In the first article I published on SeekingAlpha, The Future Is CLIR: Why The Shorts Are Wrong About ClearSign Combustion, in addition to presenting the case why long-term investors in ClearSign (CLIR) will be heavily rewarded, I talked about my background founding and building early-stage technology companies since the mid 1990s, including being one of the first 200 employees at Yahoo! (YHOO). I also shared how my philosophy around investing in tech start-ups has shifted from looking primarily at private companies to what I refer to as "public venture capital." Basically, I'm doing a lot more investments in "Intellectual Property" as an asset class - essentially, betting on early-stage public companies with patents and other IP that serve as competitive barriers to entry.
Today I'm going to tell you about a two year-old company in the online and mobile payment processing space called Spindle, Inc. (OTCQB:SPDL). Think of Spindle as a public way to play the success of such hot, private companies as Square, Braintree, and Stripe, which have raised $341MM, $69MM, and $38MM of venture capital, respectively, from some of the most prestigious investors in Silicon Valley.
Rather than attempting to compete with its own consumer brand, Spindle, based in Scottsdale, AZ, has a patented, cloud-based payment solution that enables its customers - banks and financial institutions, telecommunications companies and other businesses - to offer their own branded payment-related products to their customer bases. The beauty of the model is Spindle's customers get access to a robust, scalable, cost-effective suite of "white-label" products, which can be sold individually or bundled together, and can market them under their own brand. Meanwhile, Spindle, whose platform is working behind-the-scenes, takes a small fee on all transactions. Over time, hundreds of millions of dollars (potentially billions) annually will flow through its system. And that's why I'm so excited about this company! In short, Spindle checks the box on the three most important factors of early-stage investing: big market opportunity, seasoned management and strong technology platform with IP.
IE Market Research, a Canadian market intelligence and business strategy research and consulting firm, says the value of global mobile payment transactions (such as merchandise, digital products, ticketing, mobile money transfers, bill payments, and pre-paid top-ups) will reach nearly $1 Trillion by 2016. Yes, TRILLION! Another report from Forrester Research, the Cambridge, Massachusetts-based research and advisory firm, forecasts that U.S. mobile payments will reach $90B in 2017, a 48% compound annual growth rate (OTCPK:CAGR) from the $12.8B spent in 2012.
Spindle is already tapping into the international market through its partnership with Singapore-based Utiba, a leading global provider of mobile financial services solutions. In the deal, which was announced last October, Spindle will provide low-cost mobile acceptance technology and services to complement Utiba's Converging Payments solutions, which were borne out of a partnership with MasterCard (MA).
Net-net, the global mobile payment space Spindle competes in is absolutely gigantic and growing phenomenally quickly, so the opportunities are tremendous. Another one I'll quickly highlight is the company's deal with SLIDE, which was announced in November. As part of the agreement, Spindle will provide its secure payments infrastructure for the SLIDE offering that will get marketed in select MetroPCS (PCS) distributors. In my conversations with Spindle management, they said numerous other partnerships and joint ventures are in the pipeline, but they wouldn't get into specifics.
There are only about a dozen people working at Spindle - remember, Instagram only had about 14 when it was acquired by Facebook (FB) last year for upwards of $1 Billion - and the handful of execs at Spindle have the background, experience and network to make this a high-growth company that's going to be a great acquisition target in the next six-24 months. In David Ide, the Executive Chairman, we have a mobile industry veteran who very successfully ran Augme Technologies (AUGT), a mobile marketing company, during which time the stock went from under a quarter a share to over $4 before he left to co-found Spindle. Bill Clark, Spindle's President, has more than 25 years in the payments industry, including 17 years at First Data Corporation and was responsible for $350MM in annual sales. And it recently brought Brian Voigt and John Tharpe over from Bank of America (BAC) Merchant Services (BAMS) to lead its Strategy and Business Development. Both guys have 20+ years of relevant experience. Voigt served as Vice President of Strategic Partnerships at BAMS where he was most recently focused on defining the mobile Point of Sale ("POS") and unattended industry (vending machines) strategies. He's also worked at First Data and Chase Paymentech (JPM) as a top revenue producer. Tharpe was also a former Vice President of Strategic Partnerships at BAMS, where he worked to establish BAMS' mobile wallet, third-party payment gateway, professional sports and mobile payments strategies. Tharpe was previously involved in building several successful payment companies including Official Payments Corp., TrustCommerce, and Global Payments. Finally, Kevin McNish, Spindle's VP of Product Development, has 15 years of experience in the information and electronic transaction processing industry. His background includes product management and new business development at First Data Merchant Services.
Technology Platform & Intellectual Property
Spindle has built a substantial technology platform and, according to its 10-K filed last March, the company "owns 4 patents and it has an additional 3 patents pending with the United States Patent & Trademark Office. In addition Spindle owns the right to royalty-free use of five issued patents and one pending application in the secure encryption, media, and document security space."
The company's portfolio includes a family of patents that are foundational to the methods used in networked payments - "Processing Payment on the Internet" (now pending with the USPTO) - and their "Financial Transaction System" (#5,822,737) family of patents, which discuss "an automated payment system particularly suited for purchases over a distributed computer network" have been referenced over 140 times by companies including PayPal, a business unit of eBay, Inc. (EBAY), Visa (V), Priceline.com (PCLN), AT&T (T), and First Data Corporation (FDC) as foundational to portions of their intellectual property portfolios.
Although Spindle is focused on building a business around its IP, the company has retained Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo P.C. to manage prosecution of the portfolio and the continuation of USP 5,822,737, which the company believes is foundational to electronic payments over a network of computers (including ecommerce and mcommerce payment processing), as the patent has a priority date of 1996.
Along with Mintz Levin, Spindle has engaged HLP Integration to evaluate the patent portfolio and explore opportunities to create layers of new IP as well as "monetization," which includes both licensing as well as litigation. I view any income from these efforts as "gravy," but in my conversations with management, it's clear this could be tens of millions of dollars. From what I gather, Mintz and HLP will be working together on Spindle's behalf while the management team focuses on the core payment processing business.
From a platform perspective, Spindle's Ide believes his company was the first PCI Level 1 Compliant company using Amazon's (AMZN) AWS cloud (Amazon EC2), and the company offers a secure, white label mobile wallet product with similar functionality as Google Wallet (GOOG) and PayPal Mobile. In case you're unfamiliar with mobile wallets, Mobile Commerce Daily calls them "the new credit card." If you're interested in learning more, I urge you to check out this piece from BusinessInsider, which uses an infographic to simplify the explanation.
My research indicates Spindle began generating revenue in Q4 last year, so I'm looking forward to getting details in its next quarterly filing. With a large and expanding market, robust technology platform and an experienced team with deep industry relationships, it wouldn't surprise me if these guys start putting up some pretty impressive numbers very quickly.
As I've written previously, my early-stage investing focus has evolved from exclusively private companies to predominantly public ones because of the disclosure and oversight that comes with investing in companies filing publicly with the Securities and Exchange Commission (SEC) combined with the fact that there's a shorter time horizon for liquidity without sacrificing potential returns. And that's why I've made a pretty big financial bet on Spindle. I believe the shares offer significant upside potential to early investors over the next couple of years.
In summary, the combination of a large and fast-growing market combined with Spindle's solid management team and powerful technology platform (built by experienced payments industry veterans and backed by strong intellectual property) make this a very exciting investment opportunity and one worth serious consideration.