Farewell, Pay By Touch, Farewell

March 19, 2008 by 24 Comments

Pay By Touch has come to the end of the road. In a press release issued today, the company said it was ceasing all remaining biometric operations:

Solidus Networks, Inc., DBA Pay By Touch, regretfully announced today that it will no longer process biometric transactions on behalf of its merchant customers and consumer membership base, as of 11:59:59 pm March 19, 2008.

 

Alas, this is no surprise. The company was overextended, and bankruptcy is a terrible position for a start-up trying to right the ship. The employees and new management brought in gave it a valiant effort.

A few post-mortem observations about the company are in order.

Consumer Adoption of Biometrics

It’s tempting to consider biometrics a loser in the consumer space. Ben Worthen at the Wall Street Journal does a nice job talking about biometrics’ value as well as its shortcomings. Biometrics is very sci-fi. And yes, it is too spooky for a large percentage of people. Inside Pay By Touch, we found there were two types of people who wouldn’t sign up: those who were concerned about privacy, and those who were against it on religious grounds (mark of the beast). If you follow Crossing the Chasm theory, there was also the mainstream part of population that would wait to adopt.

But there were early adopters. Pay By Touch processed several hundred thousand biometric transactions per month. Now in the grand scheme of things, those numbers pale in comparison to the volumes processed by Visa, MasterCard, American Express and the overall number of transactions occurring at grocery stores. But processing several million transactions over the course of the year is nothing to sneeze at. It shows that consumers were indeed willing to use biometrics for adoption.

I do think the adoption curve for biometrics is longer than for, say Twitter or RFID-enabled credit cards.

Economics of Biometrics

Biometrics requires both hardware and software. The hardware is pricey, and it does need to be replaced periodically. One thing about the field is that vendors continually innovate. Hardware gets more durable and reliable, and prices do come down. I had the chance to test different vendors’ new biometric readers. A lot of effort is being put into biometrics out there. I remember one of my favorites during testing was actually from Casio. It performed well, and brought back childhood memories of my wristwatches.

But the cost of installing and replacing the biometric readers is an issue.

Installing in the grocery lanes also took money. Each lane in each store had to be outfitted. Pay By Touch had to be ready for the different POS versions the stores were running: IBM, NCR or Retalix. Always with some different configuration or customization.

Pay By Touch’s biggest play for grocers was shifting consumers to ACH. ACH is much cheaper than PIN debit, signature debit or credit cards. So, of course, Pay By Touch couldn’t charge too much per transaction. This meant that operational costs needed to be kept low, the company kept small and lean. This didn’t happen, of course.

Level of Certainty in Authentication

Pay By Touch was very focused on a high degree of confidence in its authentication of each consumer, each transaction. There are two measures for how the biometric authentication performed: false rejects and false accepts. False rejects were cases where the consumer was legitimately trying to authenticate, but the system rejected him. False accepts were cases where the system wrongly identified a consumer as someone else.

The company’s bias was to avoid false accepts. One false accept could become a major news story undermining confidence of consumers in using Pay By Touch. And the system was quite good at avoiding false accepts.

The focus on avoiding misidentification meant that false rejects ran higher. False rejects were more acceptable – no one’s checking account would be wrongly debited. Early on, the company had a bad problem with false rejects. But a lot of work reduced that number significantly to a barely noticeable level. And that was important. Too many false rejects also undermine consumers’ confidence in the system: “Oh that fingerprint payment system never works.”

A lot of time was spent improving biometric authentication at the in-store hardware level, in-store software level and the hosted server level.

What Would Have Been Better for Pay By Touch

Hindsight is always 20/20. But it’s clear the gobs of money raised and multiple business lines hurt the company. Pay By Touch really needed to be run as a small company for a while. Keep the focus simple – ACH payments in multi-lane grocery stores. The company would have run in the red for a while, and needed infusions of funding. But it would have time to work through the operational levers and to bring costs down. Work in concert with the grocers to shift consumers toward ACH usage (e.g. better product discounts for ACH users; higher discounts funded through CPGs’ trade promotion dollars).

Expansion into other areas would come after prudent consideration of what was needed to succeed. One good, but admittedly tough example: provide grocers with lower credit card interchange for biometrics than for mag strip cards due to lower loss from fraud.

Also, this is a company that really could have used the guidance of a traditional VC firm. The hedge fund investors ultimately were little more than silent money. Still not sure why hedge funds parked money in an illiquid, high risk start-up.

It’s Over

So now the remaining Pay By Touch employees are left to find new jobs. Creditors won’t see much of what they’re owed. Merchants have to tear all that hardware and software out of their stores.

But Pay By Touch’s acquired division S&H Solutions will carry on (independently or as part of some other company). It’s got a strong loyalty marketing business and some momentum from SmartShop implementations. And the biometric check cashing business, formerly Biopay, lives on as Phoenix Check Cashing. Good luck Jon Dorsey.

And someday, some start-up might try to do mainstream consumer biometrics again.

I’m @bhc3 on Twitter.

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Pay By Touch and The Peanut Butter Manifesto

February 12, 2008 by 5 Comments

In November 2006, Yahoo executive Brad Garlinghouse’s email to senior management was leaked to the Wall Street Journal, and subsequently picked up by bloggers. In the so called “Peanut Butter Manifesto”, Garlinghouse decried the “lack a focused, cohesive vision for our company”. The email takes the company to task for having too many initiatives, and for failing to integrate various acquisitions. The money quote:

“I’ve heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.”

In light of Microsoft’s bid for Yahoo, the Peanut Butter Manifesto continues to resonate as an issue for the company. Which brings me to Pay By Touch.

Pay By touch raised a lot of money, a whole lot. And Pay By Touch went after “myriad opportunities”. Here’s a list that I am drawing from memory:

  1. Biometric authentication
  2. ACH payments
  3. Credit card processing
  4. Personalized marketing
  5. Healthcare
  6. Online authentication
  7. Online debit payment
  8. Loyalty card management
  9. Financial institutions
  10. Government
  11. Paycheck authentication

The above are verticals. There were also channel-specific efforts as well: multi-lane retail, single-lane retail, international. So there was a lot going on.

The problem with any Peanut Butter Manifesto company is that:

  • Engineering cannot satisfy all the requirements needed for the initiatives
  • The ability to focus on one area, try things out, make mistakes, correct and iterate is drastically diminished, which kills an emerging technology company
  • Senior management cannot focus attention on the various initiatives for funding, sales and strategic moves

One might wonder how Google pulls it off. They certainly are into a lot of things. Here’s the secret: they absolutely own a market (search & ads) that prints money for them. They then get the luxury of trying different things. Microsoft has the same thing with its Windows and Office franchises. GE owned…light bulbs? Well they owned something a long time ago.

So let’s look at these two Peanut Butter companies. Yahoo is subject to a hostile bid. Pay By Touch is in bankruptcy.

As Garlinghouse stated at the end of his email: “stop eating peanut butter.”

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My First-Ever VC Pitch

February 11, 2008 by 3 Comments

I recently had the opportunity to pitch a VC firm. Hummer Winblad, to be exact. As someone who never thought he’d ever do that, I have to say it was all rather cool. Here are the details:

THE IDEA: Over the past couple months. I dreamed up an idea for online retailers to connect to social networks. I won’t say too much about the idea, because you just never know if it might see the light of day sometime. But I did take the time to lay it out via Google Presentation. That was pretty fun, I have to say. I had all these hack graphics courtesy of Microsoft Paint. Primitive, but it worked.

ASKING AROUND: Once the idea was written down, I needed to find out if it has legs. I didn’t worry about someone stealing the idea or anything. You can’t learn anything keeping the idea bottled up. So I asked a few friends to take a look at it. To my surprise, I got a lot of “great idea” responses. Followed by, “isn’t Facebook going to do this?” The feedback pumped me up, even if Facebook was going to do it.

CO-FOUNDER: I don’t code, can’t code, shouldn’t code. I needed to have a development partner. Well, I met a dev buddy and shared the idea with him. He liked it, and agreed to be a co-founder. So, good feedback from friends, and a co-founder who could actually make the idea a reality. Things were going well.

MARKET FEEDBACK: I talked with two different e-tailers about the idea. Both really liked it. Each had his own take on what he liked, and I was pleased with the responses. Good feedback from trusted friends, a dev co-founder, good response from potential customers. Check, check, check!

THE PRODUCT: Uh…we actually hadn’t built anything yet. Hmm…was this going to be a problem?

THE VC INTRO: I sent a link for my Google Presentation to a contact at Hummer Winblad. I had met with him a couple years ago to interview for a VC associate position (didn’t get it). To my surprise, he emailed back and said he’d be delighted to hear more details. I was thrilled, despite having no actual product to demo.

VC PITCH DECK: I needed to convert my original, handcrafted presentation into an investor deck. This was really pretty easy. First, a couple of VCs have written blog posts about what ought to be in a pitch (here’s a good one). Having spent several weeks researching the idea, the slide contents were pretty easy to pull together. The hardest thing was the financial projections. But even those weren’t too bad. See Glenn Kelman’s post on Guy Kawasaki’s blog for some very useful advice.

THE PITCH: My dev buddy and I arrive early for our pitch. We set up in a spacious conference room with a flat-panel screen. We’re a little nervous, but our attitude is “we have nothing to lose”. The VC runs late. Finally, my VC contact and an Associate arrive. We start the pitch. Good attention, questions are asked, dialogue is occurring. I’m feeling OK about it. Then they ask about what stage we’re at. “Seed. No product built as yet.” At that point, the pitch came off the rails. We were gracefully pointed toward the angel investor route. Alas, no follow-up meeting would be needed.

POST-MORTEM:

  • In this web 2.0 age of free software and services, it’s safe to say you’d better have some actual product to demo. Only well-known successful entrepreneurs could get away with not having an actual product while raising money, and it’s unlikely they would ever do so.
  • The entrepreneurs are the best prepared and most acknowledgeable people in the room when it comes to their idea. VCs can seem intimidating given all the pitches, investments and experience they have, but they’re generally learning in real-time from the entrepreneur.
  • Don’t sweat getting a ‘no’. Is it the idea, the company or the VC? Focus on your own view here. If it’s the idea, what needs to be fixed? If it’s the company, what can improve things (e.g. actual product)? If it’s the VC, there are many others.

So that’s my first-ever VC pitch. I’m noodling on what to do next. The product remains, as of yet, unbuilt.

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Do Bankruptcy and Startup Go Together?

February 10, 2008 by 1 Comment

I just left my old company, Pay By Touch, after 2 1/3 years there. You may have heard about it. The biometric identity company that raised $270 million (or so) and subsequently filed bankruptcy. If you need a refresher, check out the Valleywag coverage. Some glaring inaccuracies, but a decent accounting of the company’s woes.

One thing Pay By Touch is endeavoring to do is emerge from bankruptcy, right the ship and move forward in its business. It’s an interesting process.

Some companies have done the bankruptcy thing, and were able to achieve a certain level of success. United Airlines is a somewhat recent example of such a company. However, is it possible for a startup to pull the rabbit out of the hat?

Having just been through it, let’s examine the effects of bankruptcy on an early-stage company:

  • Customers stop dealing with you
  • Vendors stop dealing with you
  • Existing employees spend a lot of time looking for new jobs
  • Employees leave in droves, voluntarily or through layoffs
  • New employees won’t come near the company
  • Senior management can no longer focus on execution, which filters down to everyone
  • Creditors, investors and management shift, sell or shut down company priorities and businesses, paralyzing most initiatives

An essential element of an early stage company, especially one in technology, is progressing forward on something the team believes in. A friend from college used to say that if you’re not moving forward, you’re moving backward. He’s right.

Bankruptcy robs a startup of the oxygen it needs to live and grow. Not money (although that is important). Rather, the esprit de corps and belief in the big future.

I’ve got a number of friends still there, and I hope Pay By Touch pulls through. What they’re trying to do ain’t easy.

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