Why 'Gig Economy' Payments Are Attracting VC Cash
The prevailing accounts payable model simply can't handle the sharing economy (also called the "gig economy"), according to Dovi Frances, who's putting cash and influence behind that theory.
"The advent of the sharing economy has really put increased pressure on and created many new challenges for making payments to contractors," said Frances, a Tel Aviv native who founded SGVC, a Los Angeles-based venture capital firm in 2012. SGVC recently invested $14 million in Tipalti, a Palo Alto-based supplier payments automation company. Frances has also taken a seat on Tipalti's board of directors.
Contract work is expanding and digitizing, creating the perfect mix of business disruptions that are an irresistible lure for technology companies, Frances said.
"The volumes of contractor payments has increased dramatically and the global diversity of those payments has exploded," he said. "The previous human-intensive, error-prone, paper-oriented approach to managing accounts payable and sending payments to contractors and suppliers is broken and the sharing economy has helped expose this."
The sharing economy is loosely defined, but usually includes companies like Uber and Airbnb that use mobile apps, the Internet, open source development and peer-to-peer sharing of services. Venture capital is flowing into companies that operate in the sharing economy at a dramatic rate.
The model has brought efficiencies on the surface, particularly in the realm of payments. With Uber, for example, transactions are supposed to be cashless and almost invisible to riders. However, this is a delicate structure and a good supplier can be lost if its app doesn't work right.
It is critical to balance payment efficiency with tax and regulatory requirements, Frances said. The key to success is streamlining the contractor onboarding process, maintaining payment accuracy, establishing compliance and reducing payment friction, Frances said, adding companies in the sharing economy need to scale intelligently, accelerating quickly to capture market share.
"If a contractor is not getting paid in a timely accurate way, they will likely stop working for your business and move to your competitor's network. This is also true if the contractor is not satisfied with the payment method or currency options you make available or if your communication about payment status is weak," said Frances, whose other financial technology investments include SoFi, Addepar, OpenGov, HomeLight, Sunbit and Loop Commerce.
In addition to contractor payments, Tipalti has added other services related to tax documents and payments for advertising content, and it seeks share among mass payment providers such as Dwolla, PayPal, Payoneer and Earthport. Technology automates the entire workflow from beginning to end, starting with onboarding, regulatory compliance, invoice processing, anti-money laundering compliance, global remittance, contractor payment status messaging and "instant" reconciliation and accounts payable financial reporting, Frances said.
"When I see the crowdsourcing and Web marketplaces that are growing out there, that is where we play today and we are doubling down on that," said Chen Amit, co-founder and CEO of Tipalti, adding the investment will be used to expand Tipalti's sales organization and add new "audiences" for the technology.
Others in the payments industry are pursuing the same opportunity. For example, Stripe just announced a collaboration with Visa and Mastercard that's designed to expedite payments to contractors by using Stripe's instant payout feature to enable same-day payments.