Dwolla founder Ben Milne. (Photo: Twitter)

Dwolla*, the Des Moines-based payment platform that has a strong presence in NYC, announced today that it has received a $16.5 million Series C investment led by venture capital behemoth Andreessen Horowitz, with contributions from NYC firms Thrive Capital* and Union Square Ventures. The fresh funding will allow Dwolla to double its staff of 40 to 80 and open a third office in San Francisco, according to The Next Web. Andreessen partner Scott Weiss will be joining Dwolla's board.

Dwolla is a payment network that allows users to transfer money back and forth for free for transactions under $10 and a flat rate fee of $0.25 for those over $10. The platform hooks directly up to your bank account and offers transfer fees lower than what banks or credit card companies typically charge, positioning it as a legitimate competitor to conglomerates like Visa and Mastercard (not to mention that rumored deal with Square).

But the company also appears to have PayPal in its sights. In October, Dwolla announced a new MassPay feature that competes with PayPal's "Mass Payment" function; MassPay allows users to send out payments to up to 2,000 people at once with just a few clicks. It's worth noting that Jeff Jordan, the former President of PayPal, is a partner at Andreessen.

This is one of the largest investmens Andreessen has made in a payment services startup, though it's made smaller bets on Stripe, a payment system for developers, and Balanced.

Mr. Weiss, who led the investment, explained on his blog why the firm chose to make such a big bet on Dwolla:

• Founder/market fit: Ben is one of the most determined and scrappy entrepreneurs we’ve met and has a deep knowledge of the entire payment network.

• Ridiculous market size: Dwolla’s FiSync is taking on ACH and FedWire, a combined $730+ trillion market with real-time transactions, new revenue streams and incentives for key players in the payment process.

• A snowball of traction: Its annual processing run rate has moved from the hundreds of millions to billions and its business development pipeline is chock full of opportunities.

Mr. Weiss signed off: "I am excited to be joining Dwolla’s board of directors and look forward to helping Ben build the next multi-billion dollar payment company!" Enjoy all that dough, boys.

*Disclosure

Mr. Taub and Mr. Schonfeld

The Credit Card Killers

With an ever-crowded financial tech market and companies like PayPal and Google Wallet elbowing for industry dominance, the race to kill the credit card is heating up. But among the standouts is Iowa-based mobile payment startup Dwolla, thanks to an innovative pricing structure and a growing New York presence helmed by Michael Schonfeld and Alex Taub. Dwolla has raised money from two New York venture capital firms, Union Square Ventures and Thrive Capital. (Josh Kushner, a Thrive principal, is also part-owner of Observer Media Group.)

Much like PayPal, Dwolla seeks to disrupt the traditional money-wiring business and enable users to send payments with ease. Users set up a Dwolla profile, link it directly to their bank account, and can then instantly send money to friends and businesses through an iPhone or Android app.

The company also processes bank-to-bank transactions, eradicating the need for slow and costly credit card processing. “We’re building a human network based on how we think the future of payments will work,” CEO Ben Milne told Business Insider. “The current model needs to be blown up.”

PayPal, Dwolla’s main competitor, is far more established and is a trusted brand name in online payments, but its fee structure makes it expensive to use. Unlike PayPal, Dwolla doesn’t take a percentage of each transaction, instead charging a 25 cent fee for any payment over $10 (under $10 is free), making it much cheaper for businesses and consumers.

“PayPal is a pioneer, but it can only innovate so much on the backs of these 40- or 50-year-old networks that they’re using,” Mr. Milne told The Observer. “Dwolla is a new conduit to move money in a better way that anyone can use.”

Next: Mike Karnjanaprakorn, Skillshare: The Principal of New York

Back to the beginning

Mr. Davis (Photo: twitter.com)

Kohort, a social network for groups, launched last month jam-packed with friends of founder and former venture capitalist Mark Peter Davis.

But less than a month after launch, Mr. Davis took to the company's blog to announce that they have decided to "decided to run Kohort with a smaller team, a leaner approach."

AllThingsD's Peter Kafka expects the company to lay off almost all of its 15 employees. Dwolla founder Ben Milne announced yesterday via Twitter that Kohort builder Shane Reisner has already started working at Dwolla.

Users are certainly feeling the pain too. This week, a user in the New York Venture Community group (the group was in fact founded by Mr. Davis), University of Washington professor Brian Rowe posted an announcement titled "Has Kohort Died":

I know that "fail fast" is a mantra these days, but I always figured it was followed by "fix quickly". Seems like the site's been broken for a while and not much in the way of communication indicating when these things will be fixed. Not sure how you keep customers this way.

As a comparison github is really good about communicating when things go wrong and keeping everyone abreast of the status.

Mr. Davis quickly responded in a post called "Kohort is Alive & Kicking":

In response to the prior message, we're aware of the few bugs on the site & we'll be working to address them as we continue to push forward with new features.

More to come.

- Team Kohort

Before launch, the company netted $3 million from a investors like IA Ventures, RRE Ventures, ff Venture Capital, David Tisch and David Cohen, so they probably have a bit of cash to burn out. Once the user base starts checking the site for signs of life, however, it's hard not to hear the pivot sirens blaring in the distance.

Mr. Kutcher, right, explaining "cusps." Ben Milne, founder of Dwolla, left, possibly mortified.

UPDATE, April 11, 4:02 p.m.: Numerous readers, including Ashton Kutcher's publicist, objected to the suggestion that Mr. Kutcher was high during his interview with Dwolla. In truth, Mr. Kutcher appears sober in the interview; the word "high" was used to imply that his answers did not make sense—but this appeared to be due to the overuse of jargon and simplicity of ideas, not the influence of mind-altering substances. We have updated the headline.

Iowa native Ashton Kutcher returned to the homeland today to officially announce an investment in Dwolla, one of the hottest investments of the moment, and appear with Dwolla founder Ben Milne for a special episode of Silicon Prairie News's PrairieCast. The A-list actor has invested in A-list startups from Skype to Twitter to Airbnb to Path to Flipboard Gidsy to Zaarly to New York's Foursquare, GroupMe and The Fancy. He's reportedly invested in some 40 companies. He's the Real Deal, we're told, and not an opportunistic dabbler who only got into the whole startup thing because a long time ago he challenged CNN to a race to be the first Twitter account to hit a million followers.

"Ashton as an investor is brilliant," Mr. Milne said today.

"I’ve come to realize he’s one of the most insightful investors I’ve worked with," David Lee, who co-founded SV Angel, told the New York Times.

Mr. Kutcher actually has a lot of suggestions about product, other founders have told Betabeat in the past.

So we were curious to hear the actor riff on startups at length in the live question and answer session with SPN's live studio audience. Like Paul Graham's on stage office hours at TechCrunch Disrupt, it offered a rare peek into what meetings between a famous investor and his investments must be like.

We came away... underwhelmed.

A sample Mr. Kutcher answer, to a question about identifying brand advocates to evangelize one's startup:

I look at the point of any transaction and, whether it's a social transaction where I'm creating a piece of messaging and I'm handing it to somebody else across the Internet, that's a cusp, right, and any time you have that cusp, you have an opportunity for social syndication. So if your product works really, really well and you put it in the hands of the original seed users that are going to be passionate about your product and use it a lot, and you give them the opportunity in their transaction, whether it's a financial transaction in ecommerce, or it's a social transaction where someone is trading a photo of somebody else, somebody trading a message or somebody trading a song or whatever it is, when that cusp takes place, if you give them the tools to syndicate it, and they're a passionate user, they will. And that syndication, if you actually have the right product flow, will create a multiple of return of consumers onto your site. And really it's a traffic game business, right, so the more traffic you have on your site, the more potential transactions you have, the more transactions you have, the more opportunity you have for monetization. So anyime that you can interrupt that cusp and that flow with the syndication, or an encouragement to other people to actually join that platform, and/or an encouragement for individual to use the platform more, those are your opportunities.

So, basically he's advising you add lots of "tweet this" buttons? Mr. Kutcher spouts this gibberish the entire session.

Dwolla CEO Ben Milne.

Dwolla has sent over a statement responding to the $2 million lawsuit filed yesterday by the Bitcoin exchange TradeHill. Dwolla says it has not been formally served notice of the lawsuit yet.

First and foremost, it is important to note that neither Dwolla, nor any of its management or investors, have been served formal notice of any potential lawsuits. It is also noteworthy that a party making unfounded allegations would likely notify the media of litigation prior to advising the party that it says caused it harm. That said, if served, we will vigorously defend all allegations of wrongdoing in the traditional venues of the judicial system. What we will not do is provide specific comment on specious allegations made by those who have a self-serving interest in seeking publicity.

In the interests of transparency, we’d like to say a few high-level things: Dwolla has always worked closely with merchants to rightfully identify and protect the victims of identity theft. Every day, thousands of users log thousands of successful and legal transactions in one of the industry’s safest ecosystems. Unfortunately, as is a reality with all financial services (e.g. banks, credit cards, etc.), predators can use stolen identities to create fraudulent accounts without a victim’s knowledge. That’s why Dwolla requires numerous identification and verification steps.

A necessary byproduct of this kind of fraud is bank-level reversals, “chargebacks” issued by the institutions on behalf of the victim, not Dwolla. With that said, we will not play accomplice to sources of ongoing fraud. In such cases, we move quickly and act appropriately to facilitate restitution on behalf of the financial institution and its members (the victims). This is required by federal and state consumer protection laws, but more importantly it’s the right thing to do.

Most all merchants are well aware of the problem, which is why we've always had something in our terms of service about chargebacks since Day One. Notably, there are certain types of businesses and marketplaces that are continued targets for illegal activity and, just like we work hard to protect and improve our community, a similar expectation should be assumed on behalf of merchants participating in high-risk industries. If any merchant continues to be a source of systemic fraud and we cannot come to an agreement, we will always take the appropriate actions.

In the event that a user or merchant feels as though they have been wronged to the point of litigation, we’ll be happy address their concerns or issues in the court of law. It is their right to do so, as it is our right to rationally and reasonably present our side. So while people may throw a bit of mud on us, it's important to let the appropriate parties figure this stuff out. This will allow us to focus on what we do best: Build.

In the meantime, Dwolla continues to be a source for hundreds of thousands of transactions, all safe, legal, and cost-effective. Please, don’t hesitate to drop us a line.

Left, Mr. Kenna, in a Next Web interview; right, Mr. Milne (flickr.com/7878069@N02)

The proprietors of a major Bitcoin exchange have filed a lawsuit in the Northern District of California alleging that racketeering, intentional misrepresentation, false advertising, breach of contract and other violations by payments startup Dwolla have cost them at least $2 million in damages, with the final amount to be decided by the court.

The plaintiff is TradeHill, a Bitcoin currency exchanger based in San Francisco and Chile that was at one time the second-largest processor of Bitcoin currency trades, but which recently shut down. The shutdown was largely due to losses sustained because of "chargebacks" or payments that cleared and then were rescinded by Dwolla, said TradeHill cofounder Jered Kenna, although other reasons were given at the time.

"We've been trying to resolve this for eight, nine months and they ignored all communication," Pierre G. Basmaji, the Santa Monica-based attorney for TradeHill, told Betabeat by phone. "I have no idea why. I think... they don't know how to handle it and were just hoping we would go away."

Dwolla did not respond to requests for comment. UPDATE, 6:13 p.m.: Dwolla just released a statement.

Dwolla is a fast-growing, low-fee e-payments service that has been generating a ton of buzz from its headquarters in Des Moines, Iowa; the startup recently raised $5 million in funding led by Union Square Ventures. Dwolla was popular with Bitcoin exchanges because of its low fees.

TradeHill was one of the exchanges that allowed customers to purchase Bitcoins with Dwolla. But sometime over the summer, the relationship went sour.

According to TradeHill, Dwolla told merchants that transactions were not reversible, meaning money transfers would not be canceled after they had cleared. The practice of reversing transactions, known as "chargebacks," is common among payments processors and unpopular with merchants. (If your wallet is stolen and a thief uses your Visa to buy $1,000 of drinks at the Ace Hotel, for example, you're not liable for those charges: the Ace eats the cost thanks to a chargeback.) "[Dwolla] said all sales were final. Credits were as good as cash," Mr. Kenna said.

In July, TradeHill noticed some discrepancies in its transaction records and wrote a program to track its Dwolla transaction history. After two weeks of tracking, it appeared Dwolla had been clearing transactions and then revoking them. The status of charges on Dwolla's online transaction history would change from "pending" to "credited" and then back to "pending," TradeHill said.

Basically, a customer would connect his or her bank account to Dwolla. Then the customer would head over to TradeHill, fill out an order for, let's say, $100 in Bitcoins, and use Dwolla to pay. TradeHill would look at its records, see that Dwolla had sent $100, and credit the customer with $100 in Bitcoins. But in some cases, according to TradeHill's complaint, that $100 from Dwolla might disappear after the Bitcoins had already been transferred, so TradeHill effectively ended up giving away Bitcoins.

Mr. Kenna said he believed the problem was due to people scamming Dwolla, and was not bad intent on Dwolla's part. "It is unfortunate that Dwolla is the victim of fraud and we would like to work with them to resolve this," TradeHill said at the time. "We are confident that they will do the right thing."

But when TradeHill tried to talk to Dwolla about the problem, the Bitcoin exchange was stonewalled.

TradeHill went public with its story on the made-for-web-TV Bitcoin Show on July 26. TradeHill also wrote about the dispute on its blog, alleging that "Dwolla has been scammed for at least $37,000 by our records and we have prevented an additional $27,000 from being scammed."

TradeHill says Dwolla reacted by removing language on its website that promised customers did not have to worry about "chargeback concerns" and adding a clause to its Terms of Service aimed at Bitcoin:

Any purchase or transaction involving virtual currency or a virtual product is not eligible for a dispute or arbitration. This includes but is not limited to credits, downloads, PDFs, or mp3s.

After TradeHill's public statements, Mr. Kenna said the stonewalling continued. Dwolla executives "refused to be around for the phone calls," he said. "I would get them on the phone and they would say the CEO, COO is going to call you back. Then I'd get an email back that was basically a copy of the FAQ," Mr. Kenna said.

All in all, TradeHill alleges Dwolla unjustifiably reversed $94,878.72. The complaint also alleges Dwolla prevented TradeHill from withdrawing an additional $70,000 from its Dwolla account, because Dwolla told its partner Veridian that TradeHill was a fraudulent business.

The losses snowballed. Cash flow problems due to these losses caused TradeHill to shut down and lose some valuable domains including bitcoin.com, bitcoin.co and bitcoin.co.nz, TradeHill says, for which it had traded $1 million in equity.

TradeHill believes Dwolla is at fault because flaws in the Dwolla system allowed maliciously-intentioned customers to defraud TradeHill, and Dwolla simply passed the cost onto TradeHill via 45 chargebacks in total—and then neglected to notify TradeHill of said chargebacks.

TradeHill's attorney told Betabeat that the $2 million in damages "is conservative." "I'm pretty sure we can prove that much, but it will be proven in court," he said.

UPDATE, 2:20 p.m.: TradeHill just put out a press release announcing the lawsuit.

Based on public statements by Dwolla about the company's transactions, Mr. Kenna believes Bitcoin at one time accounted for a very large percentage of Dwolla's transactions. TradeHill was processing about $1 million in payments and withdrawals through Dwolla in June, he said, before the dispute, and another Bitcoin exchange, Mt. Gox, was doing almost seven times that amount: $6.8 million in deposits and withdrawals in June in 16,640 transactions, the exchange said in July. UPDATE, 4:53 p.m.: Mt. Gox sent more recent numbers to Betabeat that are lower. The exchange did $2,5 million in 9,948 Dwolla transactions in February.

On June 17, Dwolla said it was doing about $1 million in transactions per week, suggesting Bitcoin could have accounted for a majority of the transactions at the time. (Dwolla did not respond to an email asking for comment on this specific point.)

"Given Bitcoin’s recent explosion, it would stand to reason that at least part of Dwolla’s explosive growth is being caused by the ease of compatibility between it and the Bitcoin currency system," Brad McCarty of The Next Web wrote in July.

Dwolla, it seems, is pretty sick of hearing about Bitcoin. "I can’t go a day without talking about it or being asked about it," CEO Ben Milne wrote in a guest post for Silicon Prairie News. A representative for Dwolla told Betabeat in January that Bitcoin traders "now make up an extremely small amount of our daily transaction volume." Dwolla is itself a disruptive payments system and Mr. Milne would rather talk about that. He also made vague references to fraud related to Bitcoin. "Someone obviously figured out how to game it," he wrote, and "Have we found suspicious and fraudulent activity? Yes. Do we deal with it accordingly? Yes."

At least two smaller Bitcoin exchanges, Bitcoin7 and ExchangeBitcoins.com, also stopped using Dwolla. Another Bitcoin-related merchant who did not want to give his name because he is currently raising funding, said Dwolla has "holes" in its security "which allow for customers to scam them easily." About four to five times a month, he said, Dwolla will claim funds and then change its statement after the fact without warning or notification. Dwolla credited the funds back once, he said, but usually the startup does not take responsibility. "It's a love/hate relationship," he told Betabeat. "They have a failed system, so we have our own verification, but still get scammed a few times a month."

However the largest Bitcoin exchange, Mt. Gox, has continued accepting Dwolla. "While Dwolla's sudden increase in reversed transaction and the way they did it (the transactions just disappeared from the history at first, without any notice) did hurt us, the damage was limited to less than $5000, which is more than reasonable," Mt. Gox cofounder Mark Karpeles said in an email. "Each time we needed to confirm something with Dwolla they were able to communicate with us, and helped us fix any issue we ever had. Now cancellations are shown properly in Dwolla's export files and transactions do not just disappear without any trace anymore."

Dwolla said it's moving between $30 and $50 million in transactions per month, Mr. Milne told Business Insider in November, and just announced a highly requested feature: the ability to cancel pending deposits before they clear.

Tradehill v. Dwolla Et Al Complaint (Filed Copy)

Mr. Milne.

Power to the prairie! That Union Square Ventures-led funding we reported on for investor darling Dwolla—the startup of the 700 name spreadsheet—is indeed happening. (Albeit for $5 million instead of the $10 million we expected.) Village Ventures, Thrive Capital, Marc Ecko of Artists & Instigators and angel investor Paige Craig participated.

Dwolla is doing a million dollars a day in transactions, CEO Ben Milne said in the announcement, and will use the money to build a payments network (a la Visa) that will use the power of the Internet to circumvent normal electronic payment processing fees.

"Every single one of these people I met through individuals I met at events and meetups or through Silicon Prairie News. SPN is the catalyst that you can always trace Dwolla’s story and opportunities back to," CEO Ben Milne wrote in the company blog.

The company took six months to do the raise, he said, looking for just the right new team members and just the right partners. Especially partners willing to shlep out to the Midwest, because Dwolla ain't goin' nowhere. "We’ve added 16 jobs to downtown Des Moines," Mr. Milne wrote. "Received hundreds of job applications from inside of Iowa, and outside of Iowa… which we think is cool." Note to New York startups: hide your devs.

Dwolla has grown its user base by 2,500 percent over the last year and grown its merchant base by 3,700 percent, Mr. Milne said.

Fred Wilson of USV, though he gave Mr. Milne "quite a bit of time and some advise" didn't jump on Dwolla right away; USV's Albert Wenger and Mr. Milne had a near-botched negotiation. "Albert and I had a disconnect. In the middle of this process, I disagreed on something and didn’t give much feedback as to why. Then I went on my merry way," Mr. Milne wrote in a refreshingly candid account. But it all worked out now, didn't it? "Albert came out, patched it up and the rest is history," he wrote.

The news of the funding broke this morning on Dwolla's blog, in the Des Moines Register and the Silicon Prairie News. "To us, this was an Iowa story," Dwolla's communications chief Jordan Lampe wrote in an email. (It was also a Business Insider story, but nevermind.)

Disclosure.

With its Shapeways investment, the startup's Dutch founders move to New York and USV took out life insurance policies in case they got squished by taxis. But Dwolla leaving Des Moines—it's only a three-hour flight, and VCs seem to be more than happy to make the schlep.

Dwolla, founded in 2008, hit $1 million a day back in July, the company announced at the time. Now it's moving between $30 and $50 million per month, the startup told Business Insider last month, taking just $0.25 for transactions over $10 (less than $10, and it's free). The startup's million (billion?) dollar innovation is eliminating credit card interchange fees by cutting costs in a few key ways, including a massive reduction in credit card fraud risk by eliminating card information from the transaction. CEO Ben Milne got the idea for Dwolla when he "got really obsessed with interchange fees and how not to pay them" at his previous business, a speaker manufacturing company that sold products exclusively online. "I was losing $55,000 a year to credit card companies, he told Business Insider. "I felt like they were stealing from me—I was getting paid and somebody was taking money out of my pocket."

Dwolla is also moving every function possible out of the meatspace and onto the web—so no plastic cards, no statements in the mail, no card readers. It links to consumers' bank accounts and lets them send money to friends on social networks, currently available in the U.S. using Facebook, Twitter, LinkedIn and Foursquare. The fee scheme is exactly the same for merchants, who can sign up for free.

We first heard about Dwolla back in May because the company was putting free credit in new users' accounts, which some users then exchanged for Bitcoins. (Dwolla has lost popularity within the Bitcoin community since then, however.)

"Essentially, we've created our own payment network. Think VISA, but built in the 21st century, not the 1960s," communications point-man Jordan Lampe told Betabeat by email. "As a consequence, we've earned numerous merchants looking to avoid interchange fees. That included a few Bitcoin traders earlier this year, but they now make up an extremely small amount of our daily transaction volume."

We'll believe most users are mainstreamers; Dwolla has more than 16,000 fans on Facebook and 3,000 monthly users, according to the social network.

Earlier this month, Dwolla launched instant transactions, cleaned up the user experience, and is now heavily staffing up. Fred Wilson of USV did not respond to an email request for comment and Mr. Lampe declined to comment, but Dwolla has hinted that it will have some "some announcements" in "a couple of weeks." Word of USV's role as lead has been circulating for at least a month, one VC estimated, so it's possible USV and other investors are getting ready to close the deal. We're told the startup was asking for about $10 million, but we wouldn't be surprised if it's oversubscribed and the number comes in higher.

Dwolla has raised about $1.3 million to date in grants, angel funding and a series A with undisclosed investors, according to Crunchbase. The company had grown from two to 15 employees as of June; they're now at about 18, with more by extension through partners at The Members Group and Veridian Group.

Dwolla has scads of competitors, including Bitcoin, Google Wallet, BankSimple, Visa, Venmo, and as The Next Web pointed out earlier this week, PayPal, Square and Clover Pay.