Can Clinkle Bring Mobile Payments To Scale?

Welcome to the latest edition of PYMNTS.com’s VC Voices: a weekly column where we bring you commentary from the best of the best around the world of payments investment. Want to know what the biggest backers of our industry’s innovators and disrupters think? We give our VCs 500 words of unedited space to do with as they please, so you’ve come to the right place.

This week, PYMNTS.com hears from Dan Rosen, general partner at Commerce Ventures, to get the inside scoop on mobile payments startup Clinkle’s massive seed funding round.

Dan Rosen, General Partner, Commerce Ventures

Venture news is abuzz with Clinkle’s announcement of what has been called “the largest seed round in Silicon Valley history”. The company is not saying a lot about their products, but they have made public their goal to fundamentally change the way people make payments. In short, Clinkle is developing a very different approach to mobile wallets.

BACKGROUND

I had the pleasure of spending time with Lucas Duplan (Clinkle’s CEO) in 2011 when he participated in the Summer at Highland accelerator program. It was pretty memorable because the Clinkle team (the largest of that class) took over the biggest room in Highland’s Menlo Park office for almost 4 months. It became clear quite quickly that Lucas was both very smart and had a compelling vision for the business he wanted to build. These qualities helped him recruit his dedicated, talented technical team away from lucrative summer internships at leading local tech companies. Lucas’ talent for recruiting clearly extended to advisors and investors. Even before his first day in our program, Lucas had assembled an amazing group of advisors (including Stanford President John Hennessy), and we all know about the exceptional set of investors who comprise his seed round. Although my interactions with Lucas were primarily informal chats about the market and Clinkle’s product, I always enjoyed our discussions and found his product vision quite exciting.

WHY CLINKLE HAS PROMISE

The concept behind Clinkle is surprisingly simple. Mobile payments is still a nascent industry for a few reasons: 1) we have to carry our wallets for other, non-payment reasons, 2) today’s electronic payment method of choice (credit or debit card) works pretty well at the physical point-of-sale, so mobile isn’t solving an actual problem, and 3) there isn’t enough density of merchant acceptance of mobile payments to support broad consumer usage. Clinkle aims to solve for all of these:

1. The Physical Wallet – Many who have tried to build mobile wallets so far have neglected to solve holistically for non-payment wallet items (driver’s license, insurance cards, loyalty cards, etc…). The closest perhaps might be products like Lemon and CardStar, which are capturing and storing wallet items digitally on the mobile phone. The brilliance of focusing on a campus environment to start is that college students typically have less crap in their wallet than the average American consumer. This means it’s easier to completely digitize their wallets, especially where their non-payment credentials are school related (ID, campus health, student housing access).

2. Replacing Cards – NFC has been a challenged concept for the better part of a decade because it was a technology searching for a need. Of course we all know we’ll eventually pay with our phones, but the critical unanswered questions are “Why?” and “When?” In truth, the American consumer has it pretty good. We can pay with ease, quickly and transparently (no fee to us) at most formal merchants with credit or debit cards. Unless it’s that easy to pay with a phone, widespread mobile payments are not happening anytime soon. Well, as we’ve seen with ‘mobile payments’ apps from Square, Starbucks and Uber, it is possible to get the user experience right. Without divulging anything non-public, Clinkle’s technology solves for a very compelling user experience and thus has a strong chance to overcome this hurdle to adoption.

3. Merchant Density – Beyond user experience is another huge barrier to consumer adoption – merchant acceptance. If there aren’t sufficient merchants accepting a mobile payment method within a consumer’s normal shopping geography, it becomes very hard to earn their devotion. It’s a question of relevance and convenience, which refers back to point number two above about user experience and replacing the card. Let’s assume for the sake of conjecture that Clinkle aims to build a payments network over time. As most of you know, consumer payment networks are two-sided markets that involve issuing (creation of accounts from which money can be spent on the network) and acceptance (creation of accounts which are able to accept money over the network from the issued accounts). Traditionally, consumers are issued accounts (i.e. cards) and use them to make payments at merchants, which accept them. New mobile payments players, such as Google and Isis have had a hard time reaching merchant acceptance scale. Clinkle’s campus focus promises a seemingly more attainable proposition for local merchant acceptance, given that college students tend to spend most of their money at a limited number of merchants on or near campus.

CHALLENGES THEY MUST OVERCOME

Clearly, Lucas is an entrepreneur with plans to build a big company. Building payments businesses from scratch is difficult … especially if you want to transform the industry. Below are some of the challenges Clinkle is likely to face:

1. Infrastructure – Creating a new payments business requires substantial resources in transaction processing, regulatory compliance and fraud prevention. None of these is impossible, but the level of risk increases when building an alternative payments network from scratch for consumer-to-consumer money movement. Given the impressive people supporting the company, hopefully Clinkle will be able to manage this challenge.

2. Broad Adoption – The college campus strategy is unique relative to other mobile payments ventures, and we all know that companies like Facebook got rapid viral spread by starting in that environment. However, this strategy begs the question of how Clinkle will eventually reach the mainstream consumer and solve for merchant acceptance beyond the campus. Some might argue they could be a very large company by the time they need to figure that out, but it will eventually be a challenge to overcome.

3. Financing – Clearly, fundraising is a strength for Lucas, and as a result he has raised an enormous amount of funding considering his pre-launch stage. Most often, substantial funding is an asset, but sometimes it can also be a challenge. With so much capital sitting in the bank account, the temptation can set in to ‘grow faster’, which could translate to rapidly increasing the burn rate. This is concerning if the company either has trouble raising their next round (probably not Lucas’ primary worry) or if the early data on usage ends up not being compelling. In fact, this is the fundamental risk of raising such a large round early – it forces you to ‘go big or go home’. Some people will admire this boldness and some will find it distasteful relative to the lean startup/customer development approach that has become popular in recent years. I’ll leave that for others to debate.

THE “SEED ROUND”

The news today was that Clinkle raised $25 million as a seed round. It was news because it is a huge sum of money for a pre-launch startup and because of the credibility of the people who invested (Peter Thiel, Accel, A16Z, the VMWare founders, etc…). My understanding (seemingly confirmed by Amir Efrati’s April piece on the company) is that Clinkle has raised this money over time, rather than in one monolithic round…perhaps this makes the amount seem slightly more rational? In addition, I can’t help but wonder if maybe Clinkle will mimic PayPal’s famed $10 + $10 strategy, with which they gave every new user $10 in their account and $10 for each other user they refer. This is utter speculation on my part, but if they intend to seed adoption that way, it could get very expensive, very quickly and hence require big funding.

In summary, I’m not sure if Clinkle will be the next PayPal or a fantastic flame out, but I see some compelling aspects to their strategy and I have to admire the audacity of their vision. What they are attempting is very hard, and I wish them luck on their journey. We will undoubtedly spend a lot of time discussing the company at conferences and dinners for months to come, so they have already succeeded in at least winning important industry mindshare.

——————————

New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.

Click to comment

TRENDING RIGHT NOW