Bill Me Later went through a few near-death experiences as a start-up in the payment services industry. The company had to revise its business plan before it figured out its real service: performing instant credit checks on Internet users so that they can buy goods online without using a credit card. When someone wants to buy something, Bill Me Later runs a credit check on them. If they are running up bills or they owe Bill Me Later money, it doesn’t approve the credit. Gary Marino, chief executive, kept the operation going for almost eight years and last week managed a big exit. eBay agreed to buy Bill Me Later for $945 million, resulting in one of the best returns for VCs on a deal this year. Here’s his advice on how to survive in a tough market.
VB: How did you get started at Bill Me Later?
GM: I’m not a traditional entrepreneur, but I do like to invent and reinvent. I was helping run a start-up as a consultant. Then a VC from Crosspoint Venture Partners asked me to help. I ran into this company, which was funded by Crosspoint and Nortel. The business model wasn’t that good. I had to convince the VCs at Crosspoint that it would not be very successful. They asked me to stay on and rebuild the company. They had about 90 employees. We started from scratch.
VB: What was wrong with the business model?
GM: It was a model based on calling cards, where they had prefixes that you dialed in and would use it for land-line phones. It would use calling cards as a payment device. You put your number into it with an authorization digit and used phone switches to transmit transactions in addition to phone messages. It was a venture idea backed by Nortel to try to enter the industry for payments. It had significant customer acceptance issues and significant regulatory issues. It was a time when things were moving fast. Nortel just hadn’t done its homework well. I called Jim Dorrian from Crosspoint. We did a very traditional, academic exercise. We looked at the gaps for making payments on the web. We didn’t have a business model. We didn’t have the name. We were talking to the AOL guys about what merchants would want. There was a conversation about magazine subscriptions where the cards had a checkbox item that said, “Yes, I agree. Bill me later.” It was an idle conversation but then our marketing guy’s eyes lit up. He got the trademark for it. So then we had a relationship in place with AOL before we talked to Mike Kwatinetz at Azure Capital Partners. Then 9/11 happened. We had engaged Mike a month earlier. It became a nightmare. We were near insolvency.
VB: What did you have to do to survive? We’re in a tough time again now.
GM: Liquidity comes and goes in the capital markets. You could argue the bust was all about liquidity. Around 9/11, there was a loss of liquidity. We’ve had to survive each of those moments. We have done well with the backing of core investors like Azure Capital, Crosspoint, Kingdon Capital and GRP Partners. We saw a downturn was coming in the fall of last year. We saw the IPO market was closing. We did a mezzanine round, raising a bunch of money from Amazon.com and others. It was more than $100 million. We had T. Rowe Price. It was under the assumption that bad times were coming. That really helped us. We never thought it would get quite as bad as it is now.
VB: How much did you raise altogether?
GM: We raised close to $300 million altogether over the course of seven years. We had been on the road to do an IPO. The last round was meant to grease the skids for the IPO so that it would make the deal more attractive to investors. Instead, we continued to build the company privately.
VB: Did you expect to have to go for [almost eight] years before an exit?
GM: We never expected it before the previous bust. But we have seen a few miracles in our industry such as PayPal. [It takes a long time to change the payment industry]. It was surprisingly long, but we’re proud we made it.] Read the rest of this entry »
