemstep began offering its automated portfolio manager to the public in January as a free service and has built up its membership to about 2,000 users, including employees at Google and EBay. For those managing less than $25,000 in retirement assets, the service will remain free. The price to manage larger portfolios can be as high as $70 per month, including portfolio analysis, tracking and rebalancing advice.

Backed by $10.5 million in private funding, Jemstep is among a growing class of startups aiming to tear down the traditional brokerage world by providing cheaper advice and more transparency. SigFig offers weekly suggestions for saving money and improving investment performance. FutureAdvisor, backed by Sequoia Capital, says it can help consumers save as much as 80 percent on fees by optimizing their portfolios.

Jemstep was founded in 2008 by Michael Blumenthal, a former stockbroker who is now the company’s co-chief executive officer. Jemstep has 20 employees split between the U.S. and Johannesburg, where Blumenthal is based.

The startup developed its recommendations by working with Windham Capital Management, a Boston-based firm with about $1 billion invested in stocks. The portfolio manager makes general suggestions, such as how much to allocate to international equities or when to lower exposure to U.S. stocks. The next step involves telling customers exactly which funds to dump and which to purchase.

“We’re trying to help people take action,” said Roy, referring to consumers’ tendencies to do nothing rather than seek out costly advice.

Considering Wall Street’s reputation lately, trusting a startup with our financial futures doesn’t sound so crazy.

Original post is Why You Should Consider Taking Financial Advice From a Computer by Tech Deals.

Photograph by Lachian Currie

Is Silicon Valley becoming the new Wall Street?

As major banks grapple with layoffs, fewer bonuses and expensive legal bills from mortgages gone bad, financial startups are gaining momentum. Three announcements out of Silicon Valley today illustrate how hot this industry is.

Prosper Marketplace, a provider of personal loans, said it raised $20 million in a venture funding round led by Sequoia Capital, and recruited Stephan Vermut from Wells Fargo to be the startup’s chief executive officer. PayNearMe, which develops a payment network for people who use cash instead of credit or debit cards, raised a $10 million round led by August Capital. And a venture capitalist has set up a firm to invest specifically in these types of companies.

Micky Malka introduced Ribbit Capital today after closing its $100 million fund. The Palo Alto, California-based venture firm will target startups that specialize in financial lending, payments, personal-finance tools, and services for the accounting and insurance industries. Ribbit plans to invest in at least a dozen companies, Malka said in an interview.

Young financial companies tend to focus on untapped or under-served markets. Lenders, in particular, are gaining appeal because many of the big banks are shying away from loans, amid the uncertainty and increased regulation following the financial crisis of the last decade. That phenomenon helped BillFloat, an online provider of micro loans, raise $21 million.

“We’ve never had such a perfect storm of events happening,” Malka said. “None of us are proud of our banks.”

Regulators haven’t exclusively targeted the major financial institutions. For example, Prosper began in 2006 as a marketplace matching borrowers and lenders, operating in a legal gray area. Two years later, the Securities and Exchange Commission stepped in. After shutting the service down, the San Francisco-based company spent $4 million to retool its business and then reopened in 2009.

Now, people turn to Prosper for debt consolidation, auto-repair loans and business-inventory capital at interest rates as low as 6.6 percent. The company doles out loans of up to $25,000 each. Those loans are funded by investors — both retail and institutional — who use the service as an alternative to stocks and bonds.

Prosper’s revenue of $1.9 million in the third quarter was more than triple what it was a year earlier. But the company trails LendingClub, another online lender based in San Francisco, which recorded $9.9 million in the same period. Backed by venture capitalists including Norwest Venture Partners and Kleiner Perkins Caufield & Byers, LendingClub has issued $1.25 billion in loans since opening in 2007, more than double Prosper’s $447 million.

Vermut, Prosper’s new CEO, had led Wells Fargo’s prime-brokerage division since last year when the bank purchased the company he co-founded called Merlin Securities. The investment by the venerable Sequoia Capital is a vote of confidence for Prosper.

“This is a market and asset class that is very nascent,” Pat Grady, the Sequoia partner who led the Prosper investment, said in an interview. “If it works, both Prosper and LendingClub will be very big, very meaningful businesses. All the signs are there that it’s going to work.”

Based in Sunnyvale, California, PayNearMe is building an entirely new payment system geared toward the Americans who don’t have credit or debit cards. Since mid-2010, PayNearMe has let consumers purchase goods online, pay loans and buy bus tickets by going to their local 7-Eleven and using cash.

Along with the $10 million in financing, PayNearMe introduced a service that simplifies the sign-up process so that landlords, collection agencies, lenders, schools and insurers can accept the payment method, CEO Danny Shader said in an interview. The express service costs merchants $199 to set up, he said.

“This is for people whose only option today is cash or money orders,” Shader said. In other words, the ones being ignored by traditional banks.

Original post is Banks’ Pain Is Startups’ Gain by Tech Deals.

Photograph by Peter Cade

After raising $21 million, BillFloat isn’t stopping there. The company plans to raise debt financing later this year.

Where does an online micro lender go when it needs money? To venture capitalists, of course.

BillFloat, a three-year-old San Francisco-based startup, raised $21 million to fund its plans to sign on more partners in the banking, telecommunications and utilities industries. Investor Growth Capital led the financing with support from existing investors Venrock, First Round Capital and Baseline Ventures. The company has raised a total of $36.9 million.

Ryan Gilbert, BillFloat’s co-founder and chief executive officer, said he plans to expand his 40-person team by two-thirds this year, adding mostly developers. BillFloat expects its network to drive more than $400 million in loans this year and become profitable. The company charges a fee of 3 percent to 7 percent on each transaction.

BillFloat has forged deals with utilities, cable companies, wireless carriers and insurers, letting consumers take out short-term loans to pay bills. BillFloat’s automated underwriting system allows the company to reach more than 700,000 customers that most banks consider too risky.

“The credit environment for consumers is very difficult,” Gilbert said. “We provide a viable alternative to payday loans and overdraft protection.”

Over time, Gilbert expects BillFloat’s biggest opportunity to be in licensing its technology to financial institutions with much bigger balance sheets. BillFloat also said today that it’s focusing on a new service called More-Time-to-Pay, aimed at going beyond the 30-day loans it currently offers for bills. For example, the company has a partnership with MetroPCS so that customers can take out a loan for a smartphone and pay it back over six to nine months.

And BillFloat isn’t done with its own fundraising efforts. Later this year, the startup plans to raise debt financing — up to $100 million — to fund loans.

Original post is BillFloat Raises $21 Million to Expand Loan Offerings by Tech Deals.

Photograph by Jennifer S. Altman/Bloomberg

Former U.S. Treasury Secretary Lawrence Summers is joining John Mack and Mary Meeker on LendingClub's board.

LendingClub’s high-profile board of directors just got even more star power.

The provider of online consumer loans announced today that former U.S. Treasury Secretary Lawrence Summers joined the board, which includes ex-Morgan Stanley Chief Executive Officer John Mack and Internet analyst-turned-venture capitalist Mary Meeker.

Summers, 58, worked for the Treasury Department from 1993 to 2001, including a two-year stint as secretary. He also spent five years as president of Harvard University, where he currently teaches economics. He led the National Economic Council under President Barack Obama through 2010, and was previously chief economist at the World Bank.

“When you’re running a consumer lending business, economics are important,” LendingClub Chief Executive Officer Renaud Laplanche said in an interview. “Having someone on the board who’s a reputable economist and one of the best of a generation is a very strong benefit and strong competitive advantage.”

In the first quarter of 2013, the San Francisco-based company will name its eighth board member — its last vacancy — to also serve as the chairperson of its audit committee, Laplanche said.

LendingClub issues loans of up to $35,000 to help consumers pay off student loans, remodel their homes and take vacations, offering interest rates that are typically lower than credit cards. The loans are sold in pieces to retail and institutional investors on LendingClub’s website. The notes have provided a net annualized return of between 5.7 percent and 12 percent a year to holders, according to the company.

The company has issued more than $1 billion in loans since opening in 2007 and is likely to double revenue next year to $80 million, Laplanche said. In the peer-to-peer online loan market, LendingClub competes with Prosper Marketplace, which is also based in San Francisco.

“At a time when our financial system has become more concentrated, I think there are important opportunities for disruptive innovation that is oriented to making the economy work better for regular families,” Summers said in an interview. “I’ve been concerned about questions of credit access for a long time.”

The intersection of finance and technology has become an attractive spot for Summers. In June 2011, he joined the board of Square, the mobile payments startup created by Twitter co-founder Jack Dorsey. That month he also joined Silicon Valley venture capital firm Andreessen Horowitz as a special adviser to help entrepreneurs looking to build their international operations.

Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

Original post is LendingClub Adds Larry Summers to Its Board of Big Names by Tech Deals.