Dwolla raises $5 million, stays in Des Moines

Dwolla founder Ben Milne heard the question more than once while crossing the country pitching his tech startup to potential investors: Will you move the company from Iowa?

Milne said no. While he acknowledges his defense of Des Moines might have cost his company money, the 30-year-old entrepreneur says finding a good match for the company was more important to him.

“We were told more than once, ‘This is a tough one for us because of where you are (located),’ ” he said. “But it’s good to grow a company where it is; why would you want to move that? If an investor wants to take that away, it’s not a good investor at all and not someone you should let invest in your company.”

Dwolla will announce today that it has raised $5 million in a second round of fundraising, known as Series B funding. The money will help the company bolster product development and the technology that supports its mobile payment services. This means more products could be on the way and the service can be built to handle a larger volume of transactions as its user base grows.

Dwolla allows users to use a mobile phone to transfer money and buy goods and services, and it allows merchants to avoid credit card fees.

Company leaders insist they will grow within Des Moines. They signed a multiyear lease Monday that moves them from the Midland Building on downtown’s “Silicon Sixth Avenue” to larger offices a half-block away at the Wells Fargo Financial Center. The company employs about 20 people, and Milne said they hope to double that within the next year.

The company’s $1 million first round of investments came from two Iowa-based financial institutions. All of the new money this round comes from outside of Iowa, led by Union Square Ventures. The New York City-based firm has invested in tech heavyweights Foursquare and Twitter.

Union Square partner Albert Wegner will join Dwolla’s board of directors. Los Angeles-based Paige Craig of Betterworks, Pennsylvania’s Artist and Instigators and New York’s Village Ventures and Thrive Capital round out the list of investors to be announced today.

“I don’t remember the last time an Iowa company got a syndicate with those kinds of names,” DeWaay Investment Banking managing director Adam Claypool said. “It shows investors that a company in the state of Iowa can produce a top-quality management team to attract these kinds of venture investors. It tells me they have made a lot of progress in a short amount of time.”

Milne founded Dwolla in 2008 and launched the service nationally in late 2010. The company says it moves between $30 million and $50 million per month in transactions from its 80,000 individual accounts and 7,500 merchant accounts. Dwolla grew out of Milne’s frustration at credit card fees, and his goal has been to simplify those fees and make transactions safer.

Milne said the lead partnership between Dwolla and Union Square almost fizzled thanks to what Milne called a “philosophical disagreement” he declined to discuss.

“Any time you are looking at doing a business deal or partnership, there are always going to be disconnects,” Milne said. “Albert and me, we had a strong disconnect. I misunderstood what he was saying and said, ‘It’s a dead deal.’ ”

But Wegner saw the potential in Dwolla and wanted to fix the relationship. He reached out and before Milne could respond, he boarded a flight from New York to Des Moines. Wegner said it was important that he meet Milne face to face.

“Misunderstandings without a history of knowing each other are difficult to overcome by phone or email,” Wegner said. “I felt that an in-person trip was the right way to build trust.”

Union Square has a portfolio of heavy tech hitters. Along with Foursquare and Twitter, the firm has invested in social gaming leader Zynga, entertainment social network GetGlue and online craft market giant Etsy. Wegner said he sees similarities between the early trajectory of Dwolla and some of his firm’s other investments.

“We really like the level of engagement among Dwolla’s early adopters, especially in Iowa,” Wegner said. “It reminds us of other companies that seem to have struck some kind of nerve with people, such as Etsy.”

Village Ventures has built a close relationship with Iowa’s Fund of Funds, which seeks national venture capital funds to invest money in Iowa. The fund invested $5 million in Village Ventures in October 2007. Matt Harris of Village Ventures said the timing for Dwolla’s rise could prop up the rest of the Iowa tech community.

“I think this is a real moment in Des Moines, and Iowa more broadly,” Harris said. “The way the community has embraced Dwolla’s success, and Dwolla has, in turn, focused attention on the community, has led to a virtuous feedback loop. ”