Dr. Eyal Kishon, co-founder of Israeli based venture capital firm Genesis Partners, had a very personal reason for investing in Riskified, a startup that fights fraud for e-commerce sites. He kept getting rejected when he’d try to buy things online. Merchants would occasionally flag him as a “risky” purchase — perhaps because he lived in Israel and American stores can’t fact-check international addresses through the Address Verification System (AVS).
Israeli startup Riskified, which recently raised a $1.65 million seed round, thinks its “semantic risk engine” is the answer. The technology builds a story around the shopper that ties together two types of information — the transaction information (where the person’s shipping address and billing address are, what proxy server they’re hiding behind, etc) and publicly available information about the person online. That way, they can more accurately predict which online shoppers are fraudsters and which are legitimate.
For example, if someone claims to live in Dubai, even though their billing address is in Vietnam, Riskified can determine where the person placing the order is actually located, and then compare that to the person’s social Internet trail to see whether their story adds up. Does the person say they belong to a certain company, and that company just moved from Dubai to Vietnam?
It sounds like a lot of data to analyze, but Riskified trusts in their risk engine enough to insure customer purchases. Merchants hand over risky decisions to the company, and it gives them a big green thumbs up or a red thumbs down. If Riskified was wrong, and the purchase is fraudulent, then it foots the bill.
The startup says it makes few mistakes. For some merchants, Riskified processes all of their international transactions, and co-founder Eido Gal says that in these cases, the startup is wrong about whether a charge is fraudulent one in a thousand times. For other merchants, Riskified only processes their highest risk orders – the ones that are flagged because they’re most likely to be fraudulent. With those orders, the startup is wrong one in two hundred times.
Riskified makes its money by taking a certain percentage off the sale — ranging from 2.4 – 4.9 percent. The number varies according to whether it’s processing all of that merchant’s international transactions, or only the most high risk ones. The business model seems to be a win-win for everyone. The merchants get to make 95 percent of the money or more on transactions they’d otherwise decline outright, and Riskified is right often enough that its founders say they make a profit even with their money-back fraud guarantee.
As e-commerce gets increasingly global, merchants are declining 5 percent of all transactions due to fear of fraud (see Visa’s 13th annual CyberSource: 2012 Online Fraud Report). Based on his own prior experiences working for PayPal, Fraud Sciences, and Bill Guard, Riskified co-founder Eido Gal estimates that three quarters of these declined transactions are valid purchases.
Investor Kishon agrees that the market for a service like Riskified is ripe, and his firm Genesis Partners led Riskified’s $1.65 M seed funding round. The other investment firms on board include Formation 8, Founder Collective, Entree Capital in Tel Aviv, T5 Capital, and The Accelerator Group. Kishon says that Genesis Partners footed most of the seed funding bill, and he brought on the other investment firms to act as advisors for Riskified.