0:00:00 - (Blair Jeffery): This is probably one of the weirdest industries in terms of competitors working with each other. Sometimes the deepest suffering generates some of the best strength. Nobody goes to college to get into payments. You end up here somehow. We can either continue on this trajectory, or we can take a moonshot and try to do something much bigger.

0:00:21 - (Andrew Kazlow): Welcome to the Diligent observer, where we help angel investors see what most miss. I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators. Today I'm replaying one of my favorite podcast recordings. This one focused on something that we all experience every day, payment processing. Now, my guest is Blair Jeffrey, who has spent nearly three decades in the payments space.

0:00:46 - (Andrew Kazlow): He's an active angel and has served on the boards of both the Houston Angel Network and the Aggie Angel Network. In this episode, he kind of blows my mind because apparently as of this recording, half of all B2B payments still happened by paper check. He also shares two killer interview questions to test whether a founder can actually stomach failure. And he explains why taking institutional capital too early can actually be a death warrant for a company.

0:01:14 - (Andrew Kazlow): I hope you enjoy learning from Blair as much as I did. Blair, thank you for being with me today.

0:01:27 - (Blair Jeffery): You bet. Looking forward to it.

0:01:29 - (Andrew Kazlow): I would love to start by just getting a quick survey on what's hot right now. What are you excited about right now in the payment space, and then we'll break down a few other things afterwards.

0:01:42 - (Blair Jeffery): I think we're at a major inflection point in payments. You know, six, seven years ago, people introduced, introduced concepts of crypto into the space and we've gone through this evolution of wow, that seems like a wacky idea to wow. That seems like it's got some interesting use cases to maybe there really are some specific areas where we can use this as a means of currency. And then obviously when you look at the market in particular, just bitcoin, but you know, there's plenty of other sort of predicate currencies out there.

0:02:14 - (Blair Jeffery): I think it's starting to mature into that stage. I still think we're in inning two of a nine inning game. Trend number one is really around the adoption and the ultimate use cases around crypto. The second one is really around the continual move to digital payment sources. And so today in the consumer space, your mom, my mom or grandparents wrote a lot of checks that started to fall off over time. But you know, when I got into the payments industry 25 years ago, they were declaring the death of the check and Here we are still in 2024 dealing with checks. And so in the B2B space in particular, which is sort of where I spend most of my time, 50% of corporate payments today are still paper check through the mail.

0:03:08 - (Andrew Kazlow): No kidding.

0:03:09 - (Blair Jeffery): There's a huge push for that. Covid was supposed to be this great inflection point to driving people out of the office, out of cutting checks, stuffing envelopes. We did see a climb in adoption of digital payments after Covid, but we still sit at 50. And so trend number two is really about the overwhelming pushing the rock up the hill to try to get to that digital space. And then I think really the third is just breaking down the border.

0:03:41 - (Blair Jeffery): Today it's extremely expensive to do cross border payments. And yet we live in a very, very multi geographic world. There is a lot of newcomers in the space. I think this is really interesting as it relates to early stage and in particular angel investing is, you know, sort of where I look from a payments perspective is how disruptive can you be to these large industry standard revenue cycles. And they're a lot of them are based on cross border payments fx.

0:04:12 - (Blair Jeffery): And the reality is what we're seeing is some of the best new companies in the space are trying to break down those walls and do some really innovative stuff. There's a lot of friction there, but that's what happens when you're a disruptor. So I'd say those are kind of

0:04:26 - (Andrew Kazlow): the three big ones I want to poke on. Number two, I mean that is a shocking statistic that 50% of payments are still paper checks.

0:04:35 - (Blair Jeffery): Why?

0:04:36 - (Andrew Kazlow): Help me understand why.

0:04:37 - (Blair Jeffery): Well, in the, in the B2B space you have maybe you put them into three different buckets of people that you're paying. You have very deep seated strategic vendors that you're paying and those are generally contractual worked out and maybe even the payment modality has been selected through that. And so typically what you see there is some form of ACH payment and that's a digital payment that's kind of happened.

0:05:04 - (Blair Jeffery): Then you have group two, which I'd say are the folks that we pay I think are kind of consumer and corporate. So if, you know, if you're a corporate, you're probably still paying Comcast or Internet at some form or fashion, probably still paying for keeping lights on and things like that. And those are generally vendors that are very open to taking digital forms of payment, whether that be ACH or card other forms.

0:05:29 - (Blair Jeffery): Then you get into this, I think this long, long tail. And the statistics show that, you know, the average AP department for a B2B operator is something like 6,000 vendors. Well, your strategic vendors are 10% maybe. And then you've got kind of these, let's just call it keep the lights on vendors that you're probably paying with corporate card or trying to do something with an achievement. But then you have this long tail. They may be single suppliers, they give you one service once a year, don't go back to them.

0:06:01 - (Blair Jeffery): Or it's a repetitive drop off scenario. And so the challenge with those businesses is that there's no existential relationship and two, there's no real contractual pieces. So what ends up happening in those scenarios is if that supplier hasn't embraced digital access to money, they go to the lowest common denominator. And the lowest common denominator is always check in the mail. Why? Well, number one, it's universal.

0:06:32 - (Blair Jeffery): I know I can write a check, I can stick it in the mail. It's probably going to get there, Jerry Seinfeld to tell you maybe it wouldn't, but Post office is probably going to deliver that. They're going to do it in a longer fashion. I think the second one that's key, particularly in an environment now, and this is different than five years ago, is float is a big key thing. And so being able to tell somebody I cut that check five days ago, but I cut it, it's in the mail and I get five, six, seven more days of interest that's bearing on that account is important, particularly again where they're not strategic and I don't really have a strong contractual relationship with them.

0:07:15 - (Andrew Kazlow): Well, I think it's a fascinating point because so much of what we talk about and think about in the tech space in the investing world is like the next frontier of what the world could be. And we're all about the crypto trend which you talked about. But I think it's very easy to forget that like half of the transactions that are happening are still paper. Like what's going to fix that? What's being done to address that and what's it going to take?

0:07:42 - (Blair Jeffery): It all boils down to incentive structure. For those long tail one, I think you've got to be able to give them an off the shelf solution that allows them to take digital forms of payment and to do that in an economic way. The classic payments poultry problem. Can I pay? Will they accept the payment? Chicken or the egg, Right. There's been a heavy push from the payer over the years to push digital payment forms.

0:08:11 - (Blair Jeffery): The reality though is the control is always the person Accepting that payment. If you've ever walked into a convenience store and they tell you, hey, I don't want you to use a card for that $2 gum purchase, they have selection criteria and they have an economic model that says that pack of gum, when you give me a credit card for that, if the economics don't work, you may have just doubled the cost of that pack of gum for me. So under five bucks, I'm not taking card.

0:08:37 - (Blair Jeffery): The card networks in general, I think have come to play a really vital role here because they've seen over time that there's acceptance challenges to the way that the interchange market works. And so I think there's a broad base now of interchange products that would allow someone to take cards even in small dollar purchases, even in one off cases. So that's sort of one. The other one that always plays a role and it always does, it's just, it's difficult to execute is can you give someone an incentive to take it? That's not economical. And well, that generally boils down to data.

0:09:17 - (Blair Jeffery): If you're passing a payment to me, I still have to recon that at some point. And we all know like we can look through things, but we all know sometimes people short pay, sometimes they don't pay at the right time. So if you're doing a simple one to one match, trying to match up with some invoice you have out there, it's not easy. And so if you're able to pass data along with that payment now you got an incentive structure that starts to work, you've lowered the economic cost of it. And number two, you've made this receiver's job a little bit easier.

0:09:50 - (Blair Jeffery): You don't have that with check. Right. Even though check's universal, it's coming in, it's a fixed dollar amount, there's probably nothing else attached to it. It's just a check. You don't even know what account number this thing's coming from. So there's a lot of things you have to do there. But I think where we're seeing a lot of people blaze trails, quite frankly, is building the proper amount of kind of off the shelf AR systems to be able to take digital forms of payment and do reconciliation quicker even down market.

0:10:20 - (Blair Jeffery): When you look at that, those are the guys that are pushing really hard in the space to drive digital acceptance. And we think that's a huge trend in the market that we're certainly betting on both me corporately and also me angel investor.

0:10:35 - (Andrew Kazlow): What does that mean when you say off the Shelf AR solution. What does that mean? What's an example of a provider and like the world looks like when someone's using that versus not using that.

0:10:45 - (Blair Jeffery): I mean you look at the big sort of AR automation companies that are out there, a bunch of them have gone public. The bill.coms high radius is still a private company but moving very quickly to being a public company. Traditionally always started enterprise and then roll down to sort of mid market High Radius. Almost all exclusively is focused on Enterprise Companies. Bill.com has kind of built themselves as, hey, we're the mid tier guys, we're the middle market guys.

0:11:11 - (Blair Jeffery): Bill Trust and some of the other companies that are out there. You see some incumbents that are getting a little bit scared about some of the challengers like Ramp and Divi and some of the smaller Brecks and some of the smaller guys that are attaching cards to some form of AR acceptance. Those are really interesting businesses. Typically they're software businesses that are doing that. But we're seeing payments companies trying to forge their way in there, seeing acquisitions happen in there too.

0:11:38 - (Blair Jeffery): The point is that traditionally it was really intuit that was putting out QuickBooks or whatever. Then you have some of your banks that are doing it. The banks are sort of ill equipped to be able to handle that. They don't have the technical chops to be able to put a product into the micro market space. When you think about these hundreds of thousands of businesses in the US that we need to get pushed into the digital age, they've got to have something shrink wrapped, something that maybe I just pay 20 bucks a month for and I don't know what that pricing is, but we've got to get some software challengers that get down in that space and then they've got to forge the right relationships with payment providers to be able to accept those forms of payment.

0:12:21 - (Andrew Kazlow): I'd like to take a step back, Blair, and maybe invite you to just give a taxonomy for the payment world. I think there's a ton of nuance here, but for the average kind of investor, walk me through the payments journey, the major players, the key functions, how it actually works to execute a digital payment at a high level and then maybe touch on a little bit more specifically where your experience has primarily been focused.

0:12:54 - (Blair Jeffery): It's a challenging space because as I say so many times, nobody goes to college to get into payments. You end up here somehow. That certainly was my case. You know, I had a financial background and wound up in payments. But very, I mean some people go to school to be A banker. But that's in and of itself is not just payments. So you wind up here. It is a very small industry. From a headcount perspective, we often joke that it's a really small group of folks.

0:13:22 - (Blair Jeffery): We all kind of tend to know each other. But at the highest level, I have twin boys and they used to ask me what I did for a living and it was really hard to explain, like, oh, I run a payments company. Well, what's that? And I finally got down to I basically manage moving money from one bank to another. In the US we are a bank centric model. I think at last count There was over 10,000 banks in the U.S.

0:13:47 - (Blair Jeffery): many of those being small community banks, all the way up to the big enterprise banks. But that's where the major source of funds is. It's in the banks. It's this whole ecosystem that's been built around how do I move money from one bank, a payer to another bank, a payee? Ultimately, and that's not as easy as it sounds. But the banks kind of collectively got together 30, 40, even maybe 50 years ago and said, hey, there's some ways that we can do this and put something in somebody's pocket that's not a check. And so they instituted this sort of plastic credit card and that's then moved into debit cards that we all kind of know that have access to ATMs and access to, you know, sort of our bank accounts.

0:14:30 - (Blair Jeffery): And then we moved to other forms of payment. So the automated clearinghouse, which is really a sort of an adjunct to the federal government, decided hey, I want a way for banks to be able to shift money back and forth. There's a clearinghouse, it sits in the middle and they have member banks that are allowed to move money from one bank to the other. That was a big change in the space because it allowed you to access bank assets at a very inexpensive cost.

0:14:57 - (Blair Jeffery): But in typical fashion, when you have very, very large banks and very, very large government entities involved, it's a very slow process. Even today those things work in a batch environment. Three or four years ago they instituted both same day ach, which you can sort of was going to compete with wire transfers as being immediate versus something of the same day. And then they've now moved into real time payments.

0:15:23 - (Blair Jeffery): But the important part about this is that's sort of the infrastructure. But then there's no real ux, no user interface, there's no consumers that are involved in any of that stuff. So you have this wrapper that has to go around it that are providers, third party providers. You're saying, okay, I can get to these networks to process payment, but I've got to put out a front, a user interface so somebody can actually use these things.

0:15:50 - (Blair Jeffery): And that's the biggest part of the ecosystem in payments is you take the banks, whether they're operating banks or treasury banks, you take the government entities that are sort of around it. But then everything around that is either software or processing of individual transactions. And that's where all the nuance comes. And a lot of people are focused on one end or the other, either payers or payees.

0:16:15 - (Blair Jeffery): Very few are focused on both because it's really hard to do it. This is probably one of the weirdest industries in terms of competitors working with each other in very strategic partnerships sometimes to be able to allow access into the networks. And that's where I find the most unique sort of use cases around crypto is the ability to kind of strip those pieces away. And so when you see these, these challengers are coming and going, okay, we have a store of value that doesn't need to be in a bank.

0:16:47 - (Blair Jeffery): And we have a very unique way of decrementing and ledgering those transactions, which is something that banks do. And we can do that off system, off quote system. Well, that starts to get really interesting because you start to cut away some of the fat that's in the payment ecosystem and you've got this sort of trusted kernel that sits in the middle that has its own sort of risk management. And so that's why I got excited in crypto six years ago was, hey, will this really disrupt this old space, particularly around banks?

0:17:21 - (Blair Jeffery): And we certainly haven't seen it put banks out of business. That hasn't happened yet, maybe it never will. But what we have seen is this drive up of confidence and demand around having that sort of trusted source and ledger system that's not tied to some of the old batch processing systems that are out there.

0:17:43 - (Andrew Kazlow): Well, and based on your comment earlier about, we're still doing paper a lot of the time. I mean, this is a half century before that's really transitioned over. Unless we're significantly smarter and better at this kind of thing than we were

0:17:59 - (Blair Jeffery): a few decades ago, don't forget that we're behind. So when you go to Europe, digital payments have widely been adopted. They've probably got close to a 90% penetration rate on digital. There's. And in many cases they have a bank to bank system where they're actually paying the banks are paying each other and don't have an entity in the middle and you've got an infrastructure over there where you're allowed to process Visa and MasterCard transactions and not have a quote sponsor bank.

0:18:27 - (Blair Jeffery): You could become your own bank. So that's just in Europe, but even in some of the other jurisdictions, even Africa has had a massive increase in overall digital adoption because of the withstanding challenge is always going to be hey, I've got all these currencies, I have to exchange them in all these different environments. In the US it's a little easier. We all run on the dollar, they don't have that forcing function. But in Europe they did have a forcing function. Even pre eu Africa definitely has that forcing function of hey, we've got, I don't even know how many countries are in Africa, 50 something, all with different currency types. And so can we get down to some smaller group of challengers that can come in and kind of tear up that cross border thing? And you and I have talked in the past about some of these African fintechs that are popping up.

0:19:16 - (Blair Jeffery): There's a wealth of money that's in capital that's flowing into that space today, all centered around the same challenge of how do we digitize payments? Because we all want to get out of the paper.

0:19:28 - (Andrew Kazlow): So let's talk more about that because I think we've all seen the projections right about population growth over the next 50 years is going to be massively concentrated in Africa according to all the growth projections. And there's also a tremendous opportunity to kind of evolve the tech situation in that part of the world. What are the key questions that you're asking yourself when yet another African fintech hits your desk?

0:19:56 - (Blair Jeffery): I think the, the, the biggest one that's challenging for us, there's a lot of noise. So when you get into new markets in particular they may have great ideas. We all know companies that had great ideas. Timing is very important. Differentiation is really important. Today we, we know of 10 sort of B2B digital payment wallet apps in Africa that we are talking to on a regular basis. They're not, not necessarily clients.

0:20:25 - (Blair Jeffery): If I took all 10 and I put em on a little plot, I'm not sure I could tell you the difference between them other than the teams, the actual management teams, they are literally attacking the same space with the same idea, same execution. There are tiny nuances of course, but the overall what they're trying to solve for is very, very similar. So to me that tells me one thing from a macro perspective.

0:20:52 - (Blair Jeffery): Something here you wouldn't have 10 separate companies all chasing the same thing if there wasn't something there. So there's a problem that's trying to be solved for the challenge with it though is who's going to win. And you either invest in all 10 or you have to have some formulaic way to weed out this and you literally are making a bet. And so to some extent you're betting on team, which there's nothing new there. Everybody looks at it and goes, hey, is this a team I'm willing to bet on?

0:21:18 - (Blair Jeffery): But two, I think that the key thing there is the ability to evolve the product over time because most of these guys are trying to solve one use case. Kudos to them. The biggest problem I see in the early stage industry is when somebody's trying to solve three problems. Well, you're not big enough to solve three problems, you need to solve one and do it really well. So kudos to them. That's what they're trying to solve for.

0:21:43 - (Blair Jeffery): But you've got to have some vision for what's 2, 3 and 4, by the way, if one doesn't get executed, does that kill 2, 3 and 4 or can you move to 2 at this point if somebody gets there first or somebody does it in a more dramatic fashion? That's the key for us as we, as we look at this, is making strategic bets on a very tight, fuzzy world of folks that are all trying to solve the same problem. Percentage chance of getting it right, pretty low.

0:22:13 - (Blair Jeffery): So you could either avoid it. But so many macro issues here that I like the macro environment that I'd be more willing to make a few bets if things are looking pretty close than I would to not making a bet at all.

0:22:26 - (Andrew Kazlow): A quick note before we continue the conversation. Alongside the Diligent observer podcast and newsletter, I also run an outsourced operations service specifically built to serve Angel Networks. My team handles things like initial screening, social media, newsletter prep, platform management, and a whole lot more. The kinds of things that either aren't getting done or shouldn't be done by busy community leaders.

0:22:48 - (Andrew Kazlow): If that sounds interesting to you, send me a note. Now back to it. I want to poke your story a little bit more because obviously the world has changed quite a lot over the last 25 years you've been working in this space. What are some of the biggest changes or transformations that you've seen in the industry? Maybe some examples of you and the businesses that you've been working in having to make those pivots from.

0:23:13 - (Andrew Kazlow): We thought this was the thing, not the thing number two or three. Or four was the thing. What are some examples or stories from your career so far where you've seen businesses or been a part of businesses effectively doing that?

0:23:26 - (Blair Jeffery): Probably the biggest pivot driver for us has always been regulatory. Just in a 15 year window, we went from banks, were regulated entities in the US to hey, if you're an operator and even remotely get close to touching funds, now you're a regulated entity. And that was a categorical shift in our business. We were running along not really touching money, but administering and pulling triggers, pulling strings and everything else. And lo and behold, here come state or organizations that are saying, hey, actually you're in the flow enough that you should be a regulated body.

0:24:02 - (Blair Jeffery): All of a sudden you, you're on a major pivot. One, it's really expensive to become a regulated entity, both upfront and ongoing. You know, in my, in our previous business that we sold in 19, we went through about a three year window where we were having to work through what does it look like to be a regulated entity and staffing up and monitoring transactions and all those things. Nothing bad came from it, but definitely knocked us completely off of our path. Literally knocked us off into the ditch. Had to rebuild and do that.

0:24:33 - (Blair Jeffery): Our current company, most of what we do is in travel payments. Today we have an operation that helps with insurance and advertising companies too. But in travel, what we've seen, which is really cool, we went from, you know, in 2022, we went from being a domestic only sort of travel payments company, moving money from travel agents into the suppliers. We're now in Europe, which takes on a whole nother strain of challenges and issues.

0:25:00 - (Blair Jeffery): Because the reality is we're learning that space as we go and we're doing it with, I think we've built up subject matter expertise, but kind of went off into that space just saying, hey, it's a really big market. This should sound familiar to you. It's a really big market and we have a product, we have some product market fit in that market too. And we think we have a right to win in that market. Okay, well that only gets you so far.

0:25:23 - (Blair Jeffery): For us, we've had to pivot. The way that we talk to businesses over there, it's just different. It's a compressed interchange environment, which just means that our revenue is much lower over there per transaction, which is a major pivot. Because the reality is you build these vendor relationships and you build an operating model on a certain margin and then all of a sudden you go over there and you're like, whoa, what happened to all of our margins.

0:25:46 - (Blair Jeffery): And so we've had to pivot that. We've had to be really, really conscious of being able to reduce expenses in the way that we operate our business over there. And so we're talking major pivots in our business, not necessarily from a product perspective, but more so just how do you run the business? And I think that's the key. When, you know, I think about teams that I look at in terms of investment, it's not, are you a.

0:26:14 - (Blair Jeffery): Are you a smart guy? I mean, that's table stakes. You better have a great idea. You better have experience in this field. You better have shown the ability to sort of move and shake here. But it really boils down to identification of challenges ahead and then even challenges current, and then the ability to be gritty and stick to a change if you've got to do that, but the ability to be really smart through that. What I see far too often is people have great ideas. That first idea is a really good one.

0:26:45 - (Blair Jeffery): But when challenged, I don't know that they got the depth to go to step two, three, and four if they need to, or they get knocked off the road. How do they get back over there? And it's not just, you know, kind of a willingness. I think what it boils down to is, have you thought it through that if you can't execute here, you can move to something else? And that's always a challenge. I get it. If I were an investor, you know, a lot of these businesses, particularly in the institutional world, that's kind of a downer when you have to completely pivot off your business. It's not what you invested in.

0:27:18 - (Blair Jeffery): But the reality is, Mr. Murphy shows up in every one of our businesses. The ability to do that's important. So, I mean, those pivots are challenging. They make you lose sleep. But ultimately, that's when it boils down when you're like, hey, I'm investing in this team. That's what you're really looking for, is the ability to identify problems and solve them.

0:27:37 - (Andrew Kazlow): What are some of your favorite questions to ask to help suss that out? Because obviously, you don't want to lead them too far to down the road of. Here's what I want to hear. What are some of your favorite questions for sussing that out in this space?

0:27:51 - (Blair Jeffery): Interestingly enough, I asked the same questions in my interviews. When I interview people that work at our company, I always ask the same sort of core questions. The first one's what's the biggest professional risk you've Ever taken. Now, to a lot of people, that's a layup because they're like, I started a company, but is it a risk? Are you still at the other firm? You're doing this in your garage.

0:28:13 - (Blair Jeffery): You know, you've invested time and energy and probably your money into it, but how big of a risk have you really taken? Juxtapose that with somebody who has said, hey, I've got a great enough idea. I went and stood this up, I quit my job, and I'm running this. That's a risk, right? And by the way, I've got a wife and kid at home. Okay? Now that's a risk. You know, so I generally want to find out, hey, are you a risk taker? Because you don't need to be in these businesses if you're not a risk taker. It's.

0:28:43 - (Blair Jeffery): You're not cut for it. Right? So that's the first one. I always ask them about professional risk. The second one is I always ask them, what's the biggest disaster you've worked on professionally? And it's interesting. You can tell how deep they get. And I always just look for the emotional part of it. Does it still haunt them? Because the reality is, I think if you have all this scar tissue and it still haunts you, I'm not sure you're ready for it.

0:29:09 - (Blair Jeffery): You have to be able to deal with as much failure in these businesses. You're gonna fail a lot more than you're gonna succeed in early stage a lot more. The question is just, are you taking all of that personally, or are you able to digest it, learn from it, and move on? And so I look for a little comedic pieces to that. Like, can you actually kind of laugh at it, that it was a disaster? What's your favorite story?

0:29:32 - (Andrew Kazlow): Like, do you have a conversation that stands out in your mind as you say this?

0:29:38 - (Blair Jeffery): I'll give you my own, and then I'll think of one that I can give you. You know, for me, probably the biggest disaster was jumping into a company that I thought had a great idea. I thought they were definitely solving problems. I had experience in that field, and I walked into the company, and the second week I'm there, the largest investor is doing a call on their convertible note and saying, I want out.

0:30:00 - (Blair Jeffery): I'm like, whoa, I didn't count on that at all. And by the way, that could sink us working through that. It took months, pushed us way off into the ditch. And then once we get out of the ditch, finally have to get this investor off the till we paid them off and got the rest of the investors to be okay with that. And we do all of that, and then we lose our best customer. You know, it's like, this is a disaster.

0:30:24 - (Blair Jeffery): And so the reality is. Did it turn out well? No, it hasn't turned out well. Should I take some of that on personally? Of course. I mean, I learned a lot in that experience. Did I handle it perfect? No, but it was an unmitigated disaster. The reality is, that's what I'm trying to look for is, can you really articulate your part in a disaster that happened? Or, you know, are you going, yeah, I was part of the Enron, and these guys did this, and these guys did that. Well, okay, but that's not really your disaster, right? What did you play a part in?

0:30:55 - (Blair Jeffery): The only other one I would give you, it's probably the. The one. The one investor that I really, really liked that kind of articulated this to me was the guys at Victory Insoles. They produce this, like, titanium insole in their shoes. It's awesome. You know, when I talked to their CEO, Steve, I asked him this question. And he probably doesn't even remember me asking him, but I asked him what the biggest disaster was. And basically, when he started, it was really around marketing. He was like, I thought I was really good at marketing. And I came in and said, I can do this. And he's like, you know, I woke up a year later, six months later, and we had. We'd made zero progress. I mean, just zero progress. You could hear it in his heart, like, that's the one thing I thought I was good at. And then I come over here and I find out maybe I'm not so good at it. The reality is he's actually really good at it.

0:31:45 - (Blair Jeffery): He just needed to adapt. But the reality is, like, he personalized that. And then in a good way, I think, work through it. And they've been a huge success. So I look for that. And I got a lot out of when he said that. Cause it just felt honest more than anything. Just an honest assessment on, hey, I'm not perfect here. One area that I would love to talk about, and maybe this is more conversational, because your perspective is so unique, too, because you see so many different things.

0:32:11 - (Blair Jeffery): One of the things I want to solve for is even in angel investing, it's still very regional, and it's still very vacuous. And so I just think about my experience. You know, I was in the Houston Angel Network and was on the board for a while. I'M on the board at the Aggie Angel Network and here we are, we get these two angel networks, they're in sort of southeast Texas and we get fuel flow. A lot of that comes through you.

0:32:40 - (Blair Jeffery): But I don't get a lot of exposure unless I'm out on some of the other sort of app based things on the angel side. You know, what's going on in the Northwest, what's going on in the Northeast. I feel like it's still a challenge in our business or I guess in our investment community. We always talk about deal flow. We talk about it too much. But from the construct of how do we ultimately seek diversification even geographically inside of the US and find deal flow that we can invest in, it still feels like we're talking to a lot of the same parties that are all in the same geographic area. And I don't know if that's something you see. Obviously you're spread a lot wider than, you know, my vision, but I'd love to talk to you, like, how to solve that.

0:33:27 - (Andrew Kazlow): Well, it's an interesting problem and there's several complimentary projects in the works currently that are aimed at supporting this because you're right, it is a very fragmented ecosystem. Angel investing is oftentimes the first check that an entrepreneur is receiving that's not friends, family or fools. And you could argue some of this falls into that category, but it's oftentimes the first outside check. And so these are highly relational, highly informal, highly regional in nature. And so many of these communities prefer regional opportunities as well. And so there's not a massive appetite oftentimes to share and to go more broadly, how many angel groups are there that are just focused on their local community and might consider some other stuff, but are really just focused on their ecosystem? Almost all of them, because a university or an economic development group or an interest group is forming them. And so there's not, in my opinion, a massive incentive for the financiers of most of these communities to lean aggressively into a broader portfolio of deals.

0:34:44 - (Andrew Kazlow): Now, many of the investors, the individuals, the venture folks have that incentive. And so those are the ones that are driving a lot of this collaboration because the end user, so to speak, benefits from access to more opportunities. There are a couple opportunities in progress aimed at serving that, one of which we're working on with the Pitch Fact Collaborative. And then the ACA has a syndication network that they're building out, the Angel Capital Association.

0:35:13 - (Andrew Kazlow): There's several other efforts to kind of collaborate. I think at the end of the Day One of the big reasons why is that angel investors and angel communities are oftentimes more collaborative in spirit than they are in process. And that's where the gap is.

0:35:32 - (Blair Jeffery): Our current company, connexpay, was funded by angel investors. They are still on our cap table. And the head of the group there, this is a group in South Florida that invested in us originally. He's still in a board advisor and is tremendously helpful to us. And the one thing that I see that I think is a repetitive sort of consistent theme is that most of the early stage folks that are investing at the angel level are very helpful.

0:36:01 - (Blair Jeffery): They can be distracting. I get it if you're a founder, but by and large, I think one of the biggest problems that people have, particularly in the payments world, is they take institutional investment too early. They're not ready for it. They could probably have accomplished it by adding some higher net worth folks that have industry experience. This is in no way a shot at the VC or private equity out there.

0:36:25 - (Blair Jeffery): But the reality is no VC or private equity is really stocked with people that have experience in your field. They typically might have one or two people that understand that, but their business is investing. Juxtapose that with a group of. If you find the right group of angel investors that are out there, one, it's generally patient money, they're not banging on you constantly for an exit. They're there to help. But two, I think the biggest thing is you get to tap into a lot of free advice.

0:36:53 - (Blair Jeffery): And that free advice, like I said, can be distracting. You gotta be able to sort of mind through it, as you know. But I think the companies in the payments world, my recommendation has been, hey, if you need, and I'm not talking going and raising 10 million, but if you need a couple million dollars, you know, maybe do the angel circuit. Because the reality is there's probably some guys that have exited in the payment space that understand it really well that could even sit, they don't even sit on your board. They just need to be advisors for you. And they keep you sharper that way and keep you when you have to pivot. They've been through those wars as well.

0:37:27 - (Blair Jeffery): And then, yeah, there's always going to be a day where those checks get too big and you need institutional investment to come in. But the reality is those companies become very formal at that point. And formality with early stage, there's a, there's sort of a cliff that happens. You drive these businesses up and you're running well like your hair's on fire. And then you go and take a large investment.

0:37:50 - (Blair Jeffery): All of a sudden it's like, okay, I need a formal exec team, I need formality to the process. I need institute a PMO system in here and how do we do development and all that. All of those things are valuable. It's just a question of timing. And one area that I see companies stall is they take institutional investment too early and it stymies some of that creative process and that urgency that's so vital to early stage that all of us love, right? That urgency to get going, find the fit that can get pulled out if you take money a little bit too early.

0:38:28 - (Blair Jeffery): And I'm sure that's the case in a lot of different industries. But I think it's even more so in the payments industry because it's such a tight knit group of people and it's so niche that you're probably not going to find a lot of institutional folks with like deep seated payments experience.

0:38:44 - (Andrew Kazlow): Well, and that connects directly to what you were talking about earlier and how it's amazing that there's this wonderful infrastructure that the government and all these banks have put together over the last half century.

0:38:57 - (Blair Jeffery): But there's a lot of process, it's

0:38:59 - (Andrew Kazlow): slow, it's difficult, it's cumbersome. And so these new innovations are cutting out a lot of that fluff around the newest, latest, greatest tech. And that's creating innovation on top of the shoulders that we stand on. And so in the same way, I think that applies here as you're thinking about company building and deploying capital and when is the right time to bring in institutional. That's a very important distinction that you just made.

0:39:28 - (Andrew Kazlow): Say a little bit more about connexpay. I want to hear more about your work, how you guys fit in this ecosystem, what are some of the core problems that you really understand and that you're focused on solving and then maybe like mechanically for the non payments guy like me, how does the product actually work?

0:39:48 - (Blair Jeffery): The company was started, was founded in 18, ran in self mode for a little while and came out in 19. The use case of it was at the time was Pure Travel Payments. Really bad time to start a business considering that in 2020 we went to zero travel. I still say, and this predates me, I wasn't at the company at the time, but I still say it was the greatest achievement that this company's ever had by squeezing out a million dollars in revenue in a year when nobody traveled. Kudos to the folks that were here that were able to accomplish that.

0:40:17 - (Blair Jeffery): From that point on, though, I think that built a sort of a resiliency in the base of our employees that still carries forward today. So culturally, and we all know this psychologically, sometimes the deepest suffering generates some of the best strength. Right. And so I think that's what's happened in our company is they suffered through that. You'd be hard pressed to find another industry ecosystem that was more devastated during COVID than travel. Right. It literally went to zero.

0:40:49 - (Blair Jeffery): That sort of built this model. Our model is fairly simple. There's sort of two sides of a card transaction today. A credit card transaction or a debit card transaction. You have merchant acquirers that accept payments. So when you go to the grocery store or whatever and you tap to pay or you give them your card, that's a merchant acquirer that's either running that terminal and running the process.

0:41:10 - (Blair Jeffery): They run those payments through Visa, MasterCard, Discover and Amex, sort of the big four in the US and then on the other side, you have card issuers. And so when you and I pull out our wallet and we have a card in there, that's a card that's been issued by a bank. And so it's sort of two sides of a transaction. We built a system and a platform that does both. When you talk about what we call intermediary businesses, and an online travel agent's a very good example of an intermediary business. And what do I mean by that? Well, an online travel agency is effectively a direct to consumer marketing business.

0:41:51 - (Blair Jeffery): They go out, they find consumers, they market to them and say, hey, we can set up vacations for you or whatever. They come to that travel agent and the travel agent generates a transaction for them, but nothing that they're actually settling on. That travel agent doesn't own the airline, they don't own the hotel. So they literally are an intermediary to that transaction. So what we did was we built a platform that accepts payments from consumers wanting to go on cool vacations.

0:42:19 - (Blair Jeffery): And then we have a virtual card issuing platform that pays the airline, the hotel, the cruise line for that consumer. We never share the consumer's card with the airline or the hotel. Some of that's risk management. We all know that you get breach notices all the time. And unfortunately, millions of people get breached. And we use a product in the space called a one time use virtual card. The beauty to that card is it's used, once it's extinguished, it's gone.

0:42:51 - (Blair Jeffery): I don't care if you breached it, you'd never use it. Again, anyway, so we've kind of removed some risk out of that platform. That system and platform is extremely unique. Recently some other people have jumped in that were either an acquirer and added issuing or issuing and added acquiring. But as of today, we are the only platform that is completely drawn together, built into a one single solution.

0:43:16 - (Blair Jeffery): When you're an OTA or an online travel agent, you have one contract with us, you have one price with us. You can process all of your payments. We allow for lots of different payment modalities. They don't have to be cards, they could be ach, they could be other things. We accept a lot of non card payments on the front side too. If you wanted to pay with Apple Pay or Google, you want to pay with your bank account, we could do all that too.

0:43:38 - (Blair Jeffery): And then I mentioned in 2022 we made a pretty large pivot, that is when we took institutional investment. So we took a $110 million round from FTV and we were at that space where I think we had the perfect timing of we were a very profitable company, private and made the decision that we can either continue on this trajectory and we were growing dramatically then, or we can take a moonshot and try to do something much bigger. We took that investment really around two key things. The first one was go to Europe.

0:44:12 - (Blair Jeffery): The market is a little bit larger, a little more fragmented in a good way for us. And so we effectively doubled our TAM just in a business we knew. And then the second one is travel's not the only intermediary business. So when you think of agencies and you think of brokerages, those are intermediary businesses as well. And so when I mentioned advertising and I mentioned insurance, we play in the insurance brokerage business, we play in the advertising agency business and those businesses. When you start to think about it, you and I at a corporate buying an insurance policy and then having it paid for by the broker, that sure seems like an online travel agency transaction. And we think there's others. But we're trying to maintain focus on a few key areas. So there's sort of our three attack vector verticals that we go after at this point.

0:45:02 - (Andrew Kazlow): Fantastic. Well there, we will wrap there. This has been fantastic. Thank you so much for joining me today and educating me on the payments

0:45:10 - (Blair Jeffery): this world a little bit more.

0:45:12 - (Andrew Kazlow): I very much look forward to our next conversation.

0:45:15 - (Blair Jeffery): Me too. Thanks so much Andrew. Appreciate it.

0:45:19 - (Andrew Kazlow): Thanks for listening to this episode of the Diligent Observer. I'm your host, Andrew, and if you're an angel investor looking for essential angel intel in five minutes every week. I think you'd enjoy my newsletter. I send my best stuff, interesting deals and more straight to your inbox so you never miss a thing. Subscribe today@thediligentobserver.com.