How a stalled bagel empire led to a booming e-transactions business: YapStone cashes in

[This article first appeared in “How a stalled bagel empire led to a booming e-transactions business: YapStone cashes in” on San Francisco Business Times and is written by Mark Calvey.]

YapStone has enjoyed explosive growth handling electronic payments in areas largely overlooked by others, such as church pledges, apartment rentals and online marketplace purchases such as Homeaway’s VRBO.com. Walnut Creek-based Yapstone, with 310 employees, processed more than $14 billion in payments last year.

The company’s name stems from a form of currency in the Yap Islands called Yap stones, which hold value based on the size and effort needed to create the wheel-shaped rocks that were up to 12 feet in diameter. Since it can take up to 20 people to move the largest Yap stones, it’s not surprising that the people of Yap have come to embrace an easier-to-handle currency— the U.S. dollar.

Business strategy

How’s business? We’ve increased revenue six-fold in the last five years, doubled staff in the last three and expanded to four locations. It’s an absolute war for talent and hasn’t let up a bit. We’ve had people, even at senior levels, sign offer letters with us who then get such unbelievable retention packages that they back out. We’ve done the same thing for people who threaten to leave us. We’ve been on both sides. We also recently opened a satellite office in San Francisco. It was important to be back in the city. Some of the young engineers think Walnut Creek is a suburb of Sacramento.

Why all the entrepreneurial interest in payments? The potential scaling of the business is enormous. But there’s regulation, compliance and money transmitter licenses that are likely to become even more burdensome. Payments is not an easy business, which is why you’ll see more companies want to outsource it.

Biggest challenge for your business? Hiring and building the team. We’ve attracted talent from Amazon, Google and Salesforce.com. Maintaining our culture is so important. My long-term goal is to be on the list of best companies to work for. It’s my No. 1 goal because if you can make those lists, everything else falls into place.

What’s going to change at your company in the next year? We’re going out soon for another round of capital, probably $75 million to $100 million. Investors are tightening the criteria. They want to see more traction in the marketplace and a road to profitability. That wasn’t part of the discussion in early 2015.

How much money did you raise previously? We raised $110 million, including our first institutional money in 2011, when we raised $50 million. We had raised a tiny friends-and-family money when we started in 1999 and built the company for a decade. But then we reached a fork in the road. We could get a great, profitable $40 million a year business that was growing 35 percent a year since inception. We’ve always enjoyed good growth. But the fork in the road was whether we continue showing up for board meetings in our flip flops from the beach, or do we become a little ‘institutionalized,’ and raise big money, with all the great relationships we have and all they can do to help us scale. We decided that we we’re on to something in the payments space. Early last year we raised $60 million in debt, which was a great time to raise debt financing. Most of it is unused lines of credit.

Company goal yet to be achieved? To have equity capital for dry powder, for acquisitions and to pursue growth opportunities internationally. We want to build additional capacity ahead of revenue growth. It would have been better to raise the money in mid-2015, but there’s still a scarcity value to what we have in YapStone, given the $17 billion to $18 billion in payments we’ll handle this year. The sharing economy is so big, and we’re well positioned. For the right marketplaces, we’re willing to take on the risk of fraud and charge-backs. That’s a huge advantage we offer. Our goal is to get to $50 billion by 2020. That will make us a big-boy payments company.

Management philosophy

Best way to keep competitive edge? Focus on customers, keep employees motivated and remain paranoid — in a good way.

Why people don’t like working for you? There’s not a playbook when they come in. If they’ve come from a big company, they’ll need to be scrappier here.

Judgment calls

Toughest business decision? Taking outside capital after going 11 years with no outside money. Taking venture money is a big responsibility.

What sparked the idea for YapStone? I was playing poker every week with a group of guys who were primarily bankers and entrepreneurs. We were enamored with PayPal’s business model of essentially moving electrons with no inventory. I was so tired of the bagel business because it was not scalable. We realized that credit card companies didn’t really differentiate their services for merchants. We decided to go after markets where payments were still dominated by paper checks. Most people around the table at the time were using online banking but were still writing their rent checks every month. Light bulbs went off.

Tom Villante
Chairman and CEO, YapStone

HQ: Walnut Creek

Background: Villante also is chairman of Villante Capital Partners, a Santa Monica-based private equity and real estate investment firm he formed in 1997, which initially focused on buying small chains of bagel shops. That didn’t fare well, so he shifted his focus to the payments business, creating YapStone. Villante was also previously a partner at Seidler Co., a leveraged buyout firm in Los Angeles, and worked at S.G. Warburg’s investment banking division and William E. Simon & Sons.

Education: Bachelor’s degree in economics from Princeton University.

Residence: Pacific Palisades.

Mark Calvey
Senior Reporter
San Francisco Business Times