Thursday, October 4, 2007

Blast from the Past IV

From Thomson Financial:

You may not be surprised to hear that there's a startup that is in the midst of raising a third round of funding at a $2 billion pre-money valuation. But the company is not the much-ballyhooed Facebook. The company is Pay By Touch, according to sources familiar with it, and the company is looking at hedge funds as the funding source.

Pay By Touch is a 4-year-old San Francisco-based ecommerce company that allows customers to pay for purchases by placing their index finger on a sensor for identification. The company raised $130 million in September from billionaire investor Ron Burkle and several giant hedge funds, including Och-Ziff Capital Management in New York and Farallon Capital in San Francisco, both of which helped Pay By Touch, officially named Solidus Networks, raise an additional $60 million earlier this year. Sources say that the company is again raising money from hedge fund investors, though Pay By Touch won't comment on the funding efforts.

A company spokesman asked PE Week, "How'd you catch wind of that?"
Farallon and Och-Ziff declined to comment. Pay By Touch said in a January SEC filing that it had raised about $155 million of a planned $375 million funding. Gus Spanos, the company's interim CFO and executive vice president of corporate development, suggests that venture investors don't interest the company. He says that the hedge funds give companies more options in terms of financing. "And they're able to better meet our needs as a growing company," he told PE Week in an email. He added: "Hedge funds are sophisticated and run by experienced investors. More traditional private equity and venture firms tend to offer traditional 'plain vanilla' equity investments, and we wanted to go beyond that."

Pay By Touch is currently the biggest operator of retail payment systems based on biometric data, according to the company and International Biometric Group (IBG) in New York. Whether the company is capable of supporting a multibillion-dollar valuation remains to be seen, but Victor Lee, IBG senior consultant, seems to think it is possible.
Lee says that the company is the only operator of retail payment systems based on biometric data, thanks to an aggressive acquisition spree in which it has bought several smaller companies, including BioPay, its most direct competitor in biometrics-driven payment processing, for $82 million in cash and stock. Other companies it has acquired, for undisclosed amounts, include CardSystems Solutions (a payment processing company that is used by Visa and Master Card) and loyalty program startups Capture Resource, 7th Street Software and Covena. It has also acquired InterCept Payment Solutions and ATM Direct.

When asked if Pay By Touch, which employs about 650, would use additional funding to continue its acquisition spree, Director of Marketing Shannon Riordan, speaking on behalf of CEO and founder John Rogers, said, "I'm not at liberty to discuss any of our plans. The market is changing rapidly. We're also very interested in making sure that our investors are happy. So we'll evaluate what we do next and shift as the market shifts."
Riordan declined to discuss Pay By Touch's sales. Nor would she discuss if it had plans for an IPO, though in December Rogers was quoted in the Financial Times: "We believe [an IPO] is in the reasonably near future." Most of the company's customers are major supermarket chains, such as Piggy Wiggly and Harris Teeter in the Carolinas; Albertsons on the West Coast; and Pathmark supermarkets in New York and New Jersey.

Once a store has integrated a Pay By Touch scanner (at a cost of $50 apiece) with its existing pen pad, Pay By Touch charges the store anywhere from 10 cents to 25 cents per transaction, depending on the price terms it has negotiated.
The advantage to shoppers is ease of use, since there's no fumbling for debit or credit cards or customer loyalty cards. To sign up, shoppers must provide a valid driver's license, a blank check to be scanned and have their fingerprints scanned and stored. Pay By Touch serves as a conduit between the stores and the bank accounts of the customers, processing payments though an automated clearing house, the same sort of electronic transfer process that companies use to make direct deposits into employees' bank accounts.

Riordan says that Pay By Touch has plans to focus on customer loyalty programs going forward. "You'll walk into a store, swipe your finger at a kiosk located at the entrance, and be given coupons for items that you regularly purchase." It also has its sights on the health care industry to facilitate authentication and co-payments at the doctor's office and the pharmacy. Riordan says that Pay By Touch is rolling out its first health care related pilot program this summer.