Sunday, September 30, 2012

Two “Cash Killing” Startups to Watch


Social media investments have gotten a bad rap — and rightfully so. Lackluster performance and questionable business models have stolen the spotlight from highly touted social media IPOs Groupon, Pandora Media and Zillow.

Many members of the financial media have declared the flurry of activity in the social media market to be the next Internet bubble. Considering the current state of initial public offerings, these statements might not be too far from the truth. After all, even the savviest Internet businesses have stumbled when it comes to social media investments…

Google famously overpaid for YouTube when it bought the site in 2006 for more than $1.6 billion in stock. The great minds at Google were never able to squeeze enough profits out of the free video-sharing site, which, to this day, remains more popular than profitable. In short, millions of lost dollars across the social media landscape have proven that it is difficult to adequately monetize even the best technology ideas.

But recently, two intriguing startups sporting a mix of social media and financial know-how have attracted my attention. These two companies are looking to change the way small businesses and consumers interact by removing cash from the equation and streamlining transactions. Each offers unique, potentially profitable ideas, and I consider both companies to be compelling buyout candidates or potential future IPOs.

The first company is Square, which is the brainchild of Twitter co-founder Jack Dorsey. Square is a mobile payment company. It targets small businesses and consumers by offering free apps and a small credit card reader to process credit cards on a smartphone or iPad. The company has already caught the eyes of private equity, raising approximately $100 million back in June. Now Square is expanding its consumer offerings with unique payment features…

Earlier this month, Square launched a mobile app called Card Case. The app allows customers to pay for an item by just telling the cashier their name. The customer’s phone (which doesn’t have to leave his pocket) automatically opens a particular store’s tab when he enters and the cashier can confirm the customer’s identity with a photo that pops up on the store’s Card Case app display.

The technology removes many of the barriers of starting a small business — mainly, the expense of credit card processing equipment. “The technology is a boon for many fledgling entrepreneurs,” reports the, “particularly small and mobile food businesses — who found the traditional way of processing credit cards either cost prohibitive or unfeasible.”

As intriguing as Square might be, it still relies on traditional means — the credit card industry — to transfer funds. This next startup has found a way to skirt the entire Visa and MasterCard network by building its own platform.

Enter Dwolla, a tiny, Iowa-based startup looking to compete with PayPal and major credit card networks.

“With Dwolla, payments are made directly from your bank account. No credit or debit cards are allowed. And because they don’t exist in the system, we don’t have to bring the fees into the system,” founder Ben Milne told Business Insider.

“You can spend any amount of money, and when you do that, the person on the other end doesn’t have to pay 1, 2, 3 or 4%. They pay only 25 cents a transaction, which is especially helpful when it’s $1,000, $2,000 or $5,000 transactions. Obviously, PayPal becomes very cost prohibitive with those larger transactions.”

It’s an amazing concept — yet it has also been a difficult journey for Milne and Dwolla. The company spent a majority of its developmental months focusing on legal issues surrounding its business. The consumer banking and credit card industries are highly regulated, and Dwolla had to find the legal know-how — and financial backing — to navigate its business plan.

So far, everything has fallen into place for this Midwestern company.

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