Thread by @nsheth12

Modern Treasury is one of the hottest enterprise software companies out there, having recently raised $38m from Altimeter and Chetan P. at Benchmark. They’re focused on payment ops. But what is that, what do they do, and where are they going?

My longest deep dive yet 👇

1/ One of the reasons I chose to write about Modern Treasury today is b/c the quality of the team and the investors are so high that there is clearly something there.

2/ But the other is that payments, and payment ops in particular, are such a complex space that an explainer is particularly helpful to generalist investors.

3/ So, let’s start w/ the basics: Modern Treasury started w/ a focus on reconciliation.

What is reconciliation? It’s matching up inflows/outflows of cash from bank accounts to transactions that took place in the business.

4/ It’s easy to understand w/ an example from your own life: reviewing your bank statement at the end of each month. You see a bunch of entries — -$5 from Starbucks on 8/22, -$10 from Chipotle on 8/21, etc. and try to match it up to events in your life.

5/ i.e. did you actually get Starbucks on 8/22 and Chipotle on 8/21? And were your purchases of those amounts? You do this for every transaction you see to make sure that every dollar has been accounted for, and no money left your bank account that shouldn’t have.

6/ Well, businesses have to do the same thing. They pay and receive money and have to reconcile the inflows/outflows with their accounting, invoicing, and ERP systems.

7/ The difference is that the scale is way bigger. Imagine if you’re Uber, for example. You’re receiving millions of payments every day from riders, and disbursing those payments to drivers. You’re also dealing w/ millions of refund requests, chargebacks, in-app balances, etc.

8/ Oh, and you’re doing this across dozens of countries in different currencies across likely hundreds of your own bank accounts. Clearly, hand reconciliation of the sort you and I do is not an option.

9/ This is where Modern Treasury started when they launched in 2018. They built software which connects to all your bank accounts via APIs, and reconciles incoming/outgoing payments with actual transactions.

10/ So why did they start here? It makes a lot of sense when you consider that the three co-founders, Dimitri Dadiomov, Sam Aarons, and Matt Marcus, met at LendingHome, which is a loan marketplace.

11/ There, they dealt w/ tons of payments issues - collecting money from investors, disbursing to borrowers, tracking repayments, etc. Some of these transactions would even happen w/ paper checks! If even a penny is unaccounted for, that’s a major problem, because it’s investor $

12/ They built a version of Modern Treasury, called Rainmaker, internally at LendingHome. And when they realized the problem was applicable to a broader set of companies, they founded Modern Treasury.

13/ Since founding, they’ve added a bunch of additional features. “Continuous accounting” syncs up with your ERP/accounting system so that you can close your books near instantly.

They also have API triggers to initiate ACH, wire, and real-time payment transactions from code.

14/ Where will Modern Treasury go from here? Their hypergrowth (23% monthly in 2020) suggests they’re solving real problems.

At the same time, there are some risks. 1st is how bespoke the setup process is for each customer.

15/ There is a lot of work to onboard a new customer. As Modern Treasury says on their website, you need to (1) open a corporate bank account (2) enable direct transmission (essentially get your bank to open up programmatic access to your account) (3) set up all workflows.

16/ You also need to handle all the integrations — with the accounting/ERP system, with the application code, with the invoicing system, etc.

17/ This is all a largely manual process that takes weeks to months. If you can’t largely automate this process, you’re always more of a consulting firm than a software firm. Modern Treasury needs to avoid getting stuck in that trap.

18/ They’re starting to move in this direction w/ their “instant bank partners” program where you can open an account quickly with a Modern Treasury partner bank. This helps speed up the account opening piece — but the rest remains to be seen.

19/ The other question is if their customers will in-source as they scale. This is a fundamental question w/ all infra-type companies: people asked similar questions about Twilio and even AWS at one point.

20/ Ultimately, if cost of a product scales with usage, it begins to make more and more sense for customers to pay the fixed eng. cost to build in-house as they gain scale, unless the product value or switching costs grow equally fast.

21/ I don’t have a strong enough understanding of the buy vs. build dynamics in this space to make a call, but this is a key risk to watch out for… esp. since Modern Treasury charges a % of txn volume in addition to a flat fee per txn (in the “pay as you go” plan listed on site)

22/ Overall, Modern Treasury is clearly solving a real problem and there is product-market fit, at least for certain companies with complex payments needs, like fintechs and marketplaces.

23/ What remains to be seen is how broadly their software is applicable to the largest companies in the world, many of whom have custom-built payment ops software and/or have large payment ops teams doing this work manually (oftentimes offshore).

24/ I'm excited to see Modern Treasury's trajectory over the next 5-10 years.

I, for one, am an optimist - the quality of people, product velocity, and founders' domain expertise lead me to believe they'll work through any challenges!