For investors, payments companies are so yesterday. Or at least it would seem so based on the recent decline in startup investments in the payments industry.
Venture-based funding rounds to payments companies, in fact, are falling, dropping to 59 startups in the third quarter of 2013 to just 41 during the second quarter of this year, reports TechCrunch, citing CrunchBase data.
There have been a few payments industry successes. For example, online payments provider Stripe raised $80 million from investors in January. Leading that round was Founder’s Fund, established by PayPal co-founder Peter Theil, along with participation from Sequoia Capital, Allen & Co. and Khosla. Stripe, which makes a merchant application programming interface for accepting credit card transactions, in January was valued at $1.75 billion.
And there’s also micropayment-acceptance specialist Square, which closed on $200 million in debt financing in April. Goldman Sachs reportedly led the Square arrangement, along with Morgan Stanley, JPMorgan Chase, Barclays and Silicon Valley Bank.
However, despite the few darlings that have caught investors’ fancy, the payments market presents problems that make it difficult for startups, TechCrunch noted, citing Khosla Ventures’ Benjamin Ling.
“Payments are a massive industry with a lot of room for innovation, but it is very hard to break through because not only do you have to get consumers, you also need merchants and often times… third parties like associations behind you to be successful,” Ling noted. “Consumers want trust and ubiquity in payments. Merchants want to know there are large numbers of consumers. For a startup none of these is usually true. The chicken and egg problem in payments is one of the hardest to break through.”
Those challenges are what make the successes of such companies as Stripe and Square, plus a few others, that much more remarkable.
The slowdown, however, may simply be a natural progression, TechCrunch noted, citing Bain Capital Ventures‘ Matthew Harris.
“It basically came from nowhere if you look at the earlier quarters, and it was almost literally zero in the prior years,” Harris said. “Payments have gone from being irrelevant in the venture landscape to being a meaningful sub-sector, but trees don’t grow to the sky. … I also think there has been a shift in focus to alternative and ‘peer-to-peer’ lending as the hottest sector, which I think is drawing away from capital.”