A question was asked on Quora regarding Venmo, the payments startup that was acquired lately by BrainTree.

I’m re-posting my answer here.

The details of the question are not completely correct. Venmo is actually a textbook example of why payments startups fail despite having a smart team.

For starters, Venmo never catered for a large enough crowd and never found product-market fit. Although it is a neatly designed mobile experience, p2p payments and purchase sharing were never big drivers for adoption, since they don’t solve a real problem (p2p solves a problem but that specific market share is tiny and consumers oppose paying fees). Other statups (blippy, swipely) demonstrated that consumers aren’t overly interested in sharing their purchases. So although some people liked Venmo, it was not enough to cross the boundary of hardcore early adopters. This is a common misconception with payment startups – they invent a new type of experience that some people like, get a group of hardcore fans, but never expand to mainstream. A new experience isn’t really reason to move in payments; just handing over your card is fine.

The second point is distribution and money. Venmo built a FB-based experience but didn’t figure out virality, contrary to what the OP states. The sign-up-and-add-credit-card setup that worked for PayPal worked because they had eBay as a distribution mechanism and still they had to pay $10-20 per user, raising a ton of money in the process (PayPal lost $209 Million before becoming profitable). Venmo didn’t have that distribution and therefore did not reach the right scale for the extra fees they charged over CC fees to cover their cost base. That was evident by their move a few months ago to charging fees for CC purchases but not for direct bank transfers.

Bottom line, Venmo has smart founders and a good team; they started a company and got acquired for an amount that I hope made investors even. That may not be a success, but I’m sure they know so much more now – and if I had to launch a payments product in the US I’d love to have some of them on my team.

Read Quote of Ohad Samet’s answer to Venmo: Why wasn’t Venmo more mainstream? on Quora