Why eBay just paid $240 million for a mobile payment start-up.
eBay (EBAY) today announced plans to significantly expand the reach of its PayPal unit, by agreeing to acquire a company that lets users make payments by simply entering their mobile phone number. The $240 million cash deal is for Zong, a Silicon Valley company that raised $27.5 million in venture capital after spinning out of Switzerland’s EchoVox in early 2010.
One of those investors was Matrix Partners, whose partner Dana Stalder is a former eBay and PayPal executive. I spent some time discussing the deal with Stadler, and what follows is an edited transcript of our conversation:
Fortune: How much did your personal history with eBay and PayPal factor into the deal for Zong?
Stalder: I think in a couple of ways. First, I’m intimately familiar with what PayPal’s key assets are, and that led me to make the original investment in Zong because I could see how complementary the two platforms were.
Second, I facilitated an introduction between the companies about a year ago, and spent time with both parties trying to figure out a commercial relationship.
Did that commercial deal ever get done?
No. Those types of discussions sometimes lead to commercial relationships, and sometimes lead to acquisitions. I think the PayPal team ultimately felt that this was so strategic and they had such a strong chemistry with the Zong team, that it made sense to do something bigger.
When you were with PayPal, was there any discussion of creating a Zong-like platform in-house?
No. It’s really complicated what Zong has done here. It’s created direct relationships with more than 250 mobile network operators. I think it was viewed by PayPal as a very interesting opportunity, but not one that it wanted to take on itself.
It sounds like you’re saying that creating those mobile operator relationships was more difficult than creating the underlying technology.
I think that’s true for most payment businesses. The payment operations aspect of these companies is extremely hard, particularly for the funds-in/funds-out capabilities. It’s something Zong has done very well, and I think is also a core competency of PayPal, although they do it primarily with banks and payment processors.
Another major piece of this is fraud and risk management. When I was still with PayPal, I used to say that it was more a risk management company than a payment company.
How do you differentiate Zong from a rival like Boku?
There is certainly competition. I think Boku is the most-known competition here in the U.S., but there are two companies in Europe of roughly equal scale: in MindMatics Germany and Allopass France. All of these companies are formidable, but Zong has built the best team with the most direct relationships with carriers and the most converting payment flows in the business.
If eBay had picked one of those other companies over Zong, what was Plan B?
To be clear, Plan A was to build a very big, stand-alone profitable payment company. When I was talking about the original investment, my main point was that Zong was clearly in PayPal’s white space and there wasn’t competition from big payment operators. But Plan A was in place until probably around two months ago.
This is an all-cash deal. How did you get that instead of stock?
It’s not even a discussion we had. eBay has a track record of doing its transactions largely in cash.
What was Zong’s valuation when you invested last year?
I can’t disclose that, but can say we’re happy with the return.
For more from Stalder, check out this blog post he wrote about the deal.