David v. Goliath: A Detroit entrepreneur offers an alternative to Square

Pressure is rising on the founder of Twitter to find an exit for his groundbreaking mobile payments technology company. Meanwhile, a competitor ramps up.
MAY 15, 2014
Square Inc. has gotten all the publicity and headlines when it comes to mobile payment processing. Understandably so. The San Francisco-based company reportedly has raised $440 million in four rounds of venture capital since it was founded in 2009 by another headline producer, Jack Dorsey, who co-founded Twitter Inc. in 2006. Investors include Birmingham-based Rizvi Traverse Management, a previously under-the-radar investment firm that was the biggest shareholder in Twitter when it had its big IPO last November. (As a result of that IPO, Rizvi partner John Giampetroni was honored this year as one of Crain's 10 Newsmakers of the Year for 2013.) In the four years since Square created an app and a small device that slots onto smartphones that allows merchants to do mobile payment processing, it went from zero in sales to processing more than $15 billion annual. It became a favorite of small business folks — operators of food trucks, artists traveling the art-fair circuit, flea-market exhibitors and the like — and a favorite of some large companies as well. Square is now the exclusive mobile processor for the bazillion Starbucks stores and the mobile processor for Whole Foods Market stores.

ALL'S WELL THAT ENDS WELL? NOT EXACTLY

Alas, the most recent headlines haven't been so rosy. The Wall Street Journal and other news organizations reported April 21 that Square is under intense pressure from its investors to find a buyer, its losses having grown wider as it burns through that nearly half a billion in equity capital. Reports are that Square had a loss of $100 million in 2013 and has been in talks with Google Inc., Apple and eBay Inc.'s PayPal about being acquired. Marc Gardner is probably happy these days he hasn't had nearly so many headlines and very little attention. If Square is Goliath, Gardner's PayAnywhere is David. A small unassuming David who isn't worrying about killing the giant, just carving out enough space in a huge market to give him another profit center. In 1992, Mr. Gardner founded Troy, Mich.-based North American Bancard, a processor of credit card payments that has revenue of about $500 million and 600 employees processing $16 billion of transactions annually for more than 250,000 merchants nationwide. Mr. Gardner launched PayAnywhere in 2011 with an app and its own small device to allow mobile phones to process payments for merchants. Since then, it has taken up a big chunk of his time and energy. "I'm pretty passionate about it. I'm pretty excited about it," he said. Early in April, at the big Electronic Transaction Association show in Las Vegas, Mr. Gardner launched what he calls Storefront, a transaction processor that is a combination of tablet computer and stand. It affixes to surfaces with a suction cup and conducts cloud-based processing, sales data and inventory control. Storefront competes directly with Square's tablet system, which is called Register. Storefront wasn't cheap to bring to market. Mr. Gardner hired two designers from Apple and had it designed it from scratch, investing more than $30 million in development costs over three years. When he launched PayAnywhere as a separate LLC, Mr. Gardner told Crain's he was going to fund it internally and avoid diluting equity by turning to the venture-capital or private-equity markets. At the same time he was avoiding the diluting of equity, he was also avoiding the external pressures that arise from investors growing tired of the inevitable bumps in the road, delays in bringing cool new technology to maker and financial losses. Smart move. No one is clamoring for him to sell, except maybe for the chocolate Labrador he brings to work who might want a little more attention than Mr. Gardner can spare, focused as he is these days on landing merchants and building volume for PayAnywhere. Sudip Datta, a professor of finance at Michigan's Wayne State University and interim chairman of the department of finance in the School of Business Administration, said holding off on outside equity was a smart decision. "Having and keeping control of a fledgling new business venture is important. In the case of Square, that control has been compromised as the VCs are eager to see their liquidity event or exit. They typically don't have much patience, three to five years at most," Mr. Datta said. "So, if one has the luxury to avoid VC funding — not too many entrepreneurs have this luxury — you have a longer time horizon and more degrees of freedom to expand the business," he said. Mr. Gardner has always been open about revenue for North American Bancard. He declines, though, to disclose any number for PayAnywhere — the number of employees, revenue, transaction dollar volume, number of merchants signed up and so forth. He acknowledges being much smaller than Square, but doesn't care to let the competition know how much smaller. But he is pleased, he says, with all the metrics. The company is still losing money, but if its business volume is just a fraction of Square's, so are the losses. Asked if he is considering cashing out by doing an initial public offering for PayAnywhere, now that the IPO market has got hot, again, Mr. Gardner said: "No." When asked if would consider selling PayAnywhere if Google or PayPal or any of those possible buyers of Square came calling, Mr. Gardner smiled and said: "I always answer my phone." Mr. Datta had a bit of advice for Mr. Gardner. "I expect that ultimately Gardner's company will be bought out by the likes of Google, Apple, etc. However, given the pace of technological innovation in this space, if I were Gardner I wouldn't wait too long to cash out," he said. Mr Gardner, though, sees a different outcome that is more likely. He thinks that as mobile payment becomes more ubiquitous, it will probably make sense to merge North American and PayAnywhere into a single entity. "They're on a perfect path for collision," he said.

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