Jake Aaron Villarreal: I'm Jake Aaron Villarreal, born and raised in Silicon Valley, and here to take you behind the scenes to share what it's like to be a startup founder, the journey they're on, the problems they face, the products they build, and effort to make our lives better. I'm excited to have with us today Darryl Hicks, founder and CEO of FlexPay. Darryl, welcome to the show.
Darryl Hicks: Hey, it's great to be here.
Jake Aaron Villarreal: Well, thanks for uh joining. Excited to dive into your story and we'll talk about the product you have and the problem you're solving. But a little bit more about Darryl for the listeners. He's an angel investor and serial entrepreneur having scaled businesses in international B2C e-commerce, performance sales, call centers, cybersecurity, network infrastructure solutions and payments. His latest business, FlexPay, is a VC-backed B2B fintech SaaS that uses AI to help large subscription merchants reduce the involuntary churn that comes from failed payments. He's had two successful exits and the seven businesses he's founded or co-founded have cumulatively generated a hundred, hundreds of millions in revenue and generated thousands of jobs in the US and Canada. So, Darryl, excited to have you here. Before we jump in, where are you joining us from today?
Darryl Hicks: I am coming to you live from the Pacific Northwest. The Canadian version of the Pacific Northwest. So, I'm in a little town called Kelowna in the Okanagan Valley. It's kind of Canada's wine country, lots of skiing, lots of uh water sports and golf. And we have a great little hub of uh tech founders. We created a little commune of tech bros that are just doing life here together, raising our young families together.
Jake Aaron Villarreal: Hundreds of AI startups are launching every month, battling to build their founding teams. As a leader, your job is to get results. When it comes to hiring, that's where it gets tough. So, you go out and you try a recruitment firm, but they don't understand your story. They're off target, and when they send you candidates, it's a waste of time. We believe you should never have your time wasted. That's why we launch Match Relevant, 'cuz your story is more than just an open role. It's your founders' journey, the problem you're solving, the product you're building, and why it matters. When we work with companies, we make sure we understand your whole story. So, we go out and do a search. We're on target. It's worth their time. They're interested. And more importantly, it's worth yours. And when it comes to hiring engineers, we work to make sure we get it right. By deploying...
[Darryl's Origin Story]
...a team of seasoned CTOs that have built some of Silicon Valley's best companies that can collaborate with you in the technical interviewing process, they can be a sounding board or they can run it for you. When it comes to building teams, there's no time to waste. Let's make it count. If you have a role that needs to be filled, book a time with a hiring guide at matchrelevant.com and learn how we do it.
Wow. The way you say that with mixtures of wine and mountains and Pacific Northwest, it makes me want to jump out of my chair and head north.
Darryl Hicks: Yeah, it's pretty beautiful up here. I won't lie. We, we moved here during the pandemic. Like a lot of people, it seems like the pandemic was this inflection point that caused a lot of people to question like, "Why am I here? What am I doing?" And most of the guys who moved here, the tech founders, we were all living in dense urban environments with young families. And the lockdowns were just brutal. And we, it started out with us saying, "Oh, like, you know, let's just get out of dodge for like a year. Let's just try it out for a year." But you don't like take your kids out of school and uproot and move your family all the way across the country for only a year. But it turned out we loved it so much here. Me and my dog's living her best life. We're living our best lives. It's been awesome so far.
Jake Aaron Villarreal: Yeah, it's great. You kind of sometimes need pandemics to find your purpose and location of living and it's happened to a lot of us. So, really cool to hear that. In terms of you, give us a little bit of background of your origin story kind of where did you start and what were some of the things that shaped you into getting into technology and quite frankly just to being an entrepreneur?
Darryl Hicks: Yeah, so my parents were always small business operators and their parents before them. So, it was always kind of in our DNA. My mom in particular said, "There's no way that you're moving out of this house until you have your own small business and you buy a house."
Jake Aaron Villarreal: Oh, I love that.
Darryl Hicks: Renting is... Yeah, renting is flushing money down the toilet was what she said. So, at 18, I started a window washing business. I bought this super dilapidated, rundown wartime house that was like not even... couldn't even really live in it. And a first-time home buyer in Canada can uh buy a house with a down payment of only 5%. So, at 18 years old, I bought a house and I had a window washing business. And that kind of started me out on my journey.
But I got into computers. I had a really miserable life in school. I got bullied really badly, regularly chased with like broken baseball bats and jumped from behind and had my front teeth chipped and broken. And so, I just spent a lot of time at home. And one really amazing thing that happened with my parents' business, they had one good year and they decided for some tax write-offs to buy a computer. And, and I just fell in love with it. And I... there was no like 'For Dummies' manuals back then. And it was like these not very approachable 600-page books and I just sat there and would read them cover to cover and taught myself to code. And just started like doing some white hat...
[The Impact of Bullying on Entrepreneurship]
...hacking and I had a modem in the computer so I could like connect into different bulletin board services and connect into my school and kind of monkey around with systems in there and had a lot of fun with that. You know, played a lot of blackjack, wrote a blackjack game to play on my computer and had a lot of fun with that. So, I knew that I was, no matter what, I was going to get into tech in some way. I just didn't know exactly what that looked like.
But I moved to Montreal when I was 19. And because I grew up on the east coast of Canada in a very small sort of blue-collar town. And uh was able to find a computer firm that was desperate for hiring. Everyone wanted to get their computers networked. And so I started doing on-site consulting, uh taking what I had learned in the books and actually applying it in real life. And that led to eventually uh building cybersecurity appliances. It was all proprietary stuff. Somehow through a bunch of connections ended up working in the Twin Towers in New York. So I spent a lot of time living on Wall Street and working there. Uh working with Sprint and Verizon and different consultants and like securing their systems. Back then it was like the Wild West in the late 90s. I mean people would just take their Windows NT servers and plug them into the internet and like broadcast NetBIOS Port 139 out to the world saying, "Hey, come log into me." So there was a lot of low-hanging stuff that we could do to really move the needle.
And that just plugged me into an incredible world in New York of like this renaissance of people like discovering what this thing the internet is and what's going on in it. And uh one thing led to another. I found an incredible group of co-founders who were great mentors to me, uh far older and more experienced than me, but I was kind of the guy that they could rely on to do all the back office sort of tech stuff. So, I was co-founder in a couple of businesses that we launched together with this group. That was my first sort of real business where, you know, self-filling bank accounts and passive income.
We were really big into subscriptions. My role in those businesses as a co-founder was always to work in the back office on tech, a little bit of finance, um, but really focused on making sure that as we were acquiring customers, we could keep them for as long as possible. So maximizing lifetime value, minimizing risk metrics like cancellations, whether that's voluntary churn or involuntary churn, refunds, chargebacks, things like that. And you know, I'd just spend my nights swimming through the SQL, as I like to call it, trying to look at all the data and figure out what was going on. We were really lucky. I was lucky that the guys that I were with were really skilled on the sales side. And in aggregate, we either sold to or serviced tens of millions of customers across four continents. So, we were really big in Brazil, the US, Canada, Australia, the UK. About 70% of everything we did though was in the US. A lot of different payment processing, a lot of different processors that we had to connect to, a lot of different currencies. We ultimately built out a 250 seat call center uh that was open 24/7, 365 for handling all of the inbound customer...
[Transitioning to FlexPay]
...service calls. I kept trying to outsource it all the time. Like there was all these opportunities to outsource the call center to, you know, nearshore, offshore, but they could never hit the retention numbers that we needed to. And a lot of people would call for, you know, wanting to cancel a subscription that they were in. And so I didn't look at the call center as a cost center. I looked at it really as a profit center. How many of these customers can we resell on why they joined in the first place? Reselling them on the benefits. And we could handle the calls for like 90% reduction in cost by sending them offshore, but the revenue side of it was just brutal. And so ultimately we had no choice but to build out all that infrastructure onshore under our own, on our own P&L and balance sheet just because it generated so much revenue for us.
So I was really spending a lot of time analyzing the numbers. The biggest thing that was driving me nuts though was these failed payments. When I started in 2001 with with subscriptions, I mean our failed payments rates were low single digits and you know by the time I turned around in like 2016, 2018 we were like you know high like 18, 19, 20% failed payments. And I'm like it was the number one driver of churn that we had in our subscription base and I kept saying like "what are we tapped into a subprime demographic here or what the heck is going on?" So many people see these failed payments and they're like, "Oh, well, it's just payments ecosystem. Like if it's declined, there's nothing I can do about it."
But I noticed this weird thing one day, Jake, where like I have thousands of transactions a day to process. I take 10% randomly selected and send them off to like a processor over here, 10% randomly selected and send them off to this other processor in Boston. And processor in Boston, some days I'd get as much as a 3% higher approval rate on transactions. And I was like, "What is going on?" And so I called up the founder and he's like, "I don't know. Come on down. Let's try to figure it out." So that led to him creating the f- his the first ever optimization tool in 2008. I was client number one on that tool. Worked really closely with the product team and got invited to sit down into some really interesting meetings with, you know, Visa and Mastercard and some other really big processors and going deep down the rabbit hole on what actually is going on with all these payment processing and the friction and technical outages and fraud systems that are improperly calibrated and all these other things.
And that helped us to build some of our own tech. At first, it was all internal use. It was kind of our secret sauce that allowed us to compete with the big publicly traded companies that were acquiring customers in the subscription space. The only way we could compete is if we made more money per 10,000 customers acquired than they did because our lifetime values were so much higher because we were so efficient. But eventually, I had a really good friend of mine, a mentor who's like, "You know, Darryl, you know so much about this. You're a clear domain expert. You know, why don't you just take this and turn it into a standalone B2B SaaS offering? I bet you you could raise some really good VC capital, accelerate the development of the product, scale out your go-to-market team." And so that's what we did. And so I divested of all the other assets. And since 2016, 2017, I've been focused exclusively on scaling what is now Flex-...
[Understanding FlexPay's Mission and Market]
...Pay. So that's the long meandering story of how a guy goes from like washing windows to being CEO of a VC backed fintech. It's been a heck of a lot of fun.
Jake Aaron Villarreal: Well, I love that story and there's a lot in there that I want to dig into. Uh when I was going to school uh in college, one of my roommates actually had his own window washing company, too. And it was first started off as car washing and then went to window washing. And it's hard work. That's like, that is... you do that for a day and you're tired.
Darryl Hicks: Try doing it in like minus 30° in the winter in Canada where you're like washing windows with antifreeze and you're like, your fingers want to fall off. Like it's brutal. Not fun.
Jake Aaron Villarreal: I can't... I couldn't even imagine that. I mean, I looked at that and I thought, you know, "God, I don't know if I want to work, if that was the type of work that was out there." And, you know, we all find our own path. But I think it's great that you were able to get into your own home uh with your own company and be able to really grow and learn. And you know, you talked about something that happens to a lot of us, which is bullying. And it's, it happens in weird times and different ages. And you know, in some ways it actually shapes you to become the person that you are. And we see and hear this a lot. You know, "you have a chip on your shoulder." And where does that come from? "Well, it came from these things in my past and the stories that I tell myself that, you know, I'm a different person or I'm a better whatever." But the origins of being bullied, and this isn't a show about being bullied, but I'm just if you're okay sharing... like look, you're a smart guy, you're a good-looking guy, like all these things on the surface like you think, you know, is there, what could have happened? But was it just a circumstance of location or age or like when you look back, what do you think that came from? But more importantly, what, how did you benefit from it?
Darryl Hicks: Yeah, there's a lot of things that happen. Like you know, who knows why kids start getting, you know, picked on, why they end up being the runt of the class. I've talked a lot about it with my parents. I went to a school that was literally 150 yards away from our backyard. My parents bought the house that I grew up in based on its proximity to the school. And so, even though things were really bad in the first few years, they didn't really want to switch schools. And that's one thing that they regret, is they should have just gotten me out of there rather than keeping me in that same school. Because, you know, it just becomes like a self-fulfilling prophecy where you're the, you're just like the runt of the litter that's getting, you know, beat up and kicked on. And I was a late bloomer and there was lots of reasons why.
But I love that you touched on uh how much the chip on the shoulder and what, how that correlates to founders. Most founders that I know, and I do a lot of networking with founders. I'm in a group called YPO, Young Presidents' Organization. Spend a lot of time networking with other CEOs. Some of the masterminds that I've been in have just had massive impact on who I am as a man, as a father, as a husband, as a friend, as a, as an entrepreneur. And you meet these founders and you realize...
[Challenges in the Payments Ecosystem]
...man, just about every single one of them started out fueled by what I like to call "the dark side of the force," right? You got this deep insecurity and I think that you need this, well I hate to say need, but I think it serves you very well to have this deep motivation to just force yourself through the pain and to go charging through walls and to be staying up till 2 a.m. swimming through SQL. Just doing whatever it takes to be successful. Not just purely for the desire of being successful but because you've got something to prove, right? Either to yourself or to people around you, insecurity. So many founders that I talk to, we start off with this feeling like as if every day we wake up our ledger is already in the red. And we have to overshare, we have to overwork, we have to overcontribute, we have to be the one to be quick to pick up the tab for the wine at dinner, and we have to be you know uber generous, going above and beyond because we're trying to fill a hole inside of ourselves. And there's a lot of positive things that can come out of that.
But ultimately where you want to end up is, and I think in a much more sustainable place where... that's been part of the journey that I've been on, is it's like once you've had a certain amount of success and you've had a few at bats and a few things start going well, it becomes a little bit easier and you know you do the work you know, therapy or whatever it is that looks like for different people. And you start to realize, "Okay, I'm actually really enjoying this entrepreneurial journey. But I don't want my life to continue to be completely out of balance where I'm sacrificing my health, I'm sacrificing relationships, you sacrificing, you know, myself, my relationship with myself over these business ambitions that I have. And how can I switch the energy to instead of like doing it from a place of scarcity where I've got something to prove, that instead I'm doing it from a place of abundance where I'm just excited to see who can I become? How much further can I go?"
Like the problems that I'm dealing with in my business would have crushed the me five years ago. And I know to achieve the really ambitious goals that I have in front of myself and the potential that we have in FlexPay, I'm gonna have to become someone very different yet again five years from now. That lights me up. That gets me really excited and I'm trying to use that as my fuel. And most of the really successful founders that I know, they've been successful in kind of making that transition. Most of us start... some are lucky enough to start purely just they're so driven purely from this place of abundance and like "I want to go out and like to change the world." Like 99% of the founders that I've met, that's not the case. They really did this. And a lot of them unfortunately are still stuck in that place where a lot of deep insecurities feeling like they've got something to prove. But if they're willing to be open and vulnerable, you'll often hear these stories. It's very...
Jake Aaron Villarreal: Yeah. I think the through line with that is, is that the companies that you're building evolve and have to change based on the markets, but as a leader, we also have to evolve as the company, you know, goes into another level and being able to, you know, grow. You know, like what are the breakthroughs that you feel you've gone through as a leader through all these companies that you look back and say, "You know what, I'm glad I went through that because this is now how I operate." I mean what you just mentioned, one of them, like "from a place of abundance," is a breakthrough of just psychologically looking at how do you look at something and then how do you you know act on it. But we'll talk a little bit more about you personally and kind of how you've evolved as a leader on the back end.
But talk to us a little bit about FlexPay because you know, we always look at it as you know, when you start a business you have to solve a problem that someone's willing to pay for. And how big is that problem or that market opportunity? And you know, what inspired you to get into it? Your story kind of lines up to like, we can understand how you got into it, what you saw in these businesses you were running. But when you look at it today and you just in like one or two lines, what is it that you're solving and who are you solving it for most commonly?
Darryl Hicks: Yeah, there's a fundamental thesis that I have that really drives FlexPay and that is wherever willing participants want to engage in legal commerce, they should be able to do so without friction. Unfortunately, that's just not the way that the current payments ecosystem works. There's a lot of different reasons for that. But the solution is trust and transparency. That's the real mission of FlexPay, is to increase trust and transparency in payments. Ultimately to build the next generation of connective tissue to power the modern economy.
And you've got these players that are running on very antiquated rails. Like the Visa Mastercard rails were designed in the 1960s. There's been no meaningful upgrade to the ISO messaging, the actual data that flows through the rails, since 1987. You know, when financial institutions are trying to make decisions on whether do they want to approve or decline a transaction, they don't have access to IP address, email address, shipping address, device ID, shopping cart contents. There, these are really important pieces of data that are directly relevant to the fraud profile of a transaction. And they have to make a decision in sub-200 milliseconds without all of that, trying to... and they have this huge aversion to uh fraud and fraud losses that hit their P&L. They're also held accountable by the card networks and the regulators to keep fraud losses below a certain threshold. So they have this huge inherent bias to be risk averse and throw out anything that looks even remotely sketchy. Um and even the ones that are thrown out for legitimate reasons, they very often hide, they create, they deliberately create like a very opaque system that hides why the transaction is failing. And they claim there's different reasons for doing that. One of them is that they don't want the bad actors and cyber thiefs and hackers to be able to reverse engineer their systems in any way. But also they're worried about, you know, uh, from a regulatory perspective, overly disclosing that, you know, "this card was declined because Darryl Hicks is insufficient funds," and is that really information that we should be sharing? "Well, let's just hide it inside of 'Do Not Honor' instead." Or the opposite happens where things that are declined for fraudulent reasons end up in a generic bank decline code. Like it's just a great big hot mess and it's so hard to pull apart. So, there's a lot of, there's a lot of challenges inside of there. Um, very opaque system and that opacity, you know, unfortunately permits bad actors on all sides. You get cardholders that are gaming the system and, you know, canceling cards as a way to cancel subscriptions. I don't think that's the right way to handle that situation. You got merchants who are, you know, being shady and kind of pushing through transactions they know they shouldn't be just because they're trying to hit revenue targets for a certain quarter. You know, a lot of people have been there. You got issuers where like the CFO walks into the head of risk and says, "Hey, we're renewing our insurance premiums and you know, one of the KPIs on how much our policy is going to cost us is our fraud losses. I need to at least show a trend that our fraud losses are going down. So, can you just get a little more aggressive on those systems and like throw out more transactions and wreak havoc on the approval rates?" And then that irritates cardholders like crazy. It's like, "Well, this card just doesn't work anymore and that's embarrassing. I'm just going to use my Amex."
Jake Aaron Villarreal: Right. Right.
Darryl Hicks: So, it's kind of big and complicated, but you're talking just in America alone, like in the hundreds of billions of dollars of transactions per year, every year that are declined with the, a very significant portion of them being falsely declined.
Jake Aaron Villarreal: Wow. So, for the listeners out there, who is your, who, who's your target audience? Who are you selling to? Are is it the big e-commerce companies? Is it anybody that has lots of transactions they take through credit cards? Like, who are you, who are you serving?
Darryl Hicks: We've been focusing in the early stages of the business on subscription merchants just because that's where I grew up and that's where I really understand the value of this. And the nice thing about recovering failed payments for subscription companies is you're not just recovering a transaction, you're recovering a customer. And whereas you would have needlessly artificially, you know, severed a relationship with a customer and lost all the future downstream revenue from them, if you have a way to get in and fix that, the returns are compounding so much higher.
So the tech works beautifully for one-time e-commerce customer-initiated transactions. And we have some really exciting solutions that we're bringing out to market later this year that are going to even further increase the value on what we call CITs. That's the Visa nomenclature. Like CIT is customer-initiated transaction and an MIT is a merchant-initiated transaction. So all subscriptions are MITs but not all MITs are subscriptions. It's kind of like all rice is food but not all food is rice. So you know inside of MITs you have subscriptions. So we've been focusing primarily on MITs at FlexPay so far, especially on subscription as a subset of MITs. But yeah, that's like you think about any big subscription company and look, everything is a subscription these day. Like nobody buys a license of Adobe Photoshop anymore, you sign up to the Creative Cloud and they charge you every year, right? Seems like everybody wants to be a subscription. So it's a pretty, even just going after that one subset of the TAM, it's been a pretty significant pool to swim in.
Jake Aaron Villarreal: Yeah, you probably know these numbers better than I do, but I heard something like every sort of small to medium-sized company has 20 to 30 subscriptions that they operate their business with, whether it's QuickBooks or you know any service that you know you just you need to use, which is typically digital, online SaaS. And you know how to manage it, how to be aware of it... but yeah, you lose a credit card and then you've got 30 systems to figure out "what do I do and how do I go about updating it?" And that's if you lose it, but if it expires or there's a lot of issues that are not the customer's intent oftentimes, but those vendors are feeling it. So, it's great that you've got a solution if someone wants to pull out and you know why, but also recapture that. I think the lifetime value of a customer is, it's so important. It's the goal for us, too. Like once you get a company, they should be a company for life. And how do you do that? Well, and how do you consistently stay engaged? And you know, if there's tools that help you do that's great. But that, that was the vision behind NPS...
[The Value of Recovering Failed Payments]
...right? You want all of your customers to ultimately turn into advocates, get them to the high end of that Net Promoter Score scale. And yeah, like especially when you've got a subscription, like the people that you're losing because of a failed payment, those are the most valuable customers that you've been going after because they never sent a signal that they actually want out. They're, they're an engaged customer that actually wants your product. There's just... there's three big reasons. One of the thing that's kind of important for the listeners to understand. I've spent a lot of time swimming through the data and I kind of... there's hundreds and hundreds of different decline codes. When you process a transaction it's declined and Stripe gives you like XYZ reason, right? There's hundreds of them. But you can kind of collapse it down into three big buckets.
On the one end of the spectrum, you have your insufficient funds, just not enough money in the account. It still happens. On the opposite end of the spectrum, you have what we call hard declines, which is lost, stolen, closed, expired cards. And then there's this big squishy middle of like the false declines. And that's where the card is legit. There's enough money in the account, but the issuing bank has decided that things look sketchy with this transaction, and we don't want to take a chance, and we're going to shut it down. And it varies by merchant. Someone like Verizon or like, you know, Netflix and some of these other really high quality processors, their false decline ratios are very low. They still exist, but they're very low. But for most mid-market merchants, 50 to 60% of all their failed payments fall into that false decline bucket. So, it's not the NSFs and it's not the hard declines. It's this inefficiency that exists in the ecosystem. And so few merchants understand that. They just think, "Yeah, it's declined. I can't do anything." Right?
Jake Aaron Villarreal: Seems like a good problem to help solve. When you're out uh presenting your product, whether it's in a marketing ad or an event or just smiling and dialing your go-to-market strategy. Who cares most about your product? Who are you selling to within a company?
Darryl Hicks: Yeah, like I have this thesis that big subscription companies especially should really have a Chief Subscription Officer that owns like the lifetime value uh and all the and the c- that as a KPI and everything that feeds into it. We're starting to see more of that in the really sophisticated merchants, but still like we're talking only 10% of large subscription companies that have like that kind of key role. So generally we end up selling into uh finance because finance is like you know "what, what's going on with like you know my payment processing and all this kind of stuff." Or we sell a lot into tech. You know, there's a payments team inside of the technology team or sometimes there's a payments team that lives inside of finance.
But more and more we're selling into revenue because the revenue guys are like "Hey, you know if I get more lifetime value out of my customers that I acquire, that really helps me with my budget as well," right? So, unfortunately, it's a little bit all over the map. We love selling to the revenue guys and that's exciting because, you know, companies have unlimited budget for more revenue, right? And that is ultimately what we're selling is more revenue per customer, per thousand customers that you acquire. Um, but I'd say if I had to sandbag, it's probably about 50%. It's a payments team that lives inside of finance that ultimately rolls up to the CFO.
Jake Aaron Villarreal: Gotcha. Makes sense. So, it's really an enterprise sale. I mean, you're having to get the right people on the line, have probably a few different meaningful, deep conversations about what you do, why you should look at you, the value proposition, what they're getting out of it, and then ultimately doing a conversion of technology that may or may take a long time. I don't know what the integration looks like.
Darryl Hicks: Oh, we can go. This is a ravel we can go down here. I, important to still to say to you, when we first started in 2016, 2017, we were focused exclusively on SMB and we went through a really difficult pivot in the business to retool our whole GTM to focus more on the enterprise merchant. Why? Because it turns out, well we were running into like the Shopify problem selling into a bunch of mom and pops. The number one cause of churn in our customer base was going out of business. 83% of all of our churn was just the company just went out of business. So, and it also turns out that if you're a small business, you've only got $2,000, $5,000 a month in failed payments, it's probably not the number one problem that you really need to solve in your business.
But if you're like some of our clients today who have like $9 million a month in failed payments, $14 million a month in failed payments, $28 million a month in failed payments, you are motivated to find the absolute best solution. Every incremental percentage point of additional recovery that you can get off of that. Even if you know a lot of those customers were to come back to you and self-cure, the friction that's being caused in customer service and on your website and the annoyance of your customers and what that's doing to your brand, whatever you can do to seamlessly and invisibly solve this problem the at the highest degree possible, you're very motivated to do. And so our tech works beautifully from a percentage perspective. It recovers the same percentage of failed payments for SMBs as it does for enterprise. But from a volume of dollars perspective, it becomes way more interesting and compelling. And then also those customers tend to be much stickier as well. They're way more sophisticated. They have dedicated teams. They look at their data really closely. They understand the value and the impact that you're bringing. Almost all of them were doing something with their failed payments before they tried our solution. So really, they're just like, "Are you doing better than what we were doing before?" "Yes." "Amazing. I love you. Here, take some money."
Jake Aaron Villarreal: Right. Right. Well, you know, let's bring this into a tangible conversation. I've got a phone. I've got computers. I have lots of subscriptions. I lose my credit card. What's the experience like for the user? We're using your technology or the vendors we're working with are using your technology. What's the secret sauce? What are you doing differently that's going to have a positive impact for the customer, the end user rather, as well as for your customers that are using your technology?
Darryl Hicks: Yeah. So ultimately for Jake, the customer of a subscription company, it should just be completely automated and super, super easy. You don't even notice anything. You've got a new card and all of a sudden your subscriptions just show up on the new card magically without you having to do anything. You don't have to go through and... of course merchants love this because they're like we don't, they don't want to needlessly create this moment of truth where all of a sudden Jake is deciding "Ah, do I even really need that subscription anymore?"
Jake Aaron Villarreal: Right. You start cancelling.
Darryl Hicks: Like, yeah, that's the dark side of this whole thing, right? But let's just assume that Jake wants the subscriptions that Jake has signed up for, right? And that this is going to make Jake's life easier that all of a sudden there's this piece of tech that's just invisibly working behind the scenes creating connective tissue between your financial institution and the merchants to make sure your transactions go through, right? Or if for some reason, you know, Darryl's transaction is NSF this week, what's the best time to retry that transaction to get it to push through? Or should we slip it, split it into two smaller payments or something like that? Like what's the right thing to do? Is it best to email or text Darryl and find out exactly what's going on? How can we engage with him empathetically to try to, you know, invest in the relationship and figure out how we can best solve this? Right? So, we handle all of that through our platform.
But ultimately it's kind of from a merchants' perspective, what they love about this is that at scale, they've just got all these failed payments and all of a sudden they turn on this AI-driven solution and they're seeing 50% more than they saw before being recovered, 80% more, double what they were recovering before with some rules-based...
[Understanding Payment Declines]
...tool is now being recovered through FlexPay. So that's, you know, huge value for them and not... they typically see a significant reduction in inbound customer service calls for billing related issues. It'll typically turn into better NPS and brand for the merchant as well. But ultimately, it's about the dollars and cents of the ROI where they just... they're making way more money. Their lifetime values are creeping up.
I'd say one other subtle benefit that we're really focused on that I wish more companies cared about, the really sophisticated ones do, but over time the reputation of the merchant in the eyes of the card networks improves. And over time, their approval rate on first attempts improves and gets better because we're helping them to better present their transactions in a way that the ecosystem wants to see it, reducing these technical declines, reducing the false declines on fraud alerts so that overall their reputation is improving and getting more into like, you know, that gold class category of some of the largest merchants. But unfortunately, so many of like the mid-market and SMBs, they don't even know that's something that they can manage or what to do to even manage it. But it's definitely something that you can move the needle on over time. It's more of a long game. But we've seen merchants like over 6, 9 months see their upfront approval rates go from like maybe 88% up to 91%. Like pretty significant material movement just on, you know, approval rates on first attempt.
Jake Aaron Villarreal: Yeah, that's great. You know, you mentioned AI. Um, and every sector seems to have AI that's impacting it for good and in some ways maybe not so. But what role does AI or ML play in addressing the issues that you're dealing with today?
Darryl Hicks: Yeah, it seems like ever since the advent of like OpenAI, everybody wants to be an AI company now. I jokingly refer to FlexPay as being like one of the OG AI companies. We've been using uh machine learning since 2016 and AI neural networks since 2019. So... and look, you need tons of data, tons and tons of data, which fortunately we have really deep partnerships with financial institutions uh where we receive data not just from the processors on the acquiring side, on the merchant side, like you know the Stripes and Adyens of the world, Checkouts of the world, but from the issuers, the actual card issuing banks, which is a really hard thing to get. Heavily regulated industries. And I mean, good luck just knocking on the door of Bank of America and say, "Hey, can I have an export of data from your fraud decisioning tools on your Visa network?" But we've been again the, we've been fortunate to be, you know, two decades plus in investing in relationships in a highly regulated industry and we are certified up the wazoo with every single possible certification you could ever imagine and ones you probably can't even imagine in order to have access to those rooms.
And we have a lot of data that flows through us. Billions and billions of transactions. We're well into the hundreds of billions of data points now. And so fe-... so you need that really high quality data from multiple sources. You need to understand what dimensions you're trying to change like what is it that everyone's looking for? What is it you're trying to manage and the outcomes and what's going to drive those outcomes. And then the easiest part but you know also super important part is to find the really smart people with the PhDs and the double master's degrees who want to, who don't want to just work on the academic side but they actually want to see AI and ML implemented in real-world solutions and strategies that's going to move the needle in the economy. And then they come in with those massive data sets and they understand what we're trying to manage towards and they get to go build the models. And then we have a champion challenger model and we're running I think we're now in like version 32 of our machine learning models that are 30% more performant than, than the first generations that came out. So, you're constantly training and learning and adapting. But this is, it's hugely beneficial. This was, this is the right tool to me. This is like the dream application of, you know, of AI and ML in a way that really moves the needle in the economy. It's like right up there with, you know, self-driving cars in my mind.
Jake Aaron Villarreal: Yeah, it's amazing what's happening, the innovation we're seeing. Looking at the space you're in, if we could start from scratch, what would the modern payment stack look like? And what are the hurdles preventing us from having that today?
Darryl Hicks: Yeah. In an ideal world, I'd love to see something like blockchain, not government-run blockchain, like not a central bank digital currency because...
[The Role of AI in Payment Solutions]
...you have to worry about incentives. But uh I think that again coming back to this theme of like trust and transparency. Wherever willing participants want to engage in legal commerce, they should be able to do so without friction. In an ideal scenario, when people are making decisions on whether a transaction should be approved or declined, they should have access to all of the information that's available in full transparency. Right now today, a merchant will always know more about the risk profile of a transaction than anybody else because they see the device being used. They see whether someone's buying gift cards or a pair of underwear, two very different risk profiles, right? They see the email, the IP address and the email address and they see all this data. And then on the banking side, they see all these things that nobody else does like about Jake's spending patterns and is this typical and does this fit like with his profile and what's his overall sort of like risk profile as a customer.
In an ideal scenario, we'd have all that information brought together and very seamlessly, very quickly using AI in a transparent way so that nobody's playing b- like monkey games in here. We would see all this data. It'd be all stitched together and we could make a decision, the perfect decision and we'd have 100% of the legitimate transactions approved and 100% of the fraud declined and everything would work beautifully. But unfortunately, you have a lot of antiquated tech. Like I talked about earlier, the opacity of the way that the current ecosystem works enables people to kind of make self-interested decisions. So that's really what's in the way.
And what I'm working on, like when I talk about trust and transparency, like I'm serious. Like we really want to build an open system that yeah, maybe takes away some of your ability to play games around the edges, but ultimately everybody wins. It's so much better for everyone when everyone's able to see all the information and we get to make these perfect decisions. That's really what we're shooting for. It's a big ambitious play, but building an upgraded connective tissue that doesn't replace Visa Mastercard, but it really runs adjacent to Visa Mastercard that makes those networks work way better.
Jake Aaron Villarreal: Yeah, that makes a lot of sense. Things take time. Uh, but you got to start somewhere. So, I like the ideas. Blockchain's out there. It's been out there. Smart transactions, smart contracts, and we just we see a lot of evolution happening there, too. We have a number of clients in that space. So really cool to see the innovation happening uh with blockchain. In terms of the company, you've been building this now for is it seven, eight years now kind of where you're at?
Darryl Hicks: Okay. Eight years.
Jake Aaron Villarreal: What's the biggest challenge currently as you look at your company and you look at what's ahead?
Darryl Hicks: I'm really excited about some of the strategic partnerships that we've got coming up. We're rolling out like a proof of concept of these new rails uh where we get a bunch of financial institutions that are going to actually give preferential treatment to transactions that run through our rails with this trust and transparency. That's got me really excited. It's taken a long time to get to this point where we can actually roll this out. So 2025 is going to be a super exciting year. Um you know...
[Envisioning a Modern Payment Stack]
...some of the biggest challenges that we're up against are what a lot of other B2B SaaS businesses are up against, and that is it's a noisy space. How do you make sure that you educate the market when you're creating a new category? That's some of the, the most, that's where really valuable businesses are born, is when you're creating a new category. But it's also really hard. You don't want to be too early and you don't want to be too late. You got to kind of strike it just right. This is a fairly new thing and we're still bumping up against this problem of like just educating the market that "Hey, you don't just have to accept the fact that payments fail and that there's nothing that you can do about it. There's actually a better, there's something really valuable that you can do this with, this is going to massively move the needle." But you know building the trust and confidence, getting the case studies, and then feeding that all into like I, I alluded earlier in the conversation about like some of the mistakes that we made on our go-to-market. Starting out focused on SMB and then having to say, "Oh man, actually we got to figure out how to go to sell into enterprise, that's going to be way better for us."
And then building all the integration points, you, that's another thing you talked about earlier like you know reducing the tech lift for someone. Actually, "Oh I love this idea, I love this tech, oh but how am I going to bring it into my existing payment tech ecosystem? I can't rip and replace all my processors. Oh, I guess I can't use you." So, like, you know, investing into all the integration points so that now it's like a flip of a switch to turn on FlexPay's value. That took a long time to build out. So, I feel like we've done a lot of that really hard work now. We're still continuing to work on the like better locking in the ICP and the messaging and the value prop and seeing, you know, the impact that has on sales velocity as deals move through the Salesforce pipe, you know. So, that's some of the big stuff that we're up against now. But, I'm really super bullish on this year for us. I think it's going to be, I think it's going to be an exciting year.
Jake Aaron Villarreal: Yeah. Well, let's switch gears here a little bit as we uh come to a close on this episode. You know, we talked a little bit about you personally and as a leader, you know, companies evolve and also leaders evolve. I'm always curious to know what are some of the breakthroughs that people that are growing their business have gone through and what did that look like and where were you and where you are today? Can you talk a little bit about some of the maybe the lessons you've learned and how you've evolved as a leader?
Darryl Hicks: Yeah, this is a really important point. One of my uh good buddies, Clayton Maske. He gave a talk that really hit me like a 2x4 across the forehead maybe 10 years ago at one of these masterminds that I was at. And he just released a new book and he talks about this same principle in his book about how businesses tend to move in like ones and threes, he said, right? You know, from 100,000 to 300,000. From 300,000 to a million. From a million to 3 million. From 3 million to 10. From 10 to 30. From 30 to 100. For some reason these business businesses seem to move in stage. And you can dispute whether it's really ones and threes, but I think everyone understands that what got you...
[Challenges in Building a New Category]
...from, you know, 300K to a million in ARR is very different than what's going to get you from one to three and is very different from what's going to get you from three to 10. So, and it's often the case that the executives and portfolio leaders, a good one can get you through a stage, no problem. A great one can get you through two stages, but it's a truly rare unicorn that can get you through three. In fact, some of the only uh leaders that are able to get you through three stages or more are typically the founders and the entrepreneurs. And part of the reason why is they have this really deep drive and desire for growth and to just, to do whatever it takes to be successful in this road. And you do have to constantly be reinventing yourself.
I was just talking about this with one of my team members earlier today. Like, do I have what it takes to be the CEO of an institutionally backed mid-8 digits ARR business? What are the skills that I'm going to have to acquire? What does a 10 out of 10 really look like? So, everyone learns different ways. I really love learning from other smart people that have kind of been there. Success leaves clues. So, I spend a lot of time networking with people that are just one or two stages beyond where I am. I love also working with people that are one or two stages behind where I am and like sharing what it is that I know. I get a lot of joy and value out of that. But I've learned a tremendous amount from some of the great founders that I've got in my tribe.
I even talked about, you know, moving to Kelowna where I live now. Part of the drive and the desire to do that was inspiration comes from proximity. And I wanted to be around more people who have like... our hashtag for the group of founders we have here is #NoSmallPlans. We're dropping that in our group chats all the time. Like these are big ambitious founders who want to go put a dent in the universe in their respective, you know, fields and disciplines. I'd say if I want to get more tactical, one of the key things that really moved the needle for me was before I had my first dollar of revenue in FlexPay, I built a killer advisory board and it has just been transformational. Like I can't even, I can't even tell you how valuable that advisory board has been, uh Jake. And in fact I've got a talk that I recorded for...
[Leadership Growth and Breakthroughs]
...someone with a whole framework on how I did it, how you compensate them, how you communicate with them, how do you curate what is, you know, what's the value look like? How do you think about how you want to build the people, how many should you have? So if you're interested I can send you a link to that video. I just share it for free with other founders, but it's been massively impactful for me in my business, continues even at the stage that FlexPay is right now to generate massive value for me.
Jake Aaron Villarreal: Yeah, I think that would be really valuable for a lot of founders, first-time founders, even second or third-time founders uh that you know have gone through Y Combinator or Techstars or wherever they've gone through. And they've come out and you always need advisory or mentorship or others that can give you some insights or inspiration or maybe some guidance about a problem you're trying to solve. And yeah, it could be your board, but I think advisory is a different strategy and maybe have more, more of like a safe place to like really get insights and share your problems where you can get some real feedback that you know hopefully can solve problems. I think it's an incredible idea and I think the semantics around the "how", like how do you build it and what's the process, and you talked about a framework. I think that would be really invaluable is just to understand, and also what's in it for the advisor, right? So, you know, you're successful, you have so much time. What's your interest level? How much time, do you get paid? Do you get equity? Is it just more of a "I want to give back"? Like some of that, you know, I think is important too to understand.
Darryl Hicks: I've got all that in the video. Exactly those themes. Yeah.
Jake Aaron Villarreal: Very cool. Well, yeah, I'd love to hear about that. Uh want to kind of end here with one of the challenges a lot of founders go through, which is if you're starting a company whether it's Series C or A or B, you're raising capital. Oftentimes founders have a playbook of things that have worked for them when they want to go out and raise funding. You've done this a number of times. Give us a little snapshot if you can of maybe a few little lessons that you've learned or things that you might want to share with others that you know they can get some value from.
Darryl Hicks: Yeah, there's... Okay, so there's some solid gold in here and I hope that the founders who are listening to this really take this to heart. I stole this idea from one of the guys on my advisory board who stole it from Facebook. But recording videos and putting them in your data room is a massive game changer. Every single document that you've got in the data room ultimately belongs to a portfolio leader inside of your business. Have that portfolio leader record a three to five minute video to introduce themselves, give a quick bio and create color and context around the documents that are sitting in the data room in order to kind of say "you might have a question about this" or "I want to explain a little bit more deeply what this number means" or "how you should think about this particular thing." And you give them 15 tries to record the video, right? Like some of them they record the video, they send it back to me. "I love this, I love that. Tweak this, tweak that." Make them go back and re-record it. But a bunch of them were like great on the first try. It was unbelievable what it did for capital allocators as they're going through the data room. That first conversation we'd have post data room access was so much richer and it just felt like it was helping to accelerate the whole process and really helped us to showcase the amazing management team that we have and really kind of check that box for the capital allocators. So cannot sing the praises of doing videos enough.
Another thing I would say is I had to learn this lesson the hard way. This concept of a pre-term sheet data room versus a post-term sheet data room. Giving yourself permission as a founder and as an executive team to not give all of the data that the capital allocators are asking for, especially pre-term sheet, because that data is extremely valuable. We had one capital allocator before we learned this lesson that went super, super deep and we were open kimono. We pride ourselves on being radically transparent. It's one of our core values. Ended up not working out, which is, you know, 99% of the capital allocators that are going to go through, you know, an early look. Uh, it's not going to work out. And then, you know, two quarters, three quarters later, they're investing into one of our biggest competitors. And then that competitor is knocking off a whole bunch of our marketing strategies and going after the same verticals that we're going after, right? And it's like, really? Are you kidding me? Like, bad on us. Bad on them, but really bad on us, right? So pre-term sheet data room versus post-term sheet data room, super important concept.
And I think the last one is really curating the list. Remembering that investors don't want to meet you, they want to be introduced to you. And founders are really generous, way more generous than sometimes they should be. It doesn't even make sense, but getting in front of other founders and asking them like you know "what was it like to work with investor XYZ," and for the ones that are really good, just saying "hey, would you mind an intro?" And having an intro from a founder that's already one of the portcos into like you know a GP at that capital allocator... hugely valuable in changing the dynamic of the relationships and moving things forward. As you know, Jake, these are all, you know, very emotional decisions. And if you're a charismatic founder, which most founders are, you know, leverage that, get in front of the GP, sell them really hard, and let it work kind of top down as he goes and pushes on the analyst and said, "There's a reason why we need to do this deal, right?" So, those are kind of be my top three. I got a bunch more that I also put into a playbook. What I...
[Lessons in Fundraising Strategies]
...sh- what do I share with some founders? But those are kind of my big ones, I think.
Jake Aaron Villarreal: Yeah, those are great. Those are gold. And I can't wait to see what the future holds for you at FlexPay and hopefully there's a lot more gold at the end of your journey. Uh really excited to have this time to chat with you. I know we spoke a while back and finally were able to get some time on the schedule. So, thanks for being part of this show and thanks for the listeners for listening. It means a lot to me. You spent your time with us. I'm your host, Jake Villarreal signing off for now. I can't wait to catch up with you all in the next episode. Until then, Darryl, the world, take care. If you like what we're doing, don't forget to subscribe, leave a review on Apple Podcast or wherever you listen, and follow us on YouTube where we go behind the scenes to learn what it takes to be a startup founder.
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