Paresh Patel, PayRange: Validating Bootstrapped, Then Course-Correcting After Overfunding

1Mby1M Research · 1Mby1M Case Study

Interviewer: Sramana Mitra

This interview is part of the case study-based research and entrepreneurship education work of 1Mby1M, the global virtual accelerator founded by Sramana Mitra.

Abstract

Paresh Patel founded PayRange in 2013 after selling an earlier bootstrapped vending-machine business and running a short-lived credit card reader company, drawing on a personal moment of frustration at a gas station to identify the need for mobile payments on unattended retail machines. He self-funded a six-month MVP build using part-time contractors, then validated demand at a 2014 industry trade show by securing a distribution partnership and collecting over $1.5 million in pre-orders from a few hundred customers. 

That traction enabled a $2.6 million seed round, followed by a $12 million Series A from Matrix Partners in 2015. However, PayRange over-hired and scaled prematurely after the Series A, burning through its capital and forcing layoffs and a $4 million debt raise to course-correct. After refocusing on product and iterating on its pricing model for roughly three years, the company landed on a hybrid hardware-plus-subscription model by early 2018, achieved 777% growth over three years, became cash-flow positive, and scaled past $20 million in revenue with just 22 employees without needing further equity financing. 

This case illustrates both the risks of premature scaling after a raise and the discipline required to course-correct back toward capital efficiency, reflecting the 1Mby1M emphasis on validating demand before – and staying lean after – raising venture capital.

Transcript of the Interview

Sramana Mitra: Let’s start at the very beginning of your journey. Where are you from? Where were you born, raised, and in what kind of background?

Paresh Patel: I was born in Vancouver, Canada. I grew up there and moved to the United States when I was about 10 to Portland. I spent the rest of my life since then in the Pacific Northwest.

Sramana Mitra: You’re still in Portland?

Paresh Patel: Yes.

Sramana Mitra: What journey did you take via education?

Paresh Patel: My background in business started at a very early age. When I moved to the United States, my parents had bought a small business. I started learning about how business works. By the time I was 12, my dad gave us a pop machine. We ran that as our business. We were filling the soda machine, collecting the money out of it, and go and buy more. I bought my first Commodore 64 with the money we were making from the pop machine.

By the time I got to high school, I was looking for a way to pay for college and decided that this one machine has been working pretty well for us. What if I had more? I started placing more vending machines out there and used that to pay for my schooling. I got my undergraduate and then I went to University of Washington for my MBA. Later, I got my Ph.D.

Sramana Mitra: Where was your undergraduate?

Paresh Patel: Portland State University.

Sramana Mitra: You were doing all your schooling in the Pacific Northwest as well.

Paresh Patel: Yes. I was doing at the same time. A lot of people thought that it’s a lot harder. Because I was doing business education, I felt like they were complementary. I literally had a case study where I was implementing things I was learning. As a result, I learned a lot more.

Sramana Mitra: I agree. I’m a huge fan of student entrepreneurs. I started my first company as a grad student. I was not a Computer Science student. It was starting early. How long did this business last?

Paresh Patel: I kept the business for quite some time after I graduated. I was thinking about trying to go into something else. An opportunity came my way where I could grow my business. I kept growing it until about 2011. I sold that and then got into the technology side. That company was on the customer side of where I’m at right now.

With my vending company, I not only learned about business but also about the industry and customers. I learned a lot about the problems. Part of the issue I learned was I saw the struggles our customers had paying machines. I’d setup a vending machine for example at a community college and watch my consumers. Fewer and fewer of them were able to make a transaction. They didn’t carry change in their pocket. My current company makes payments digital to unattended retail.

Sramana Mitra: What is your Ph.D. in?

Paresh Patel: It’s also in e-business and organization management.

Sramana Mitra: The vending machine company was yourself?

Paresh Patel: There were employees. We grew to about 25 employees.

Sramana Mitra: What kind of revenue levels did you get to?

Paresh Patel: We’ve never disclosed that publicly.

Sramana Mitra: Was the exit substantial?

Paresh Patel: It was enough for me to reinvest in a new company.

Sramana Mitra: This is what I like about these bootstrapping techniques. It’s a wonderful way. Also, it paid for your education.

Paresh Patel: By the time I finished my education, I didn’t have any student loans.

Sramana Mitra: Terrific. What year did you start the new company?

Paresh Patel: I had one company in between this one and the vending company. I started that one in 2011. It was a company that made credit card readers for vending machines. I had that from 2011 to 2013. It did not go well. I got out of that and started this company in 2013. I bootstrapped this as well.

Sramana Mitra: Let’s start at the very beginning of this company. You already described the problem. People didn’t have cash in their pockets. How did you go about starting this company? What form would your MVP take?

Paresh Patel: The genesis of this company was a singular moment. I had always known about this problem. Not just vending, but any unattended retail. I wasn’t quite sure how to solve the problem.

There was a particular moment in Labor Day of 2013 where I was in my car with my kids. My tire pressure light came on. I pulled into the gas station and went to the air machine. I was a quarter short to start the machine. My kids were in the backseat worried. I picked up my phone and made a call. My call connected to my car’s Bluetooth.

I just realized wouldn’t it be neat if my phone could connect to the machine. I have a network connection. I have money in my account. I have a credit card. I just don’t have a way to tell that machine. At that moment, I realized that there should be a technology that allows your smartphone to connect directly to a machine. I went home and I found the industry trade show. I rented a booth which was going to be in April of 2014.

I put the booth on my credit card. I drew a line in the sand and said, “I’m going to build something to show the industry.” I got a small group of contractors who I reached out to. We spent the next six months building an MVP. It was working and was able to send payment. I demonstrated that at the trade show.

Sramana Mitra: What kind of trade show was it?

Paresh Patel: It was called NAMA which stands for National Automatic Merchandising Association.

Sramana Mitra: It was a retail industry trade show?

Paresh Patel: Yes, a vending industry trade show.

Sramana Mitra: I’ve experienced the use case that you described. The gas station around the corner from me doesn’t have any digital payment option.

Paresh Patel: That was the problem. The machine only took cash.

Sramana Mitra: Do the gas station people attend these kinds of trade shows?

Paresh Patel: No, but the people who make the machines do. I wasn’t just solving for air machines, laundry, or vending. It was unattended retail in general.

Sramana Mitra: All unattended machine makers were at that trade show?

Paresh Patel: Correct.

Sramana Mitra: Great. You said you spent six months to get an MVP done by hiring contractors. Talk about that. Where did you get these contractors from?

Paresh Patel: I was self-funding this, so I didn’t have a lot of cash. I had to look for people who weren’t big companies. These are just individuals who were in my network. I hired one person to work on the hardware and another on the firmware. It was just a very bootstrapped company. They were not even full-time.

Sramana Mitra: Were they from the vending machine industry?

Paresh Patel: No, just general engineers.

Sramana Mitra: Your undergraduate was in business and not in tech?

Paresh Patel: Correct.

Sramana Mitra: But you had enough understanding to scope out what they needed to build for you.

Paresh Patel: Exactly. I’ve always been pretty technical, so I’ve been able to architect effectively. I’m not a coder, but I can design a solution. If you can do that, then it’s hard to hire somebody to build it. You need to be able to scope it out.

Sramana Mitra: Six months in, you have a minimum viable product. You’ve taken this booth at a trade show and you showed this to the community. What response did you get?

Paresh Patel: I didn’t have more money to go past the trade show. I needed to get validation and I needed to get validation in a way that investors would appreciate. Leading up to the trade show, I signed a deal with a distributor who agreed to distribute our product.

When I was ready to sell it, I had somebody to distribute it. This was a distribution company that had 220 sales reps across the country. That was huge because that showed that if I could get customers to buy it, I had somebody to distribute it as well. When I went to the trade show, we did a very nice job of collecting pre-orders. We had people sign up pre-orders for our device.

We also built 500 working devices and sold them at the show. We gave them to people for a nominal amount. They could take them home, test them on their own machine. You’ve got to remember, in 2013, using your mobile to send money was a very foreign concept. Nobody understood that at that time. We took pre-orders. I signed up over a million and a half in pre-orders. It was amazing. The reception was fantastic.

Sramana Mitra: The form factor of your product was that you would just clip it on a retail machine?

Paresh Patel: The design was remarkably simple. It almost works like a thumb drive. You just take the device and plug it into the machine. In three seconds, it could take that legacy machine and convert it into a modern mobile machine.

Sramana Mitra: A million and a half worth of orders were from how many customers?

Paresh Patel: A few hundred customers.

Sramana Mitra: What did you do next?

Paresh Patel: I took the pre-orders and realized that we had a really great product. The trade show was in April. I spent the month of May finalizing requirements and things we needed to do. Then I started pitching investors.

Sramana Mitra: In Portland?

Paresh Patel: In the Bay Area. I made several trips there. We got some pretty good interest. Right after the trade show, I was able to find an investor.

Sramana Mitra: What was the scale of the investment?

Paresh Patel: The seed was $2.6 million.

Sramana Mitra: Against a $1.5 million order. Fabulous! You got your seed round in and have $1.5 million worth of orders. How long did it take you to fulfill those orders?

Paresh Patel: We now had to convert this MVP into a production product. There was a lot of work to do that summer. We closed our seed round in July 2014. We spent July to September rebuilding the entire system. We had to do a lot of work on the server and web console to make everything production grade. I had to go get a production line going. I flew to Taiwan, found a manufacturer and had them build the production line. We had to do everything.

We launched our beta in October. It was about a few hundred devices. The first day we shipped it, we realized we needed to do a firmware update. Luckily, we have built our device to be updated in the field. Over the next month and a half, we did 13 or 14 updates. By January 2015, we went into full-scale production.

Sramana Mitra: The manufacturing was in US?

Paresh Patel: Taiwan.

Sramana Mitra: How did you find your manufacturing partner?

Paresh Patel: My manufacturing partner saw that I had left my last company and cold-called me. She was new to her job. She was the first employee in the US and trying to find a business for that manufacturer in Taiwan. We formed a relationship. It was pretty much like that.

Sramana Mitra: So now you have a fully-functional product and are fulfilling your backorders. How long did it take to finish that process?

Paresh Patel: We started shipping our devices in January 2015. By now, some of the orders have fallen through because it had taken so long. Our first run was a pretty big. It was 25,000 devices. We started selling them, but we were running out of money. So I had to go do an investment round. As soon as we got live, we went to pitch for a Series A.

Sramana Mitra: How much was that?

Paresh Patel: $12 million.

Sramana Mitra: What is the price point of your device?

Paresh Patel: We had different price points. When we initially launched, it was a $49 device. Over time, we built up not only the hardware but also a software suite. We started adjusting the price. We have it on subscription.

Sramana Mitra: In 2015, it was a $49 device?

Paresh Patel: Right.

Sramana Mitra: $12 million Series A also from the Bay Area?

Paresh Patel: Yes.

Sramana Mitra: What happens next?

Paresh Patel: We started to prepare the company for scale. We had just received our Series A. We got $12 million in the bank. I first hired a COO and then a CFO. We opened up a new office. We messed up. We hired too fast and too big. Too many positions that didn’t really need to be hired for yet.

Sramana Mitra: Series A is more about how to build the product and how to sell the product.

Paresh Patel: Yes. We made a lot of mistakes.

Sramana Mitra: Who was your Series A investor?

Paresh Patel: Matrix Partners.

Sramana Mitra: Who from Matrix?

Paresh Patel: That partner is no longer with the firm.

Sramana Mitra: The investor should know to guide you in that direction.

Paresh Patel: This was done in conjunction with them.

Sramana Mitra: Right. I’m surprised that they were willing to make those moves.

Paresh Patel: They were wrong hires.

Sramana Mitra: When did you course-correct and find your stride back?

Paresh Patel: I very quickly realized that this was not on the right track. By January, I had to make some very difficult decisions. We were running out of cash.

Sramana Mitra: You burned through $12 million.

Paresh Patel: Yes. We did some layoffs. We got rid of most of the people who we had hired and refocused on the product.

Sramana Mitra: That’s what we emphasize greatly. Early-stage business building is to focus on product.

Paresh Patel: Exactly.

Sramana Mitra: How did that go?

Paresh Patel: It was the first time in my entire career that I had to do a layoff. We had to do what was right. I had to rebuild the company. That summer, I was running out of cash. We ended up borrowing more money. We did a debt financing of $4 million.

Sramana Mitra: How did you do that?

Paresh Patel: It was a debt provider. Because we had Matrix as our backer, we were able to get that.

Sramana Mitra: With that $4 million debt, what milestones were you able to achieve?

Paresh Patel: We were able to course correct and get the product sold and deployed. The rest of it’s been going well since then. A lot of times, companies can easily get distracted, especially trying to prematurely scale. Premature scale is one of the worst things a company can go through. You think you need to build up all the staff and people, you don’t.

Sramana Mitra: You knew that there was demand for your product early on. By 2016, you’ve known for three years that there was demand. Did the market not start seeing competition?

Paresh Patel: There was competition but not direct competition. The competition was mostly credit card reader companies. Their solution was on a total cost of ownership basis. They were 10x more expensive than us. It was a more complex and expensive solution. We had filed for some foundational patents. I filed in 2013, 2014, and 2015. Even though we were a small company, I wanted to protect that. They continue to be granted. We have over 50 patents issued or pending today. We have robust patent portfolio which, for the most part, has kept our competition at bay.

Sramana Mitra: What kind of revenue numbers were you able to hit after you found your stride?

Paresh Patel: We’re still a private company, so we’re not talking about revenue, but Deloitte just recently ranked us as one of the fastest-growing companies in North America. Over the last three years, we had growth of 777%. We’ve been growing pretty nicely.

Sramana Mitra: In terms of customer acquisition, what is your primary mode?

Paresh Patel: When we think about customers, there are two different types of consumers. One is our business customers. These are the people who buy our device. They’re our direct customers. Then we have consumers who use our app.

Sramana Mitra: Those are users.

Paresh Patel: Exactly. For our customers, we do trade shows and direct sales. We also do advertising. There’s some inbound through trade publications.

Sramana Mitra: What is an average deal size from your direct customers?

Paresh Patel: It’s very skewed. We have customers whose deal sizes are in the millions. We also have deal sizes that are in the hundreds or thousands. We have customers that have more than a hundred thousand machines with us. Then we have customers that are buying 50 machines. It varies quite a bit.

Sramana Mitra: Did you do another financing round?

Paresh Patel: We have not. We became cash flow positive with our existing funding. We didn’t have to go out and raise additional funds. It’s hard. Even though we’re investor-funded, we still have that bootstrapping mentality. It’s surprising how having limited cash focuses you.

Sramana Mitra: We are huge fans of capital-efficient entrepreneurship. It seems like you have made some business model changes from purely selling a device to device plus software subscription. At what point did that start to kick in gear?

Paresh Patel: That was one of the things that was the hardest – trying to figure out what to price our product in a way that makes money for the company. You have no competition and you’re trying to figure out what the market can bear. When I say no competition, there is no direct product. You have to figure out the alternatives and how much they’re paying for the alternatives.

We tried different models. Initially, we were just selling the hardware. Then we just gave away the hardware and just charged a high transaction fee. That didn’t work out very well. Then we charged some for the hardware, licensing fee, and a transaction fee. We had to try different things to figure out what works.

Sramana Mitra: Have you figured out what works?

Paresh Patel: Yes. We need a model that had a little bit of both. There’s some upfront cost. Then there’re some recurring licensing and transaction fees also. That allows us to continue to invest in the platform and continue to build features. Our customers continue to get additional benefits from the platform.

Sramana Mitra: What is that combination and at what point in your evolution did you hit upon that model?

Paresh Patel: It probably took us three years to end up on that.

Sramana Mitra: 2019?

Paresh Patel: Early 2018.

Sramana Mitra: What is the split in your business?

Paresh Patel: Almost none of it is actually device revenue anymore. Even when we sell the device, what we’re actually doing is charging an activation fee. The hardware itself is usually free or low-cost.

Sramana Mitra: Now your business is SaaS enabled by a hardware device.

Paresh Patel: Exactly.

Sramana Mitra: What about the team? Are you all in Oregon?

Paresh Patel: We run two offices. Our Portland office is our headquarters. That’s where our business team is based out of. In our San Jose office, we have our engineering center. That’s where our engineering team works out of. We have sales people who are remote and we do have a few engineers who are remote.

Sramana Mitra: How big is the team?

Paresh Patel: 22 employees.

Sramana Mitra: Fantastic. Can you give me a range in revenue? Over $20 million?

Paresh Patel: Yes.

Sramana Mitra: Over $50 million?

Paresh Patel: Not over $50 million. Not yet.

Sramana Mitra: Over $20 million with 22 people. That’s an extremely capital-efficient business.

Paresh Patel: Yes, it’s very capital efficient. We think there’s going to be a time where we’ll put in more investments, but we didn’t need that to get to where we are.

Sramana Mitra: What about the VC’s? You still have a large chunk of venture capital on your cap table. You raised $12 million. I’m curious. How do the VC’s deal with a company like this?

Paresh Patel: We had a few stumbles early on. The core business is solid. We think we’re getting positioned to take some additional capital. There is a next iteration of what we’re doing that can scale us.

Sramana Mitra: I would imagine so. The gas station use case is still unsolved.

Paresh Patel: Correct. It’s still a big opportunity.

Sramana Mitra: It was very nice to meet you. Thank you for your time.

Key Takeaways

• Paresh Patel validated PayRange’s mobile-payment device for unattended retail machines by self-funding a six-month MVP and securing over $1.5 million in pre-orders from a few hundred customers at a 2014 industry trade show, before raising a $2.6 million seed round.
• After raising a $12 million Series A from Matrix Partners in 2015, PayRange hired too fast and too broadly, burning through the capital on premature scaling and unnecessary positions, which forced layoffs and a $4 million debt financing round to stabilize the business.
• The company spent roughly three years experimenting with pricing before landing on a hybrid model combining low-cost hardware, licensing fees, and transaction fees in early 2018, shifting the business from device sales to a SaaS-enabled model.
• PayRange course-corrected after its early missteps, achieving 777% growth over three years, reaching cash-flow positivity, and scaling past $20 million in revenue with only 22 employees – without needing additional equity financing beyond its original seed and Series A rounds.