Thesis
By 2020, B2B payments amounted to $120 trillion annually around the world. Before the COVID-19 pandemic, only 33% of B2B payments were made electronically, compared to 70% of B2C (business-to-consumer) payments. Cashless and contactless payments have become increasingly popular among consumers for convenience and simplicity, and merchants appreciate the streamlined payment process offered by digital options. Despite that, many businesses today still use cash, checks, and physical invoices to transact with other businesses. 40% of all B2B payments in the U.S. are still made via checks.
On average, 65% of businesses spent 14 hours per week on administrative tasks related to collecting payments in 2021. 40% of CFOs reported decreased check usage due to digital accounting in 2022. In the United States, it is estimated that $3 trillion is tied up in outstanding account receivables (AR); on average, businesses have 24% of their monthly revenue tied up in AR, payment terms, or trade credit. Poor billing and AR practices have led to many problems, which can be rectified with digital automation. As a result, many businesses are shifting to digital payments.
Melio allows businesses to manage their B2B payments and receivables digitally. It offers a single, integrated solution that allows businesses to make and receive payments – helping with cash flow needs, reducing or eliminating late payment costs, and saving time spent on administrative payment-related tasks.
Founding Story
Melio was founded in 2018 by Matan Bar (Co-Founder/CEO), Ilan Atias (Co-Founder/CTO), and Ziv Paz (Co-Founder/COO; left at the end of 2021).
Before co-founding Melio, Atias was VP of R&D at a predictive maritime analytics company, and Paz worked at a private equity fund in Israel. In 2009, Bar was the co-founder of The Gifts Project, a company that allowed friends to collaborate and purchase gifts for mutual friends. The startup was acquired by eBay in 2011 for $20 million. Bar went on to work at PayPal, which at the time was owned by eBay. At PayPal, he led the group responsible for peer-to-peer payments globally. Bar was shocked to see how SMBs in the US utilized applications from Venmo, Square, etc. to manage consumer payments while still cutting paper checks for B2B payments. As a result of this experience, Bar conceived the idea to bring the same ease of use to back-office payments that PayPal provides for peer-to-peer payments.
After the founding team came together to start Melio, they began interviewing customers and prospects to better understand the nuances of a B2B payment process. They did not have the right questions to ask small businesses, so they started a small bookkeeping firm. For four months, they managed end-to-end accounting and payables for 10 small businesses. This experience proved invaluable in designing Melio’s initial product. The team discovered that the priority for small business owners was to minimize financial instability and optimize cash flow, not to automate payments. As a result, the team focused on developing a third-party account that allows buyers and sellers to pay and receive funds however they prefer.
Ziv Paz (co-founder/COO) departed from the company in 2021, after which Tomer Barel joined as COO in March 2022.
Product
Source: Melio
Pay
Melio Pay lets businesses pay their vendors, suppliers, or contracts seamlessly through whatever method the businesses prefer, regardless of how the vendor wants to receive the payment. Vendors get a check or a bank transfer and don’t need to sign up. Melio supports payments through ACH (free), credit cards (fee of 2.9%), or checks ($1.50 per check).
Users can remove dual data entry with automatic two-way sync for all bills and bill payments with Melio's QuickBooks Online or Xero integrations. Users can see invoices with customer information in both places, send payment requests easily, and auto-reconcile payments. To upload invoices, users can use their phones to take a photo. Melio will then grab the relevant information it needs to schedule the payment. It also allows businesses to pay multiple bills, split a single bill into more than one payment, and make international payments to over 90 countries. The product also supports approvals workflows, automated bill capture, and allows customers to collect points and rewards points on credit card payments. Melio also offers an iOS app.
Source: Melio
Get Paid
Melio’s “get paid” offering allows businesses to receive payments by credit card, ACH, or check. Invoices are sent in an email with a built-in pay button.
Melio helps businesses streamline the payment process for their customers by providing them with a personalized payment link to pay the bill and integrating it into back-office bookkeeping software like QuickBooks, Xero, FreshBooks, and Business Central. It will match all incoming payments with invoices so they are automatically reconciled. Businesses can add their branding to payment links, requests, and emails. They can track every payment from request until it's paid and are offered full payment protection from fraud.
Source: Melio
Accountant Dashboard
Melio also offers a business payment solution for accountants. The accountant dashboard help accountants manage their client’s business payments and set up approval workflows. This tool functions similarly to the “pay” and “get paid” offerings, although it is designed for accountants with multiple clients requiring access to multiple businesses. Accountants can connect their clients’ QuickBooks Online or Xero accounts to eliminate dual data entry and get automatic two-way sync for all bills and bill payments. They can add members to their team and assign specific client accounts to them to manage workload and data access. Through the dashboard, accountants can schedule payments on behalf of their clients. There are no sign-up fees for the accountants.
Source: Melio
The Melio Network
Businesses can speed up their payment process with a Melio-verified network of billers. They can pick their billers and pay without the billers needing to sign up. The Melio Network includes 7K+ local and nationwide billers across telecoms, utilities, financial institutions, and local vendors and suppliers. The offering eliminates the need to enter payment delivery details over and over. The vendor list and Melio’s network keep track of all that. Users can add the bill, pick the biller, and schedule payment.
Market
Customer
When Melio started, it strategically targeted SMBs like wine shops or hardware stores in the US. This part of the market was underserved by existing solutions, which focused on large companies instead. Melio’s target buyer within these small businesses isn’t the finance team as with larger companies, since most small companies have only a handful of employees. The business was therefore designed around having a small business owner as the primary customer.
Market Size
B2B payments amount to $120 trillion annually. Before the pandemic, only 33% of B2B payments were made electronically compared to 70% of B2C payments. 40% of all B2B payments in the U.S. are still made via checks. The US is home to over 33 million small businesses. SMBs are interested in adopting payment solutions, and 73% of SMBs reported they are likely to pay for an all-in-one payment platform.
Competition
Bill: Bill is Melio’s largest direct competitor. Bill is a publicly traded company with a market cap of ~$10 billion as of May 2023. It was founded in 2006. Its revenue was ~$640 million while serving over 157K customers in 2022. Like Melio, it supports accounts receivables, accounts payables, accounting software integrations, approvals, controls, and mobile apps. Unlike Melio, it offers an all-in-one expense management solution via Divvy, which it bought in 2021.
Stripe: Stripe, founded in 2010, is a major player in the payments industry with a wide offering of products. Its core business focuses on C2B (customer-to-business) payments, such as ecommerce. However, It also has an AR tool called Stripe Invoicing. Although Stripe does not directly compete with Melio’s core business, given Stripe's large number of existing customers and brand recognition, it has a large distribution potential. It can expand capabilities and potentially capture more market share. Stripe has raised a total of $8.7 billion and was valued at $50 billion as of March 2023.
Tipalti: Tipalti is a payables automation platform with a wider offering than Melio. It is more geared towards larger companies with more complex needs. It was founded in 2010 and processes over $30 billion in annual payments volume as of December 2021. It offers bank transfers in over 32 countries. Tipalti has raised $715 million in funding. As of December 2021, Tiplati was valued at $8.3 billion.
Stampli: Stampli, founded in 2015, is similar to Tipalti, with the main difference being that Stampli does not have as a mature invoice or bill generation software product. But compared to Melio, Stampli has a wider offering, targeting larger companies with more complex payment processes. Stampli has raised $84.7 million. As of May 2021, Stampli had 1K customers and had managed $20 billion in transactions.
Plastiq: Founded in 2012, Plastiq has similar product offerings. Both companies offer payment tools for small businesses, allowing their customers to pay through credit cards even when a vendor doesn’t accept that payment method. Plastiq operates on a SaaS model, with three product levels ranging from a free version to $119 monthly. Plastiq has raised $141.8 million, and its latest funding was a SPAC merger with Colonnade Acquisition Corp, which valued it at $480 million in 2022. In May 2023, Plastiq filed for bankruptcy.
Business Model
Melio is free to join for its customers and does not charge for ACH bank transfers or subscription fees. Customers who want to process payments faster incur a fee from Melio. This works for Melio in the aggregate if there is a high volume of payment transactions. Melio can afford this strategy because it spends less to acquire and onboard customers, and its software handles much of the work to serve them which translates into lower marginal costs. The company can thus offer its product for less than competitors. When one of its customers pays another vendor, that vendor does not need to sign up for Melio and can receive the payment how they want. But if they sign up, they can get paid faster – a large incentive.
Source: Melio
Traction
As of October 2022, Melio was processing $2.5 billion monthly in payment volume and was on track to reach an annual run rate of $40 billion by the end of 2022. In September 2021, it was reported it grew its monthly processing volumes by 50x over the prior 18 months.
Melio laid off 10% of its workforce in December of 2022. Bar remarked that this was not due to performance but rather due to general market conditions.
“To say it's not related to the market would be unrealistic," Bar admits. "If the market had continued to behave as it did in 2021, we might have gone back on the decision about layoffs, but I believe we would have reached it anyway."
Valuation
In September 2021, Melio raised $250 million at a $4 billion valuation. Melio has raised $504 million from strategic investors (American Express, Salesforce Ventures, Capital One) and VCs (Accel, General Catalyst, Bessemer Ventures, Coatue, Aleph).
A good public comparison to look at for a relative valuation is Bill. When Melio raised at $4 billion valuation in 2021, Bill’s market cap was ~$27.7 billion and was was trading at a ~116x revenue multiple. As of May 2023, Bill’s market cap is ~$10 billion, with a 65% drop in value and trading of ~10x revenue multiple. If Melio were given a similar multiple today, it would need to reach $400 million in revenue to reach the $4 billion valuation.
Source: Koyfin
Key Opportunities
Partnerships
One area of opportunity for Melio is to continue to develop and expand partnerships with marketplaces and integrate Melio as the default accounts payable solution for their merchants. Melio has started to embark on this strategy with its recent integration with Shopify. These partnerships can help Melio with the distribution. The small business market is highly fragmented in contrast to enterprises. The challenge facing Melio is reaching these individuals' businesses in a cost-effective, scalable way. Distribution through B2B marketplaces, which already have gathered the merchants and businesses into one place, could be a good potential strategy.
Product Evolution
Melio, up until now, has primarily focused on building out functionality in its accounts payable (AP product). This has been the main pain point of most of its customers. But as the company evolves, it can develop further capabilities in its other products, such as AR. If it can develop a product, such as its AP product that is customer-oriented and highly user-friendly, it can leverage its existing customers and grow its top line.
Key Risks
Crowded Market
Melio operates in a highly competitive market with intense competition from established players and new entrants. There is a risk that established players will start to move down market and target more of the SMB market. These companies have large existing customer bases and strong brands, which may make it harder for Melio to compete on features and products as it expands its offering.
Macroeconomic Conditions
In general, the current market environment presents unique challenges for high-growth startups. Over the past decade, companies were often rewarded for prioritizing growth at any cost. However, the landscape is changing, and companies that can demonstrate a clear path to profitability are now receiving greater recognition. Melio secured funding during the peak hype when valuations reached record highs and capital was readily available. With the market dynamics shifting, a genuine question arises regarding how Melio and similar companies can successfully grow into their valuations.
Summary
Melio is a B2B payments platform that eliminates headaches and wasted time from mailing checks. Melio also empowers small businesses to effectively manage their cash flows, allowing them to pay vendors, suppliers, and contracts in whatever method they choose. Melio is free to use and only charges when businesses decide to withhold payments to improve their cashflows. As trillions of dollars are being paid through checks in the mail every year in the US, Melio can capitalize on the digitalization of B2B payments.
