Tech

Toast has built a $ 30 billion business by competing with Silicon Valley venture capital

Chris Comparato, CEO of Inc. IPO, Toast, New York Stock Exchange, September 22, 2021.

Source: NYSE

Shortly after selling software company Endeca to Oracle for more than $ 1 billion in 2011, Steve Papa called Bessemer Venture Partners with a hot chip. He said three of his best engineers are working on new things that would make Bessemer, who had previously backed Endeca, obsessed with not funding.

Kent Bennett, a junior associate on a contract with Endeca, called. He told Dad that there was free space available to his people in the Boston company office. However, Bennett knew that one of the largest and most successful companies in the venture industry couldn’t write a check to three engineers on an unspecified project.

“I said,’Well, send them here, and they can hang out here until they understand it,'” Bennett recalled his conversation with Daddy on CNBC. I told you.

The three guys and some office space eventually became toast. Toast closed the day with a market capitalization of over $ 31 billion, providing software and hardware to a restaurant that debuted on the New York Stock Exchange on Wednesday. (Since then, it has fallen to $ 28 billion.) The three co-founders (Steve Fredette, Amannaran and Jonathan Grim) are millionaires and continue to be the company’s top executives.

Fredette, Naran, and Grimm currently have about 2,200 colleagues. They call them toasters.

Bessemer eventually invested in Toast in 2015, with Bennett joining the board. However, it is one of the largest holders, holding more than 12% stake, but if Bessemer had previously jumped in, the earnings would have been much higher.

Bennett told one of his partners that he made a “major mistake” by passing. It wasn’t just Bessemer. Venture capitalists didn’t want to have anything to do with the restaurant industry, which is famous for its low margins and tight budgets.

So in early 2013, Dad filled the first gap by investing $ 500,000 in his money in fellow startups.

“I said,’Everyone, it’s not my space, but you helped me succeed, and I owe it to you,'” said Daddy, who was on the toast board until recently. Said in an interview after the IPO. “I was going to help them no matter what. In this case, it meant the capital to move them. Did we understand the shape of it then? No.”

Daddy’s investment today can be measured in billions. As of the end of Friday, his 12% stake in Toast is worth $ 3.1 billion accumulated from initial investment and subsequent financing. After investing over $ 100 million in 2015-early 2020, he has slightly less control than Bessemer, who owns $ 3.3 billion in toast stock.

There is no “West Coast crime”

The origin story of a startup is part of the structure of the technology industry. Apple and Google started famous in the Silicon Valley garage, and Facebook was built by the boy mysterious Harvard dropout. PayPal came together through a nasty collaboration between Elon Musk and Peter Thiel and included an exhaustive list of other $ 1 billion building engineers. -Dollar company.

The story of Silicon Valley is becoming more and more stereotyped thanks to programs such as Y Combinator, which has turned into a unicorn factory in the last decade. Startup incubators help the birth of Dropbox, Airbnb, Stripe, DoorDash, Coinbase, and Instacart, and serve as a direct path to meetings with top venture capitalist companies.

Toast was born on the other side of the country and away from the world. The founder lived in the Boston area and had no plans to leave. Boston used to be a venture hub, but the momentum moved to Silicon Valley, where all the big exits were open. Bessemer has offices in both locations.

Daddy said a Bay Area VC was interested in the toast pitch but didn’t want to fly.

Toast’s president, Fredette, said the company’s East Coast roots could ultimately be advantageous because it could be “a little unconstrained by the traditional wisdom of growth, growth, and growth.”

“We were talking about the West Coast crime, which was a hype to the entity,” Fredette said in an interview with the New York Stock Exchange on Wednesday. “The East Coast will be substantive at first and not enough hype.”

The founders sprinkled a healthy amount of naive. Fredette said he and Chief Operating Officer Naran would often discuss each other at investor meetings because they were unfamiliar with financing and business in general.

The original idea of ​​toast came from all the time Fredette, Naran and Grimm spent figuring out what to make at Boston’s bars, cafes and restaurants. One day, after a particularly long check wait, I thought I found a problem that could be solved by paying the check from my smartphone. All you need is technology.

They developed the app and released it in 2012 at Firebrand Saints, a frequently visited bar in Cambridge. The app provided customers with a way to start tabs at restaurants and link their credit cards.

“We often went there to get burgers and beer after work,” Fredette said.

As they slowly expanded in the area, they signed up for the Cambridge cafe Dwelltime.

So Bennett demonstrated the product. The transaction is complete. Still, Bennett was afraid to invest in companies looking to acquire existing point-of-sale vendors such as Micros and NCR, which Oracle acquired for $ 5.3 billion in 2014.

“It sounded like a suicide mission to me,” Bennett said, recalling that he told the founder that it would take five years to make something feasible. “These legacy systems were old and painful, but they had 50,000 features in a very complex roadmap.”

Meanwhile, Dad quickly flew around the country, landing new commerce and trying to help recruit talent.

One of the places he didn’t go is the Bay Area.

“We deliberately chose not to have personnel in Silicon Valley,” Papa said. He said they could “continue to arrogantly reject it” unless potential competitors saw the product in action.

Instead, Dad was traveling to places like Grand Rapids, Michigan. Michigan has a 124-year-old company called Gordon Food Service. Gordon distributed food to restaurants across the country and became an important distribution partner for toast.

“We focused on the middle of a country that was mostly overlooked,” Papa said.

Toast has rapidly evolved from a relatively simple mobile app in Firebrand Saints and several other spots to a more complete back-end restaurant system that uses an Android tablet as a device. At the time, the iPad was a much better product and was used by vibrant start-ups like Revel Systems.

Toast chose Google’s open source Android technology. This allowed the company to design their own hardware and customize their software without being limited to Apple’s closed system.

Toast POS system

toast

By late 2015, Toast had up to 170 employees, generated millions of dollars, and had 75 Mexican-themed chains such as Costa Vida and 40 Beach Hut Deli in the west. Used in thousands of restaurants. The coast. Another Endeka alum, Chris Comparato, has just joined as CEO.

At that time, Bessemer finally plummeted, leading a $ 30 million round with a valuation of about $ 100 million with Google’s venture division. Bennett said the big move that changed his mind was the push to pay for toast. As a complete point-of-sale vendor that reduced all transactions on the system, Toast finally has a volume business with a consistent and profitable source of revenue.

They used margins from payment processing to support software development, and the business model clearly worked, Bennett said. In a memo to the company in December 2015, Bennett said, “We are anxiously waiting as the team clearly fits the product market but was keen to raise more shares. I wrote.

To get on the cap table, Bennett had a monthly supper with the founder trying to persuade them to take Bessemer’s money. He also recalled telling the company’s mentor, Ferda Hardimon, “I think this will be the biggest business Boston has ever seen.”

Daddy made the same statement as he tried to seduce investors. In a June 2015 presentation, he said in one slide that the toast could “become the next Uber or Airbnb worth billions of dollars” and “build an exit of over $ 10 billion.” There is a possibility. “

“Many people put such things on slides to be fair to VCs,” Papa said. “We have a survivorship bias.”

Bessemer was very bullish, but he didn’t expect toast to be this valuable. In Bennett’s memo, he showed the potential results and the amount the company would receive in each case. The off-the-chart “Just Gonuts” scenario creates $ 8.3 billion in enterprises and brings $ 700 million in profits to Bessemer.

“Oh my god, we’ll lose it.”

The growth trajectory of toast over the next four years has been so dramatic that in February 2020 the company raised $ 400 million at a valuation of $ 5 billion. Annual revenues have risen to $ 665 million, primarily from transaction fees paid. Backed by a decade of bullish markets in the tech industry, Toast featured an astronomical reputation across the enterprise.

Almost everything collapsed a month after that megafinance round.

The Covid-19 pandemic instantly revealed the obvious risk of toast. Dependence on a single industry. As the infection spread rapidly, restaurants across the country plummeted by 80% in March, disrupting the toast business.

Cash declined rapidly and Toast was forced to cut about 50% of its workforce in April, cutting about 1,300 jobs.

“We find that we are in an enviable position to reduce headcount because we have limited visibility into how fast the industry will recover and we are facing slower-than-expected growth,” Comparato said. I wrote in a blog post that announced the reduction of personnel.

At the board level, there was a panic.

“I soon said I was burning a lot of capital and would go out of business if I didn’t do anything right now,” Bennett said. “I remember going every day thinking,’Oh my god, we’ll lose it.'”

Even more shocking was the speed of the rebound.

The restaurant has reopened the door to takeaway and outdoor dining and introduced a range of new technologies that enable contactless and mobile payments.

Toast’s point-of-sale system has been extended to include inventory management, payroll management, and menu controls in multiple locations. All of this helped simplify the manager’s job. But what the restaurant really needed was a takeaway app that synced with the existing system and a way for eaters and waiters to limit contact.

So they asked Toast for new products such as take-out curbside notifications, flat-rate shipping, and mobile software that enables orders and payments from devices.

By the third quarter, revenues were up again from the previous year. And for 2020 as a whole, sales increased by more than 20% to $ 823.1 million. Personnel are back to pre-Covid levels.

Bennett said toast became a consumer brand during the pandemic. He knows because his friend started talking to him about his experience in a restaurant using mobile payments with the toast logo.

Toast mobile payment

toast

“This year, I’ve probably received three dozen texts from friends like’This is your T-shirt bread’,” Bennett said.

It’s an exact idea that inspired the founders eight years ago, long before the technology to make it work. “We were too early,” Naran said Wednesday, and the company “completely circled.”

Even Bennett is surprised that many restaurants now use it.

After a recent meal at Pummy’s in Cambridge, Bennett waited for a while for the check to arrive. After finally paying with the card, he noticed the QR code on the receipt. If he had scanned it, a toast payment option would have appeared on his phone.

“It would have driven me out of it sooner,” he said.

Daddy also hears from friends, including those who couldn’t have imagined that the restaurant technology startup he seeded almost 10 years ago was worth nearly $ 30 billion.

A friend sent him an email on Thursday. “But I don’t remember you mentioning a pandemic. Anyway, it’s a pretty success story.”

look: NYSE debuts toast and AKA brand

Toast has built a $ 30 billion business by competing with Silicon Valley venture capital

Source link Toast has built a $ 30 billion business by competing with Silicon Valley venture capital

Back to top button