INSIGHTS #29 — Simility’s Rahul Pangam on building a $120M company in just 4 years

On this edition of the #INSIGHTSPodcast series, we have Rahul Pangam, Founder of Simility, a fraud prevention and risk management platform that was acquired by Paypal late last year.

In this podcast, Rahul talks about his early days working at Google, how he met his co-founders, started off with a focus on building solutions for e-commerce companies, which became interesting enough to pique the interest of larger banks as well as Paypal. And of course, the entire phase of the exit.

Building fraud detection and risk management systems at Google led him to the thesis that there would be a greater need for new ways of managing the risk of fraud as more and more businesses went digital and the conventional methods lost relevance. He found great complementary skill sets in his future Co-founders Kedar Samant and Uttam Phalnikar, with Rahul taking charge of the business and operations, Kedar leading data science and Uttam heading infrastructure and engineering.

Rahul talks about the team’s thought process at the time, saying, “We knew right off the bat that we were a self-contained unit that could build a POC (proof of concept) and sell the product. The three of us could build a company without needing a fourth person, for at least first 1.5–2 years”

So, Simility started off with the vision of using the power of machine learning to detect and adapt to the constantly changing fraudster behaviour. They decided to first chase ecommerce companies, as they were the easiest with whom the team could build early traction. Moreover, e-commerce was a space that Simility understood better than banking or any other industry in terms of customer pain points.

As Simility scaled, they hired sales, marketing, and user experience teams out of the US while the engineering and data analytics teams were based out of Hyderabad. This was possible thanks to Rahul’s network from his days at Google and the incredible young tech talent present in the city who were excited about working for an enterprise startup.

Simility’s success with ecommerce players led to inbound interest from fintech players and banks who collaborated to customise the product for the banking industry. As Simility gained traction in the banking industry, investors began showing an interest. Accel, one of their early investors, helped connect Simility to Paypal, who saw great promise in Simility’s technology.

The road from Paypal’s participation in Simility’s Series B funding in December 2017 to the final offer of acquisition at $120 million less than a year later was full of twists and turns, but resulted in a happy ending for everyone involved — investors got a quick return at decent multiples and the folks at Simility found a new and equally loving home at Paypal.

Tune in to the podcast to hear their story.

Accel shares such interesting entrepreneurial stories, with informative nuggets to run and scale your startup. Follow the links below and subscribe to our #Accel #INSIGHTSPodcast Series using the following links: iTunes, Google Podcast, Stitcher, Twitter@Accel_India, and the RSS feed.

Below, we’ve shared an edited transcript of the conversation with Rahul.

Episode transcript

Anand: Thanks. Welcome to the podcast, Rahul.

Rahul: Thank you.

Interviewer: It’s a pleasure having you here. Congrats on your exit and very few entrepreneurs go through the whole journey and return money back. It’s good to get to get multiples of the money that they invested. Thank you.

Rahul: Happy to do that.

Anand: Good. For the founders who might not know your story. We’ll start with your background, Rahul, and then we’ll go into similarities, which is what we want to spend and majority of the time, we want to spend on the exit, that whole process. We want to come into that as the core focus, but we’ll start out with your personal background.

Rahul: Great. Spent seven years at Google from 2007 to 2014. Largely, building fraud detection risk management systems.

Anand: This is the Bay Area.

Rahul: Bay Area. I went to business school at Michigan and went to work for Google post that and basically, when we look at Google’s growth from 2007 to 2014, they had established their core business in Ads and search and then, the rest of the groups or technologies had to be scaled to work with that. Fraud detection, risk management was a big initiative. We had to build our own technologies. We had to build our own way of operating differently. What I learned a lot was the technology that was used by old school buyers and legacy technology. Why it didn’t work, what was the replacement in the new age when you went to digital. Because Google was at the forefronts of going digital.

The other thing I learned there was, essentially, Google was launching a lot of products and every time a product needed risk management capabilities, my job was to evaluate the problem and put together operations and infrastructure to help them meet their risk management goals. Essentially, it’s like working in a startup setup inside of a company like Google, which is fast paced anyways, and quickly build to scale, as these products scaled. A lot of learning there. The key themes that I picked up were one, as industries are making transition to digital and Google was in media, so that was fast and it was e commerce then banking.

The traditional ways of detecting fraud. If you’re walking into a bank and depositing a check, you can ask the person for an ID. You can look at the check. What if you are doing some transaction from your mobile phone? The person is not there, very different means of transaction. The fraud evaluation had changed and largely the vendors were still trying to build new technologies, assuming digital was a channel and not the core. I felt like going forward that was not going to be the way of operating, digital was going to be the main channel and you had to build a system ground up for that.

There was a thesis that if we have been able to do this in the media world, we can do this in the e-commerce and digital banking world and build a platform that will be useful for them as they shifted into big data, post mobile, post big data world in detecting fraud and risk. That’s the background, 2014 started the company, left Google in March, started in April. I didn’t take a break, just jump straight into the startup.

I had two co-founders, Kedhar who was my office mate at Google. We used to always whiteboard ideas on what systems you can build, what problems they could solve. Largely, fraud and risk management was solve problem at Google by 2014, we had brought fraud rates down to incredibly low rates. There wasn’t much to, in terms of new innovation. We used to always think about, “Okay, who else can benefit from this thinking, what would be a system if you were to build it from scratch with today’s open source technologies? Kedhar and I were like thought partners given we share the same office.

Kedhar had worked with Uttam, who’s our third co-founder in a prior company before and they too were thought partners there in terms of, they had built to scale learning management systems. They would always discuss, “Hey, how would you start from scratch, how would you use different new open source technologies?” We got together and we said, look, we have slightly independent skill set. I was more operational, business focused. Kedhar was more data science focused. Uttam was where infrastructure and engineering focused. The three of us could build a company without needing a fourth person, at least for the first one and a half, two years. I knew right off the bat and we quit on the same day. Because we said, “Look, we’re going to commit to this together.” I knew right off the bat that no matter what, it’s a self-contained unit that can take us to a certain milestone. You can do a POC, you can build a product, you can sell to a certain set of customers without needing a fourth person.

Anand: Then the initial thesis of starting fraud for which industries and maybe, give some examples for the audience who is not familiar with- [crosstalk]

Rahul: There are two or three standard use cases. Let’s say, you are an e-commerce platform and you’re selling digital goods like song subscriptions or gaming downloads or so on and so forth. You would have customers who are using credit card to pay for it. If they have a stolen credit card, which they bought off the internet or what have you, if that person whose card was stolen claims that it was fraudulently used, you as a merchant are on the hook to return that money.

Now, the good is shipped but, you don’t know who the buyer was and now, you have to pay back this money. That’s a large financial loss for you. How do you detect these compromised accounts, whether somebody is using a stolen credit card, whether somebody is creating a fake account? That’s what we were trying to solve for.

Anand: Got it. What was the methodology? Or how did you go about doing this?

Rahul: Fraudsters are constantly changing their attack patterns. Today, if they’re using a particular IP address, if you start knowing that I’m going to use IP address to blacklist so that they can’t do a second transaction, they immediately realize that and they use a technology that will circulate IP addresses. You have to rely on machine learning based systems because as the fraudsters change their behavior, the system had to adapt to that. Knowing that you can quickly morph as the patterns and attacks are changing was important.

You couldn’t do that with a static rules based system where you write certain rules and assume that they will last you forever. Largely, our technique was, “Look, here is the behavior of a good user. Here’s what constitutes a behavior. Maybe they buy once in six months. Maybe they always buy within 20 kilometer radius of their home. Maybe the credit card is always issued by certain list of banks.” All of these are encoded as behaviors that are desirable of the user in machine learning models. Anytime you have an anomaly in that behavior, you want to flag it and probably block the transaction.

Anand: Got it. This is in e-commerce. Did you go across multiple industries? How did it thorough out?

Rahul: We started with e-commerce and marketplaces primarily because, as a founder, as you’re trying to build go to market in early stage. There’s this concept of, there is rabbits, customers that are small but many than there is like deer, which is mid-size but substantial enough meat. Then there are whales or elephants. The proverbial saying is, “Don’t go elephant hunting when you’re small.” Because, it takes like 18 months to close a bank and if your funding is 18 months- [crosstalk] you exhausted the funding. Go after the deer.

Anand: Rabbit or deer. Okay.

Rahul: Because you need a lot of rabbits. So, either you have a lot of rabbits or a few deer, we said, “Okay, we’ll go after a few deer.” The mid-market e-commerce. E-commerce has a lot of mid-market, growing tech companies. They are not averse to trying new technologies because they themselves are tech companies. They are themselves fast growing. That was our thesis going after e-commerce. I think two hypothesis there, one, it’s the easiest to build early traction with. The second hypothesis was, we should stick with the world that we understand best. Those two made us gravitate towards e-commerce, marketplaces, digital technology companies as our first group of buyers.

Anand: Got it. The business model here is what? How do you charge?

Rahul: We started with subscription. For every transaction that we evaluate, we’ll charge you a few pennies, two cents, sic cents, 10 cents depending on your size, like number of annual transactions. If you’re a small company, you pay us 10 cents, if you are mid-size, maybe somewhere five to six cents. If you’re really large, maybe two cents.

Anand: The more transaction the less. [crosstalk]

Rahul: The more transactions, the better tearing you get in terms of cost you have to incur.

Anand: That’s great. Talk us through some of the scaling. You had India and US, how are you splitting?

Rahul: Yes. It’s interesting, were in the US. We started similarity in the Bay Area. But during my Google time, I had been to India to start the Google team in Hyderabad and I’d made a lot of friends when we hired people for that team. There was a lot of young talent here who wanted to be in startups and enterprise startups. I don’t think the market was mature enough India facing to give them an avenue to explore their capabilities. One of our employees at Google, he expressed interest in joining but he said, I want to stay in Hyderabad.

We said okay, why don’t you work from home and you’ll be our employee number one, our employee number one was Hyderabad. Then, we saw the talent pool here was amazing in Hyderabad and we could keep hiring. We said, “Okay, Ravip Sandapudi who was our first employee. Why don’t we hire two other people to work with Ravip, we’ll hire a co-working space,” and that’s how we hired our next two, employee number two and three and that just grew.

We said okay, now we should just have an engineering base in India, the US is primarily focused on testing with customers, getting feedback. Then, focusing on building a go to market and product market fit hypothesis because you’re super close to the customers. You can engage with them every day, you can psychically work with them, let’s make that our capabilities core skill set and large part of infrastructure building, data analysis, all of that will happen out of our Hyderabad office in India.

Anand: Got it.

Rahul: That’s how we grew both those things.

Anand: How about machine learning and the data science side?

Rahul: Initially, as the company grew, we staffed up sales, marketing in US, we also staffed up user experience and data science in the US. Primarily, because, the talent there was more, like it was easier to find that talent from our data science in US standpoint. Also, the market perceptions and understanding of what the users need and you’re close to the users there, that was important in those early days. That’s the reason we staffed those teams there. Teams in India are largely data analysis, full stack engineering, back end engineering, the platform capabilities, all of them were staffed up in India, our product management was in India.

Anand: Got it, got it that’s helpful. Then, as you scaled, did you go after from the deer to the elephants or what happened?

Rahul: I think, is was very helpful to technical co-founders like us. I’ve seen folks who come from a sales background, they start with a go to market hypothesis. We started with, “Okay, did we want to build a cool platform and then we’ll see who can use it.” Probably, people like us will appreciate it more, that’s how we went to e-commerce. But, as we were selling to e-commerce, we had built an overly sophisticated system for the average e-commerce user. The most it resonated with was like enterprise eCommerce and then, we started getting inbound interest from banks and fintechs.

That hey what you have built is applicable to us because the level of sophistication is relevant to my business model. We’re like great, I’ve never worked at a bank and I can’t put myself in the shoes of the user, but there are a couple of — A fintech called Chime, which is a new age bank and a top 50 bank called Zions, they approached us. What I realized is, their pain was so acute and their existing technology group was so outdated. That at they’re willing to co-innovate with us and build the product that works for them over one and half year period.

Because, their other option was build it themselves which 80%-90% probability, they would not finish building the product and even if they did, it would take them five years. For them, the obvious choice was, somebody else who gets it, let them build it for us, it’s like having our own in-house R&D team but that’s not in house. That has already got the product 85%, it’s built for eCommerce but they can tweak it quickly the last 15%, that’s how we got inbound. I jokingly say that, when Zions bank reached out, we thought it was somebody playing a trick on us. I don’t think top 50 banks actually reach out to no-name companies and tell them I want to give you — I want to test your platform.

Rahul: We were contemplating not taking the call, because we went to LinkedIn, looked at this person’s profile like, is this a real guy? Maybe Scalia? Maybe it’s a fake LinkedIn, like we went to that.

Anand: Fake news like.

Rahul: Thankfully, we took the call, we showed them the demo and, the Fintech Sales cycle was very short between, discussing and closing and getting the system live was likely five to six months, but the bank was like, we started talking to them in December 2015, by the time we agreed how to design the system and do a pilot, it was July 2016. By the time we finished the pilot, it was October November 2016, and by the time we signed the production contract, it was February March of 2017. 15, 18 months were for sale cycle.

Anand: Did they pay you for that period in a return?

Rahul: They did pay us. That’s right. This was the beauty of banks and enterprise customers. They pay you for everything, and they pay you premium dollars for everything, but it’s just a long sale cycle. What we learned from there is this is where people don’t go elephant because, it takes 15, 18 months, and probability, maybe, even if you get paid for the pilot, they might not choose you because, a lot of times, they might have IBM.

IBM might send a sales guy that says, “Okay, I’m going to give you 50% of what they’re charging you and continue with us,” because they’re already entrenched there. Why would they give up that account? What we learnt is, there are long sale cycles, but for the first time we figured out that there are enough customers, where if I do a simple math of number of potential customers and how much each one can pay, we said one to two million dollars, which is what the enterprise banks would pay and the mid-market banks would pay about 500K.

There is enough of these, that you can build a hundred million dollar company, registered e-revenue, recurring revenue. Now, which also meant, you had to change your pricing model to have implementation fees, professional services, it was a much more complex pricing mechanism. We had to change our thought process around pricing, the sales people we needed, the go to market and all of that. That’s how we made the shift into banking, got this to inbound.

We had successful POCs, we were deployed, and once you have two, the third person is easier to convince. That, “Hey, we have two deployed,” this is what became references. You have the performance numbers, and then, we hired banking sales people, and that’s how we started. I think that’s truly when we found our go-to-market motion. We had founded it at e-commerce but I don’t think it was a big enough market to build a hundred million AR business.

We wanted to be very clearly — in our head, it had to be obvious that this is no-brainer, hundred million. Because all the other players in that space were IBM, ACI, NICE Actimize, S.A.S Cycle, they’re all public utility companies. They’re already built businesses that were multi-hundred dollar million revenue. All logic told us, all data points told us, that this is a perfect place to build the business. Although we didn’t have the understanding, we had learnt enough in the two only customers to build that.

Anand: You had a platform technology that was applicable to two different industries and you had deer one and elephants as you called them in a different, and then you went after the deer because it’s faster to close, but the market wasn’t big enough, is what you realized, and then you switched and went after the elephants, which is the banks, even though it took longer. In hindsight, would do it differently, or what would — this is more from a question of entrepreneurs who are selling into similar situations, like the mid-sized to large?

Rahul: There are two ways to approach when you do a startup. You have a pain, you solved it for yourself for its unsolved, and you build to solve it. We came from e-commerce. We thought about the way of the world, in terms of how our pain was or you can do a very meticulous analysis of go-to-markets, and you found a little bit of fraud system, I should look at the landscape and look at banking. That is not a process we did. We just said, “My thing is, I’m going to solve for my problem, the most elegant way.” Had I come from banking, that would have been very intuitive, but since we didn’t come, we went down the e-commerce route.

There are companies that are built 15 million AR and e-commerce. It’s not like it’s a market that can get you the skill, but in our case, people were hesitant to switch providers because, the margins in e-commerce were low, which meant, switching costs was big from an IT implementation standpoint and the delta offers inferior product that was a predecessor to switching to superior product had to be massive to make that switch, because people are putting up with substandard technology simply because they didn’t want to switch.

Those are things — I mean, even if you did an analysis, you knew there was a market there, you wouldn’t have realized unless you actually went through the pain of understanding that this route is kind. It seems appealing, but it’s blocked. Yes, we could have built a hypothesis, but both would have looked equally compelling. The only way to notice test and fail. Right?

Anand: In testing, it takes a long time in the elephant side, right?

Rahul: Correct, that’s the other thing. [chuckles]

Anand: Maybe even in hindsight, the sequence and also, you got a proof of concept working in a particular industry, you’re an updater and you got the inbound because of the proof points.

Rahul: The proof points are non-banking, but the banking people are willing to use that. If you went with a hypothesis or a non-tested product, they probably would push back. Some of it helped, unintentionally.

Anand: Technology also probably the [crosstalk] that’s great. Cool. Let’s switch gears and talk about what we already talk about in depth, which is going through the whole phase of the exit. Maybe, talk back. How did you meet PayPal? Start from the beginning.

Rahul: When we got some traction in banking, we started getting some interest from existing investors to do a round. Just for context here, we had taken some angel money, right after we left Google, about $75,0000, $800,000 and then, we had done a seven million dollar price round, one year after we started the company. That round was led by Accel Dinesh Khatiar from Accel India and there was another micro VC fund that had joined that round called the Valley fund. Trinity ventures joined that round as well.

As they started to see that we had a go-to market that was working, there was $100 million path. One of the forms made an offer saying, “Look, we want to invest and we want to lead the round.” Then, Dinesh said, “If they don’t lead the round and the round is going to be like, if other internal investors are jumping in, we can all close the round and move on. Because there’s enough of us who understand what’s going on and have believe in the promise, you don’t need to be distracted by a fundraising round.”

At the time, Accel connected us with PayPal. Interestingly enough, PayPal Venture capital had come to India to ask Accel India, can you connect us with portfolio companies that are doing interesting things in the payment space or e-commerce space. They said, “Yes, we have one that you should really talk to, but they are back in the Valley. [chuckles] It’s interesting that PayPal US got the lead, the venture group from Accel India to go and talk to us. When they came back, they connected with us. We did some deep dives. I thought it was a road to nowhere because, PayPal claims they are best in risk management and they truly are.

They have the best risk management platforms. They have the smartest risk management people and why would they want to get a vendor. I thought, if there’s an investment opportunity, they would want to partner as well. It’s a strategic investment, they are not going just put money for the sake of putting money. Anyway, as we said, what’s the harm, worse case we get feedback from the smartest people in the industry on our solution. Best case, if they make an investment and potentially a small partnership for a small area of their business, there’s validation that the best people have recognized their platform. We went in, we had a lot of discussions.

Anand: This was 2000?

Rahul: This was 2017 about May, June, when we knew that we would have a round and there was enough to finish that round. Then, PayPal really saw the promise in the technology. They wanted to be close to how we were building, because this was their bet of how next generation systems look like. I think, just looking back, maybe internally they were thinking of the same components and the same real building, so they wanted to be close to a company that was doing something similar. They came back and said, “Hey, we want to join the round. Can you make room for us?” I’m like, “Great, I’m happy to do that.” I think there was a verbal understanding that, we’ll help you with a partnership deal because of course, when we invest, we want to see that-

Anand: Go to market side.

Rahul: Go to market side. Finally, the light bulbs in our head went off that, “If PayPal can use our technology — “ They have like 20 million small merchants. Merchant all risk API connected. They’re already in the billing platform. They already have a contract. The three biggest friction points that I have to contract with someone, which is, I have to do a contract, I have to do API integration and I have to bill an invoice and all that, is gone because, all I have to do is plug into this huge platform. For the first time, I was like, “We can get the rabbits as well as we can get the elephants.” This is unbelievable business model. To straddle the two is impossible almost, but we can make this work. That’s how our relationship with PayPal started.

Anand: Did they want any strategic rights, anything that prevented the upside for you at that time or any things you had to think through?

Rahul: They had a board observer seat? Because, we already had a full round, the percentage of equity that they had was not very large.

Anand: Any role for rights or any specific things that limited? Or it was purely financial investment?

Rahul: It was purely a financial — They wanted notification if you had an inbound offer [crosstalk]. The thinking in PayPal’s mind was, if I’m going to tie one of my business units to a vendor’s capabilities, I want to know if a competitor-

Anand: Is going to acquire that.

Rahul: Correct. From a purpose of putting a dent in our business, they just do and come and acquire the company. I felt like that was a fair request on their part, that we should notify them when those things happened. I feel like we finally hit the gold mine because, not only we identified go to market, we identified go to market that addressed both edges, the most profitable edges of the market.

Anand: Who gave very little ownership [crosstalk]

Rahul: At the time, right?

Anand: At that time, yes.

Rahul: An interesting segue here is immediately the PayPal validation started to show impact. PayPal had a close relationship with the Accel Growth Fund, because they had sold companies, Braintree was the last previous one. They had a conversation with the growth fund saying, “Hey — “ I wasn’t inside the conversation, but it went something like, “This is the best fraud detection platform you’ve seen in the last 10 years. By the way, this is a portfolio company of your India fund. I’m not sure if you know about it. I know you’re a growth stage fund.

You don’t invest in this early, but, irrespective, you should know, because, we have a relationship, and we are betting on this company and we trust you guys, so you should know.” They said, “I want to see what these guys do.” We got called in for a demo and explain how we approach the market. I think that thesis of being able to attack both ends with a single business model. Because for us, PayPal was the size of a bank and the sales motion as an end client was the same as a bank. It’s a large enterprise client, a sophisticated buyer.

For us, we didn’t have to build a different product, but we could scale that other market through them. I think that was very appealing and I think that Accel looked at this, the growth fund, they felt like this was something they should be involved in. Accel took the whole round at that point, a large lion’s share round plus PayPal. Again, they were betting on the hypothesis that we come in early, because we want to see if there is a way this market is unfolding. This is the youngest company in that market, so we want to be very close as this scenario unfolds. Then, we started the discussions with PayPal about the partnership aspect.

Anand: This was post around-

Rahul: Post around.

Anand: -2017.

Rahul: Yes. December, 2017. We started the discussions and, of course, Christmas happens. The first week of January, all silent because everybody is out on vacation. As January comes in, I start asking the product people and the tech people because, the M&A people had connected us to all the teams that we should be talking to. It seemed like we are getting a lot of response from the product people. I didn’t know what was going on. Then, eventually, because I had built relationships with these folks, somebody wanted to and said, “The EVP of risk has left PayPal. He was your corporate sponsor, so we need to — “

Anand: Restart.

Rahul: Yes. “We need to have an internal conversation around where this goes now.” Now, I had the “Oh, shit moment.”

[laughter]

I was like, “We bet big on PayPal as our go to market partner.” Then now, we have to re-engage the different set of people and restart. I said, I’m going to restart and go to the VP of merchant solutions, the VP of risk technology, the VP of risk operations, the GMs of Braintree, the M&A head of PayPal and just explain to them what we’re doing because it’s not going to be easy, again, to get in because there are certain hypotheses, not a hypothesis, if everything else is out of the window.

Anand: This is for getting access to the 20 million customers?

Rahul: Not even 20 million. I said even if I got a subset, because PayPal has many brands. Braintree operates independently and so on and so forth. Even if I get access to a small traffic, at least we have a start. I said, “Let’s start small and have a convincing use case of how it works in a PayPal concept with their customers, and we’ll see how far that goes.” I started having these conversations one by one and all the product site folks were like, “Yes, this is interesting. Yes, we want to do something, but we don’t know what to do. We don’t have it quite nailed down where we can start or the right hypothesis or a use case.”

It’s like, “Wait and see more.” Then, I met the head of M&A, whose team does the venture investing like, “Can you help me at least get a POC?” Because once we prove the value, maybe these other folks can see the numbers and then, that wait and see more goes away. He said, “Yes.” This was the strength of the venture investment because he felt the responsibility to help us make a case internally. We said, “Let’s find a place where you can do a POC.” He said, “Here are three different and great people, you can engage with and get a POC.”

Then, at the same time, because Accel had a relationship with Bill Ready, who’s the CEO at PayPal. I asked Ryan who was on Braintree’s board to say, “Can you ask Bill to just have a quick look at this ability and see if he sees any potential areas that we can collaborate better?” He said, “Bill is very busy. He is in Davos, Switzerland for World Economic Forum right now, so it’s very hard to get his time, but I want to try out the next two or three weeks to get you a small time slot, 30 minutes or so, so you can at least have a conversation with him.”

That did happen after two or three weeks. They did get a conversation with Bill. That half hour, he said, “Come back tomorrow for another hour or two hours to just — we want to dig a little bit deeper. I want more people to understand this.” I think that got the wheels turning in everybody’s head because, Bill is the second most powerful person at the company after the CEO, and he’s interested in this in a way that’s strategic to the business. Now, people are actively thinking of, how do we use this versus can we use this, where. Now I have to make sure that we have a good understanding of, where’s the best fit here? There’s an urgency to do something. We met with Bill. We had almost six months of trying to rejuvenate this relationship. It was around March-

Anand: 2018?

Rahul: 2018, yes, by this time where we’re going back and forth and trying to find a fit. That other two-hour meeting we left with Bill. He comes from an entrepreneurial background. He’s been a CEO at four companies. He was like, “I think we should have gotten here faster, if you spent some months trying to get this here, but we should move faster. Tomorrow morning, you should hear back from our contracts, M&A team, product team on the next steps.” I’m like, “Okay, great. The contract is back on track.”

[laughter]

The next afternoon, I get a call from M&A saying, “What we want to do with you is too strategic to our business and, this has to be a part of PayPal.

Interviewer: [laughs] Wow. [crosstalk]

Rahul: Because, you have to make bold bets. If this truly is a next-generation technology, there is no small things here and there to do that. Like, make a bold bet and try and see how far you can take with. I was shocked. Because, I didn’t know how to respond. I’m like, “Let me talk to my board, let me talk to my founders. I can’t say — I don’t know what to say.” It’s not I can’t say one way, I don’t even know how to react. Forget what to say.

Then, I came back and I talked to Dinesh, who was on our board from Accel India, I talked to Ryan and I said, “I don’t know if this is real or not, since you guys have a relationship, maybe, you should do a call and check in and see what this is and how serious this is.” They had a conversation. Fortunately or unfortunately or just coincidentally, in the next three days, we had a board meeting anyways, like a regular check-in. After that board meeting, we huddled for half an hour just on this topic, because PayPal had a board-observer seat. They are not to be in this discussion.

After our meeting was discontinued, we went on and we had a conversation and they’re like, “This is serious. What do we want to do?” I said, “Look, you guys have been entrepreneurs, you guys have had exits. So, my sense is, we have a part to market. But, PayPal is a critical element. That’s like almost half our go to market strategy. We need to rethink now in the new word of that could be at risk or that could be a place where we go crazy based on how we react to this offer and, how do we think about this?”

I mean, all of us had different opinions. Kedar, Uthappa and I also had mixed feelings because, we knew we could build a much bigger company.

Anand: What scale were you at?

Rahul: We are about three million ARR. We could see a path- [crosstalk]

Anand: How far could you talk about the offer?

Rahul: There wasn’t an offer. The offer was — This is important to us.

Anand: Okay. Come back.

Rahul: Yes. It’s like okay. What do I go back with if I have to go back or what do I say? Kedar, Uthappa and I are always like, “Look, the optimistic side in me says, we have a clear part to 200 plus million revenue in the next year, year and a half, two years”. But that path should look dimmer and dimmer if PayPal is not part of the equation. That is a genuine risk at this point, given where we stand, assuming we go stand alone. And the conservative side was — We had always said, 100 million is a mark [chuckles], and anything about that means we have to let entertain an offer. Of course, there is no number on the table- [crosstalk]

Anand: 100 million market cap, as a mark or?

Rahul: 100 million in terms of the exit, the valuation of the company at time of exit. That was our — just for context here, if I look at the fraud detection exits and space, since 2010–2012 onwards, there have been multitude of some 100 million dollar exits, and there are tons of buyers for that. 30 million, 20 million Aqua hires slightly more than 50 sometimes. Then, majority of the people who are established go to market fit were between 100 and 300 million. There was nobody who had sold for less than four years of being as a company for 100 million plus. Everybody who had slogged for like 10–12 years could barely get 300–350.

There was one company, the only outlier in that group was ThreatMetrix, which had sold for like 700–800 million. But, they had spent 12 years building a 60–80 million dollar ARR business. So, those are my data points, number one from a valuation standpoint. The second set of data points was, industry was consolidating very quickly in the last three years. So, your potential people who could buy our data bureaus, so XP, Equifax, and TransUnion. TransUnion and XP had bought a ton of companies in the last two-three years. They had exhausted their pile of money. The other group is Reuters Thompson, LexisNexis, which are more like consolidators of data assets and technology assets and all of that. They had bought companies. They had exhausted their pile of money. The third list technology companies like IBM, Oracle, they had done a few deals. They had some money open but we had not engaged with them thus far. From this point on it’s a long haul to like engage with them.

The fourth group was payment providers, backing platforms. The likes of PayPal. PayPal was the biggest buyer in the market. There no other company at 100 million valuation. They just mean, they can swing bigger. If you’re just looking from a very rational point of view. That meant that, this was a serious point in time and depending on what path you take, there was no turning back. Because more options would get closed.

For us we were leaning more towards saying yes at the right price. Still ambivalent. Dinesh by now had been with us for almost three years as a board member and he was super vested in the company. He was like, “Guys, we should keep going.” Because I can see the promise. Very rarely we see things straddle in both these ends. The rabbit and the elephant end and you’ve managed to do that. You have identified that route to market but, of course, the PayPal piece might be at risk, but we should keep going.”

Ryan had a more practical point of view, which is, “I don’t doubt you guys will be at 350 million in three years, but you’d probably dilute another 50%. We would all spend the time here and we will dilute as well as investors. Potentially, from a monetary standpoint, we’ll reach the same outcome. Unless you tell me. You show me a way to go IPO. We all know that there’s a clear line of sight to maybe 20, 30-ish million but, beyond that is going to be a slog.”

Anand: To go IPO, you need a hundred million [crosstalk]?

Rahul: Correct. 100 million at 2X growth. Which is a slog and we can see ThreatMetrix is the biggest guy in your industry barely merit to 60, 70, maybe 80. All that reality came into the picture. That’s how we thought about, how we evaluate opportunity. We told Ryan who knew Bill and who knew the PayPal and many folks and so on. If I were to rationally tell you, I think a hundred million plus is a good-

Anand: Good considerate.

Rahul: Good considerate. Ryan was like, “Look, my intent is very straight forward.” Is that Accel is very fond of him, so we will follow your guidance. You should feel like you got the best outcome and you’re super happy for yourself and for the team. That means, we had done a success in the outcome and so, he told them about the hundred million number and that for the team. PayPal was the right one. Because, we have a very forward thinking.

The smartest guys from like Google, Amazon. They want to work in a tech environment. None of the tech buyers have a payment business, so PayPal is the best home for the team. If I look at all those considerations is probably the best home. Even the size of the company and all. He said, “Yes. Okay. Fine.” Like, “Let me have a conversation and come back.” Of course, he was looking at the multiple of the — We barely had done the last round. We’re three months in at that point. He was looking at like multiple of the last round.

Anand: It was a 50 post or what was it?

Rahul: A dollar 60 post.

Anand: 60 post. Okay.

Rahul: So that you can justify to your own investors, “Look that’s not a quick exit but in no time. Now, hold our money, big deal. It can reinvest that somewhere else. Because, you want quick exits. Even if it’s 2X, 3X. That’s great. Or, you want huge exits if you are long term in it. This wasn’t the first category. I said, “Look, I can trust the Dinesh and Ryan. They will negotiate on our behalf. Even if you’re not in the room.”

They had the conversation and we all decided, “Okay.” Again, PayPal was very open to listening. We all ball-parked around the 120 million numbers and this is fair because from a multiple standpoint. From the founder’s standpoint. From a PayPal standpoint justifying it to their board of how they could plug this technology into PayPal and what five year revenue they can expect. All of it. Just locked everything pointed to the same ballpark number. Which was huge. Because nobody had to like- [crosstalk]

Anand: stretch too much?

Rahul: — and stretch too much.

Anand: How long did this last phase take?

Rahul: Barely a week. Because, it was such a perfectly align the game for everybody. It was pretty straightforward.

Anand: We could go on for hours talking because, this is such an exciting story like of six, three months. All this change looks like [crosstalk]. No, the March meeting on with financial. This is exciting. Thank you so much for sharing the stories, people over the phone listening, they have a lot of notes taken, really good takeaways and how you practically thought through this [laughter], and thanks for making money. For Accel and ilations and hope you go on to do bigger ones in the years to come after your [crosstalk] Paypal.

Rahul: Thanks for giving me the opportunity to speak here. I truly speak from my heart when I say, “Look, Dinesh was an extended part of the team.” I could not have asked for a better board member from the first round and between him, Arun and Ryan from the Growth Fund. They always had a founder-first mentality. I have not worked with many VC funds, but I’m lucky that the only one I did work with that I had that trust, and Kudos to XM.

Anand: Thank you. That’s very kind of you. Really appreciate it. Thanks.

Rahul: Perfect. Okay. Thank you.