SAN FRANCISCO – While working at McKinsey & Co., Steve Abernethy, Ahmed Khaishgi and Lalitha Vaidyanathan, the founders of SquareTrade, had a problem: they wanted to build their own Internet business – but what Internet start-up had not already started up? The answer: Solving other people’s online problems. Venture firms liked that answer, and the company has raised more than $10 million to date.
Founded in September 1999, SquareTrade is an online dispute resolution service built for the e-commerce marketplace, explained Abernethy. Web-based technology is combined with a network of more than 150 mediators to resolve disputes between buyers and sellers online.
An e-commerce consumer with a complaint needing resolution logs onto the company’s Web site, fills out some basic information about the transaction in question, and then provides SquareTrade with the complaint. Next, the second party in the dispute is notified by e-mail of the complaint and brought into the process. That party fills out their own electronic form presenting their side of the story. Disputes are often settled at this point in the process off-line, once both parties understand the problem.
If the dispute is not settled at this point, the company assigns a mediator to the case. Mediation is conducted through the Case Page – a secure, password protected area, to which only the mediator, the parties involved in the dispute and SquareTrade have access – that contains the whole history of communication concerning the dispute. The mediator works out a solution by reviewing the material contained in the Case Page and by communicating back and forth with the parties involved in the dispute. The solution becomes a legally binding agreement when both parties involved in the dispute click on the “I accept” button. “When it comes to clicking the I accept’ button, the solution has already pretty much been agreed on,” Abernethy said.
This tool has begun to attract interest, as in mid-April the company received $9 million in a second round of venture capital co-led by Western Presidio Capital and Chase Capital Partners, each investing $4 million. The rest of the capital was provided by new investor Staenberg Private Capital LLC and existing investors Draper Richards LP, Argus Capital LLC, partners of Clayton, Dubilier & Rice Inc., Global Investment Partners and Thomas Layton, former president of Ticketmaster Online-CitySearch Inc. Abernethy said SquareTrade decided to take Chase and Western Presidio’s funding proposal because both firms showed strong interest in the company from very early on and because they both have a history of long-term involvement with their portfolio companies. “These guys traditionally do follow-on investments and help companies grow into big businesses,” he added.
Draper Richards led SquareTrade’s first round of venture capital seed financing in October 1999, with an investment of $400,000. Argus Capital, partners of Clayton, Dubilier & Rice Inc., Global Investment Partners, Thomas Layton and some other individual investors provided the rest of the funding in $100,000 to $200,000 pieces for a total commitment of just over $1 million, Abernethy said. The company plans to use the capital to focus on product development, brand building and product delivery. SquareTrade will accomplish this by buying additional computer servers and other equipment, as well as by hiring more employees for its in-house team of product engineers, expanding its marketing efforts and the company’s service into new e-commerce marketplaces.
Abernethy believes the company will likely do another round of venture financing sometime toward the end of this year, although he was unsure of the exact amount the company would seek at that time. Abernethy believes SquareTrade will eventually represent a good value for any potential exit strategy. However, at the moment he and his co-founders are not focusing on an exit date. “We are just trying to make this business essential to the marketplace, so that it can grow as e-commerce grows,” he said.
The company’s service is currently available to users of eBay in disputes where the transaction has a value of more than $100 and does not concern fraud. eBay deals with cases of fraud on its site, while SquareTrade provides a resolution service for all other transaction-related disputes. Users reach SquareTrade’s site through eBay’s customer service center, and the service is currently free of charge. Abernethy said that SquareTrade plans to team with other e-commerce business and consumer marketplaces by the end of May, at which point SquareTrade will start charging for its service. Abernethy said the company has yet to decide on a final pricing model, although he said the cost will be correlated to the size of the transaction and complexity of the dispute. There will also be a minimum transaction value for disputes the company will resolve. Abernethy said it is too early to talk about the company’s revenues.
Paul Roberts, a principal at Chase, said his firm invested in SquareTrade because it believes that e-commerce will continue to grow and that SquareTrade should help to enable that growth. “It is good to have a mechanism for resolving disputes online, because at the moment, not having one is preventing some people from doing business online,” he added. Tom Patterson, general partner at Western Presidio, agreed. His firm believes as e-commerce evolves and grows larger in size, e-consumers are going to want a safety net. “We believe that Steve is right and that consumers will come to embrace this as necessary to protecting online business relationships,” he added.