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Startup Exits Podcast with Mark Volchek, founder of Higher One

The $600 million IPO: how Mark started, ran and took Higher One public
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Mark Volchek

Founder of Higher One

Mark Volchek is an entrepreneur turned VC. While a student at Yale, Mark set out to disrupt academia by making student payments electronic. Higher One grew to a thousand employees and hundreds of millions in revenue, went public on the NYSE with a valuation of $600 million, then went back private as 3 entities that were all sold for hundreds of millions each. What a ride!

We chat with Mark about

  • The power of connections in B2B enterprise sales
  • How to measure product/market fit for a B2B company
  • Distributed workforce at scale: hundreds of employees in many locations
  • What’s needed for a startup to IPO?
  • Running a public company vs a private company
  • Going back private after being a public company
  • Fundraising advice from a founder turned VC
  • Finding great startups in non-obvious places
  • How to approach investors as a startup founder

Mark now invests in “extraordinary people who are building the future in non-obvious places” via Las Olas, an early-stage VC firm.

Episode transcript

ANDREW VASYLYK: Hey everybody. This is your host Andrew Vasylyk and you’re listening to Startup Exits. Today, I’m joined by Mark Volchek.

Welcome to the show, Mark.

MARK VOLCHEK: Good morning.

VASYLYK: You started a company called Higher One, which provides financial services to college students. You took this company public on the New York Stock Exchange in 2010, which then 6 years later got acquired by Blackboard for somewhere around $250 million.

But first, I want to take it back to the early days of the company. You guys started in the year 2000, which is 10 years before the IPO and 16 years before that acquisition – what was your initial idea for the company?

VOLCHEK: Back in 2000, we (myself and 2 co-founders) were trying to make student payments electronic. In the late 90s, everything was paper-based – schools were sending out paper bills, your financial aid was paper-based, you would pay your tuition with a paper check as well.

Essentially, we believed that we could bring electronic payments and the Internet to college and university back offices and make those transactions between students, parents and the school electronic. That was really our initial goal and motivation.

VASYLYK: Were you guys students at that time?

VOLCHEK: We were. So I was a senior, Miles was a junior and Sean was a sophomore. We understood the problem and we thought we had come up with a good solution. Our goal was to hire really smart people around us to help us build this company. And that’s what we did.

VASYLYK: OK, so you guys had a personal pain point that you felt as students, and you decided to go after that pain point. What was the first product or service that you launched?

VOLCHEK: So the first real product we launched was with the University of Houston. It allowed the students to use their ID card off-campus. They were able to put funds into an account associated with their ID card through a MasterCard logo – essentially we integrated the ID card into the Debit Card. Subsequently, we allowed schools to disperse excess financial aid (for room, board and books) directly into that account that was linked to the ID card. It was to make it very convenient for students right at the beginning of the semester to buy their books and pay for their expenses from financial aid if they needed that. So it was sort of an integrated package in the very early days.

The first full product was actually launched at the University of Wisconsin Stout, which is one of the UW System campuses. They launched approximately in 2002 or 2003 with the full product bundle.

VASYLYK: So you guys combined the Student Card with a Debit Card, and I guess that’s where the name of the company comes from – “Higher” for higher education and “One” for one card – Higher One.

VOLCHEK: Yeah, exactly. That’s perfect.

VASYLYK: What was the initial go-to-market strategy here? How did you guys launch this thing?

VOLCHEK: We took a difficult route in terms of selling to the schools. We believed that the only way to really get good adoption and good integration was to get schools on board. That was very difficult. It took us almost two years to get our first client signed up. We had done a small scale pilot. Plus, we were building this technology over 15 years ago, and back in the day, it wasn’t as easy to get things up and running. There were no cloud services so we had to buy servers, do programming, facilitate integration between the banking systems,  schools, etc.

Ultimately, we raised a little bit of angel money in 2000. We hired a CTO and a VP of Sales whom had experience selling to University CFOs. Then we raised another round in 2001. Again, this was right after the dot-com collapse, thus it was very difficult to raise capital so we sustained and built the company for two years on angel investors’ capital. Then in 2002, we brought on an outside CEO. He was an experienced CEO who was 20 years older than us and had done lots of exciting things in his career. With his help, we were then able to raise our first institutional money in 2002.

The power of connections in B2B enterprise sales

VASYLYK: So education is often seen as sort of this “old man’s game,” in a sense that it’s very difficult to get your foot in the door, very difficult to offer something new or to close deals with educational organizations. Essentially very difficult to disrupt.

As you mentioned you decided to take the difficult road of actually closing these schools – how did you get these first meetings with colleges and how did you actually close them?

VOLCHEK: The key there was really to hire that VP of Sales who had sold to Universities. He had actually, prior to joining Higher One, worked for a Telecom company, selling physical phone lines to universities, because back in the 80s and 90s student dorms had physical phone lines in them. So he was in the business of selling to universities. Therefore, when he came on board with us it was very easy for him to get a meeting. The first thing he did was to get a focus group together with a number of CFOs and bursars who run the business office in the university.

That was sort of this the first step to getting meetings. But he was very experienced in the space and had a lot of contacts. When going into a business of an old-line industry, it’s very important to have somebody who can open those doors and get those meetings. Often we would go with him and we would talk about the tech and the product but he would really get those meetings and ultimately get through the process.

As you can imagine, a lot of universities have purchasing processes that might include an RFP (Request for Proposal). Often the sales cycle would take 6-12 months, and sometimes even 18 months. So it’s important to have a very experienced person to help with that.

How to measure product/market fit for a B2B company

VASYLYK: So you guys had a person that could get you in the door and get these deals done, you had a ready product and partnerships with colleges – was there a particular point in where you felt like you reached product/market fit?

VOLCHEK: Sure, yeah. Once we started getting some traction we went from one customer to 2 customers, then to 6 customers and 13 customers. In fact, our customers were launching every semester. So 4 semesters in, when we got to 13 customers, we felt like we had a product/market fit.

That’s a pretty good ballpark for enterprise-type companies to have a dozen customers, continued growth plus revenue generation and 100% retention. We had a 100% retention of university clients for, I believe, the first 10 years of the company, so we did not lose a single university partnership. Of course, we were very proud of that. Product/market fit assumes not only a certain number of customers but also a high retention rate. In our case, it was a 100 percent retention rate.

VASYLYK: So when you guys had these first dozen customers and such a high retention rate did you experience some sort of explosive hockey stick growth after that?

VOLCHEK: In some ways – 1, 2, 6, 13 – I don’t remember the exact counts of accounts after that. When you double every semester, that’s actually very fast growth. We grew very quickly from 2002 all the way through 2008, probably, for those 6 years, and then we started getting very large. So, in 2008 we ended up selling a third of the company to a private equity firm and started diversifying the product as well.

Back to your question, the first product was this card, an integrated solution that allowed the electronic disbursement of financial aid. A few years later we also launched electronic bill presentment and electronic bill pay. That allowed the schools to send out bills electronically and get the payments electronically. So we started diversifying our product set because we had so many university partnerships that felt like we could add more value to existing clients rather than just go after new clients.

VASYLYK: So on the topic of hockey stick growth, I think obviously it’s something that all startups strive for, but at the same time it could present a lot of challenges, especially for companies that are not ready for it.

In your opinion what sort of things have to be in place at a company for it to scale?

VOLCHEK: It’s really a combination of the right team, the right products/technology (and that depends on the type of business), and product/market fit which then leads to demand. If you have the right team that can execute, that can sell, and you have the right product that people actually want and are willing to pay for, then those are really the key ingredients for growing the company and hitting that scale inflection point.

Distributed workforce at scale: hundreds of employees in many locations

VASYLYK: Yeah, and I think a lot of companies that are thinking about scaling tend to hyper-focus on marketing and growing (meaning scaling the demand side of things) but they sometimes lose sight of other aspects of the company, like scaling operations as well.

At the peak of the company, while you were still there, how many employees did you guys have?

VOLCHEK: About 1000 and that included about 400-500 part-time customer service reps. We had a lot of seasonality in terms of our customer service needs. So I would say we had about 400-500 full time and another 400-500 part-time employees.

VASYLYK: And were they all in one location or were they spread out?

VOLCHEK: HQ was based in New Haven, Connecticut, because we started the company while being students at Yale and were stuck in New Haven. Through some acquisitions and other initiatives, we ended up with offices in upstate New York, in the Bay Area, in Atlanta and then also in Chennai, India. Ultimately, we had a somewhat distributed workforce. About 300 of our employees, and those were mostly full-time, were in New Haven, Connecticut.

VASYLYK: In the past couple of years, we’ve seen a lot more startups become open to having remote employees, whether in another state or in another country. That’s happened for a variety of reasons.

In your case, what made you guys want to hire people in another country?

VOLCHEK: It was a combination of access to talent and cost. The CTO we brought on in that 2008-2009 timeframe had a lot of experience working with folks in India. He brought on a manager for that India operation whom he was familiar with and who did a great job for us and hired some great people. But as you know hiring tech talent is difficult in the US. It’s a tight labor market, even back then. So we were not only able to save cost but we were able to hire talent quickly that we needed to grow and scale for particular projects.

That really led us to open an office in India. And those were all our employees. So we didn’t outsource to India, we essentially opened the full office, hired a director for that office and then we scaled it while I was there to almost 50 people.

VASYLYK: Did you set up that office yourself or did you use a third party to help you set it up?

VOLCHEK: We did it ourselves because our CTO had experience with this particular person who we hired to be the manager of that office. He had done this before for other companies did that all kind of for us as our employee.

VASYLYK: Ok, so he was the one that could get you in those markets. Let’s switch gears to your exit.

In 2010 you went public on the New York Stock Exchange – what made you want to IPO?

VOLCHEK: I would say there was one step before that, sort of a partial exit. In 2008 we sold a third of the company to a private equity firm called Lightyear Capital. That sort of put us on the path to eventually go public in order to create liquidity for them and for all our shareholders. So 2008 allowed us to provide some liquidity to early shareholders, and we had been in business for 8 years at that point.

Then in 2010, an IPO was not really an exit event because we only sold about 20 percent of the company’s capital structure, of the issued shares. Our IPO was all secondary shares because we didn’t need primary capital as the company was generating in excess of $50 million of EBITDA. Hence, we really used the IPO as a way to create liquidity, to create a market for our shares, but it wasn’t really an exit. It takes years through an IPO after all the lockups, sale restrictions and other things to allow management or board shareholders to sell post-IPO.

What’s needed for a startup to IPO?

VASYLYK: What is needed for the company to go public? Can any company do it?

VOLCHEK: Back then in 2010, the guideline was to have over $100 million in revenue. We were significantly above that, very profitable and the goal was to get a billion-dollar market cap. Otherwise, it’s sort of subscale.

I think today that has actually moved even further out. Nowadays, companies that want to go public really want to have two or three billion market cap to make it worth the cost of going and being public. And there’s a lot of hard and soft costs associated with being a public company. There are lots of technical listing requirements like audits and SOX compliance and other things. As an entrepreneur, I would think of whether my company is approaching a billion-dollar value or more before even thinking about an IPO.

VASYLYK: Nowadays, we see fewer startups go the IPO route than they did 10 years ago. Do you feel that it’s because guidelines that got stricter or are there other reasons?

VOLCHEK:I do think it’s because the cost of being public has gone up. As a result, people’s expectations of the size of the company have moved up. Technically, you can be public at a $50 million valuation. There are all kinds of pink sheets and over-the-counter trading.

But if you want to be a fully-listed public company with institutional research coverage, that kind of follows those guidelines I talked about. I think companies are taking alternative routes of selling their shares to private equity firms. As you know, there’s lots of private equity money out there looking for great profitable companies. That’s an alternative that often creates a lot less risk and costs after the exit.

That’s an alternative that more and more companies have pursued.

Running a public company vs a private company

VASYLYK: Nowadays, VC funds and funding rounds got much larger, so companies can raise massive rounds without having to go public and avoid some of the downsides of being a public company.

What are some of the things that are different about running a public company than a private one?

VOLCHEK: The biggest issue I would say is just too much focus on quarters, quarterly reporting, quarterly numbers. In terms of communication, it’s much more important to restrict certain data to make sure it doesn’t get out too early to the public, which means often restricting information from your employees. There’s a lot of costs associated with public company insurance.

There are also time costs for the management to meet with public company shareholders or go to public company conferences. Some companies decide not to do some of that stuff, but then you’re giving up the advantage of being public and getting to a reasonable stock price and reasonable float in trading of your shares. So that time cost and the communications friction is something to be considered by every public company aside from the hard costs.

For our company, it was probably a million dollars of hard costs just between insurance, audits, and filings and all kinds of other things you have to do as a public company. The soft costs can run you in the millions in terms of management time, management distraction and issues around internal communications.

Going back private after being a public company

VASYLYK: You’ve got a pretty interesting experience because you went from a private company to a public company and then you went back private – you got acquired by Blackboard in 2016 for somewhere around $250 million.

What was it like to go back to a private company after being public?

VOLCHEK: Let me step back a little bit and talk about that. I left my full-time role in 2014. Thus, I was the CEO of a public company. In 2014 we decided that we were just subscale, our market cap has a sort of fluctuated around $600 million when we went public. We peaked a little bit over a $1 billion. Then, given the regulatory environment and some of our partner bank issues, we essentially saw a decline in our market cap. Hence, we decided that the best strategy for the company to maximize value for shareholders would be to split the company into three parts.

Therefore, starting in 2014, as a board we decided to do a 3-step go-private transaction. I decided to leave my full-time role as I burned out over 15 years, so I just stayed on the board. We hired an interim CEO for that two-year period in order to do that three-step transaction and split the company. The first part of the company was sold to Leeds Equity, the second part of the company was sold to Customers Bank, and the third part was ultimately sold to Blackboard in a two-year span, starting in 2015 through 2016.

I stood on the board throughout that period. Then in 2016, once the last of those three transactions was complete, the company was essentially dissolved. That last piece became a part of Blackboard and my role with the company was complete.

Fundraising advice from a founder turned VC

VASYLYK: So you left the company and you went to the other side, so to speak – you started your own venture capital firm called Las Olas.

When you were a founder, running Higher One, you raised capital from angels, from venture capitalists, and from the public. Now you sit on the other side of the table as a VC, what sort of things do you wish you knew as a founder about raising capital that you know now?

VOLCHEK: That’s a great question. It’s actually really exciting to be on the investing side.

Even though we really feel like starting a venture capital firm, we’re running it just like a startup. We had to raise capital for the fund and recruit employees, we had to do a lot of the things you would do when starting a company. We also run our venture capital fund like a company, we think of founders as customers and think of investors in some ways as customers. We run it a little bit different than many venture capital firms, in that we track our marketing budgets and where our leads come from for inbound deals. We do a lot of things like we would for a tech startup.

That said, it’s essential for founders to know what investors are looking for. And certainly now, being on the investor side, we’re really looking for companies where the management team seems to really be working and executing. The number one thing to prove is that you can set yourself goals and you actually hit them.

I believe, thinking back to the Higher One days, it’s one of the things we had done maybe naively, without knowing exactly what we were doing, is setting annual financial and other strategic goals. And when we would hit them, we would go back to investors and say “listen, here were our five goals for the year, we hit all five and we need more money.” And that’s how we were able to raise more money every year during the Higher One days.

That’s really what we look for in some ways as well. We focus on B2B companies, so the ones that sell their products to enterprise to business. We look for repeatability – management teams that have a sales process, that have product/market fit and can show that they’re executing and have high retention of customers, success on the sales side and a product that’s not obvious (so, somewhat defensible) but one that people are willing to pay for and stick with. That’s kind of what we look for and that’s our thesis.

I think all VCs look for management teams that can execute, can actually fulfill their plan because that’s the bottom line, that is what makes a business successful.

Finding great startups in non-obvious places

VASYLYK: A part of your investment thesis at Las Olas is “investing in extraordinary people who are building the future in non-obvious places.” What are some non-obvious places that you guys look for? Like, what are non-obvious places in general to you – is it a geographical or some other factor?

VOLCHEK: To us, it’s mostly geographical. I’ll talk about what else it means in a second, but geographically we believe there are really smart people outside of New York, Boston and Silicon Valley. We noticed that there are lots of opportunities and actually under-invested opportunities in the Southeast, for example. We’ve made a few investments in Florida, Atlanta and in Memphis. They’re really smart people in non-obvious geographies but also non-obvious sort of industries. Generally what we find are founders who are really smart and know some industry better than the average person.

Often, when we look at a business, we’re like “we didn’t even know this was a problem!” But, obviously, if you’re inside that industry you start understanding that there really is a problem. One of the areas we focused on has been DevOps, which are tools relevant for developers. And not being a developer, I often don’t even know the exact problem that a developer might have. That’s where meeting the right teams and extraordinary people who have sort of a product or solution in a non-obvious place. Again that’s geography or industry or sector. It’s really where we want to invest, because when something is obvious either by geography or sector or solution, then it becomes a sort of a war of who can raise more money and who can spend more money on marketing.

That’s not really what we want to invest in. We want to invest in great companies and great people where we’re winning thanks to a non-obvious product that’s just better and a better team that can outcompete the other folks. We don’t want to be in a race of who can spend more money as we are not a big enough fund to play that game. Certainly many in Silicon Valley play that but that’s not the kind of what we invest in.

VASYLYK: I can definitely resonate with a point that you mentioned about investing in founders that are solving a personal problem that they personally have. I think these kinds of founders are not only able to identify certain problems within a market better but as well as they’re able to reach product/market fit sooner, because they presumably know the market better and who the target customers is, since at the end of the day they are potentially the customers of their own product.

At Las Olas, is there a particular stage that you guys focus on?

VOLCHEK: We generally like to invest at the seed stage and that can mean lots of different things for different people. For us, it’s a company that’s reached early product/market fit, generally evidenced by paying customers. But that can manifest itself in many different ways. Our perfect company would be someone with maybe a million dollars run rate, probably with 12 or 15 enterprise clients paying and using the product. Perhaps, they only have one or two salespeople today and want to scale the sales team and are looking for a partner with capital and expertise to help with that.

That said, we’ve also invested in a few pre-revenue companies that have lots of users though,so there’s a product/market fit but maybe they haven’t been able to monetize yet. One example is Cypress, where they have really started from being an open-source freeware-type solution and had thousands and thousands of developers using their products. They were raising capital to add sort of an enterprise layer on top that would be a paid service. They did that very successfully and we’re very excited to be a part of that, having invested right before they started the monetization.

I’d say seed is pretty great to us as we want to see a proven product/market fit. But it’s exact meaning really depends on each company and the go-to-market strategy they have.

That’s actually one of the areas where we’ve spent a lot of time looking at these sort of bottom-up go-to-market strategies and different approaches rather than just doing everything as enterprise sales. Some companies have the great opportunity to sort of let end-users start experiencing the product before they actually start making those enterprise sales. And that’s kind of a different go-to-market strategy that we’ve been spending a lot of time on.

How to approach investors as a startup founder

VASYLYK: For founders that are looking to raise capital, often times the hardest thing can be simply getting a foot in the door and getting those first VC meetings.  As an investor yourself, how do you like to be approached?

VOLCHEK: We look at all the opportunities that come inbound. The easiest way is to go through our website which is lasolasvc.com and we have a way to contact us through the website. The other way to approach us is to get an introduction through one of your early angel investors. What we found out that when things get curated, most of the companies we invest in have raised the previous kind of pre-seed or friends and family round. Getting an intro from one of your very early angel investors is often better. That helps to filter things and spend more time on deals that come through our trusted sources.

But we do look at all opportunities and all emails that we get inbound so we’re happy to get things directly through our website and look at those as well. An important thing about the right stage and the right way to approach us is being really upfront about your current stage, where are you in terms of traction, market fit and team. If you are too early we love to stay in touch with founders and entrepreneurs, give them some advice or point them in the right direction. But it’s crucial to give us that information right upfront so that we can assess what the right approach is.

VASYLYK: I’ll make sure that the link to the website is in the show notes so founders know where to find you.

Mark, I want to thank you very much for being on the show. It was great to have you on.

VOLCHEK: Great! Thank you Andrew, I really appreciate it.

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