Modern corporations need to immediately understand who they are engaging with before any exchange of goods and services can take place. While there are regulations for businesses in how they handle consumer data for verification purposes, the equivalent protections for businesses do not currently exist. Kyle Mack, 29, and Kurt Ruppel, 34, realized there was an opportunity to have a massive impact on B2B commerce and created Middesk. Middesk is a business verification startup that aggregates relevant and up-to-date identifying information about companies that other corporations can reference quickly to understand who their prospective customers are. Accel's Rich Wong led the $4M seed round, with participation from Sequoia Capital and Y Combinator.
Wong says, "We [at Accel] look for authentic founders in the spaces that we invest. These types of individuals have lived the problem they are trying to solve. They have proven there is a large business around addressing this pain point. Most importantly, the founders we look to partner with show a deep understanding of the nature of the problem. Kyle and Kurt were able to demonstrate these qualities we look for in founders, which drove our investment in their startup."
Chief Executive Officer (CEO) Mack and Chief Technology Officer (CTO) Ruppel have had first-hand experience grappling with problems in the identity verification space given their time at Checkr. Checkr (YC S14 batch) is a startup that leverages artificial intelligence (AI) and machine learning (ML) to generate background checks on a company's prospective candidate automatically. Mack had to deal with the friction and bottlenecks of manually verifying that the businesses they were working with were legitimate. Checkr had internal requirements as well as government regulations to comply with to know their customers. The Fair Credit Reporting Act (FCRA), passed by Congress in 1970, is an important piece of legislation that "regulates the collection, dissemination, and use of consumer information."
FCRA is one of the primary data protection laws enforced by the Federal Trade Commission and the Consumer Financial Protection Bureau to regulate consumer reporting agencies. FCRA's statement of purpose, as defined in Title 15 of the United States Code Section 1681, is two-fold. One, consumer reporting agencies such as Checkr must "maintain reasonable procedures for meeting the needs of commerce…in a manner which is fair and equitable to the consumer." Second, they must ensure the "accuracy and fairness of credit reporting."
The combination of Checkr's internal requirements and compliance with FCRA made the challenge of automatically generating background checks turn into a tractable problem. These requirements and regulations led to standardized practices on aggregating, updating, and maintaining the data needed to perform background checks fairly and transparently. Ruppel and Mack understood that data protection laws shaped how the data they needed was stored and made accessible.
Mack says, "Since businesses do not receive those same consumer protections, data products in this space are commonly incomplete or report data that can be many months stale."
The two founders' realization of this fact drove their creation of Middesk to capitalize on the massive, lucrative market opportunity that stemmed from the absence of high-quality data products focused on business identity.
Directly estimating the size of the business verification market is challenging due to a lack of available data and market research. However, the personal identification and background check market can serve as a useful proxy of Middesk's target market. The foundation upon which identity verification exists rests on Hank Asher's shoulders, the man Business Wire called "the father of data fusion." Asher was one of the first individuals in the 1990s to aggregate data about the relationships between companies and individuals across a myriad number of electronic databases. His work was the forerunner of the modern background checking industry.
Today, the global market for identity verification is estimated to be roughly $20 billion, according to McKinsey & Company's Fuel Team. Also, the management consulting firm's Global Institute reports that the potential value the U.S. could accrue by adopting advanced digital ID services is $995 billion by 2030. More importantly, businesses that rely on these digital ID services to verify their customers (both individuals and companies alike) could receive roughly ~50% of the nearly $1 trillion in additional economic value.
Wong, providing additional context around the industry, says, "Looking at the bigger picture, a couple of decades ago, only a small part of the world's GDP was transacted digitally. Most of these transactions were facilitated using Electronic Data Interchange (EDI) software, which has been around since the 1970s. As more transactions are occurring digitally, as opposed to physically, businesses must understand who they are transacting with to comply with modern financial regulatory standards. Studies show that financial systems built on a foundation of trust and the rule of law facilitate GDP growth. Middesk's focus on creating "frictionless trust" between businesses will accelerate global GDP growth and create more economic opportunities for the next generation of modern corporations."
Middesk has created the machine learning infrastructure to accelerate onboarding, minimize risk, and increase efficiency for businesses using their products, and counts Plaid and Checkr as early customers. Their target customers also include those businesses involved in lending, payment processing, commercial banking, and credit card companies. With each product, there is a human-in-the-loop to help assist Middesk's clients. The Middesk employees involved in the operation of these products also serve as a manual safeguard in ensuring every report produced is accurate and up-to-date. Identity is a set of Middesk's identification tools to help their clients quickly understand a clear picture of the company they engaged with to ensure compliance with the relevant regulations governing their commerce. Middesk's True Industry product gives the startup's customers a clear view of the nature of the industry of their clients' partners.
True Industry is essential to the startup’s clients given the inadequate existing North American Industry Classification System (NAICS). NAICS classifies businesses based on their type of economic activity. Also, the lack of unique business identifiers across states results in the difficulty in verifying a company to be legitimate or not. The founders have built their products using a unique, standardized taxonomy of the data. Their taxonomy is reflective of the criteria used to build Identity and True Industry, which is access to the most recent files and documentation of a corporation, coverage of companies in their earliest stages, and sourced data from the high-quality repositories of business identity information. Therefore, developers who use their platform can be assured of the consistency of how the data has been classified and organized. More importantly, Middesk has built-in business logic that allows users to integrate the startup's products into their established workflow seamlessly. The business and technical expertise needed to help companies to understand who they are working with can be found in Mack's and Ruppel's partnership as cofounders.
Mack and Ruppel present a compelling case as to why these two are the team to solve such a seemingly complicated, intractable problem. Mack has a long history of successful sales experience at AnyPerk (YC W12 batch) and Checkr before starting Middesk. Ruppel has nearly a decade of software engineering experience, including stints at Zendesk and Checkr, the latter where he met Mack. Now, they are building a world-class team to provide better solutions for business verification and credentialing needs.
Mack states, "We're looking for people who want to stretch beyond their comfort zone, learn how companies are built, and directly impact company strategy, vision, and mission. We have challenging problems, an entrepreneurial team, great early customers, a strong product, top-tier investors, and an opportunity to impact the way businesses interact with one another fundamentally."
Building on top of the foundation Asher laid, Mack and Ruppel of Middesk are building a verified future for B2B commerce.
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