Vijay Menon helped catch accidental subscription churn at Xbox, Dropbox and Scribd. “I realized every subscription company must face this problem,” he said.
Butter Payments
A decade ago, Microsoft, Dropbox and Scribd were all leaking money. They were losing millions a year to subscriptions that were being “accidentally” canceled, says Vijay Menon, whose work shoring up the financial backend at each company helped his previous employers to retain revenue they otherwise might have lost.
It’s on this premise that Menon started Butter Payments in 2020. Three years later, the startup is finding its footing at a time when many companies are grappling with an economy that’s putting a dent on their bottom lines. On Wednesday, Butter announced that it raised $21.5 million in Series A funding from Norwest Venture Partners, with participation from Atomic. Norwest partner Ed Yip joins the board as part of the financing, which came at a valuation of close to $100 million, according to people involved with the deal who did not want to be named.
In its infancy, Butter has assembled a customer base that includes Menon’s three former employers, as well as both consumer and enterprise-facing firms like online learning company Skillshare and Raydiant, which helps brick-and-mortar shops manage interactions with customers. That fueled Butter’s roughly $6 million in revenue last year. For founder and CEO Menon, who was selected for Forbes’ latest 30 Under 30 list in Enterprise Technology, the business idea was a surefire bet from the start.
“I could’ve done this at a fourth company and know with a 100% chance that it’ll work,” he says. “Every subscription company must face this problem.”
Obvious as it may have been to him, few people were aware the problem existed at all. When he took a meeting with the startup incubator Atomic after learning that the firm wanted to start a company for reducing churn, Menon discovered that Atomic’s partners were not even aware of the phenomenon of “accidental” churn. Atomic, which counts itself as the company’s “cofounder,” soon convinced Menon to lead the business they had in mind.
“There is no one majority reason why payments fail. That’s why our business succeeds.”
After signing up a customer, Butter’s team dives into the company’s financial backend to build a bespoke machine learning-powered model that identifies all the ways the existing payments infrastructure is causing unintended churn. Speaking from his past experiences, Menon says that a high-engagement user was just as likely to be accidentally churned as a casual customer. About 75% of these customers don’t sign back up, he says, some because they switch to a more reliable competitor’s offering, and others because they simply are unable to sign back up due to technical bugs.
Subscriptions can churn for a plethora of reasons, which often differ across companies depending on their customer base. For example, the majority of people in Indonesia do not have bank accounts, and Menon says Butter has found cases in which a company was failing to process Indonesian transactions because it did not have the proper payments infrastructure set up. Other issues such as time zone differences or discrepancies in collecting data like zip codes have caused active subscriptions to suddenly be canceled. “There is no one majority reason why payments fail,” Menon says. “That’s why our business succeeds. You have to build a machine learning solution to look at all these different reasons.”
While Butter helps businesses to improve their subscription revenue, its own revenue is not based on subscriptions. Rather, the startup runs a revenue-share model where it takes a cut of the money that it helps customers to recoup, typically starting at 10% and increasing if Butter is able to improve its recovery rate.
That’s helped Butter naturally improve on its own balance sheets over time. Whereas it said it could help a $500 million revenue business recoup $2.5 million to $5 million at the time of its seed round in December 2021, it now promises a roughly $25 million return. “When we heard the idea of Butter, we were like, ‘that’s a no-brainer,’” says Norwest’s Yip. “Whenever we look at any company, [retention] is always the number one metric we look at.”
“At the start of the process, [my peers] told me these numbers were basically unachievable, and to try to set a valuation goal of $40 million or $50 million.”
Menon now has his eyes set beyond just revenue recovery. With the new funding, Butter is setting about building products for pre-authorization—to make sure that the initial transaction is more likely to be processed successfully in the first place—and to help businesses route their payments to different fintech services like Stripe and Adyen. In the process, he plans to double the team size to 50 employees. That ambitious vision, coupled with Butter’s early business successes at a time when many fintechs have faltered, allowed Menon to raise at a valuation far above what his circle of investors and peers advised him was realistic.
“At the start of the process, they told me these numbers were basically unachievable, and to try to set a valuation goal of $40 million or $50 million,” he says. “I think we got an awesome raise.”