Archive | September, 2016

Why Payments Companies Should Eventually Buy All Meaningful POS Companies

20 Sep

People seem to forget just how important data is in today’s world. Google, a $550B advertising company, is a data company. Facebook, a $350B social network, is a data company. Amazon, an ecommerce juggernaut pounding retailers, is a $350B data company. Companies that aren’t data companies at their core desperately want to be - and for good reason.

Tomorrow’s currency is data. Smart companies are now repositioning business models to capture and make use of data instead of billing customers for the main offering. I’ve never given a dollar to Google or Facebook directly but I’ve undoubtedly made them thousands of dollars over the years.

The market is rewarding such thinking in both revenues and revenue multiples. Below is a graphic of the largest companies over the past 15 years. Notice a trend?

There’s a LOT of data produced in the physical world but hardly any of it is put to use. Mostly it’s because the market is focused on other things. From the merchant’s perspective, there are 1,000 fires to put out on a daily basis. Business owners set-up-shop to offer goods and services to customers, not analyze data.

Parties that serve merchants have been focused on endeavors that bear the most revenue. POS and payments companies traditionally saw more money from non-data services, so data was merely a distraction. We’ve seen some of this starting to change…

  1. Merchants are becoming more comfortable using data to better manage their operations. Tech startups are showing merchants what’s possible with improved data analysis and the serious impacts it has on top and bottom lines. In the next decade business owners will have grown up using technology backed by data and will expect much more sophistication from their providers.
  2. POS companies are offering more reporting and “above store” features than they have previously. Investing development resources into data tools, even if rudimentary, has become table stakes.
  3. Processors have started monetizing aggregate payments data. Processing revenues are falling as competing acquirers beat each other up on basis points and new sources of revenue are being looked at more closely than before.

For the markets to wake up and prioritize data revenues, we’re going to need the right ingredients merging.

First, POS will need to continue its commoditized decline. POS prices should continue falling for the next few years as they follow in the footsteps of the payment acquiring business. With more US acquirers building/buying/partnering to offer a POS solution, you’ll see processing revenues offsetting would-be POS revenues, undercutting market prices. Continued downward pressure will be exerted by lower POS software development costs and falling hardware costs.

Second, as stand-alone POS companies can no longer make much margin, the smart ones will seek other revenue streams. Since cloud POS is making item level SKU (stock keeping unit) data available from one API for all of its merchants – a serious problem for non-cloud, local-server POS systems – these companies will be the first to benefit from the data transition.

Assuming enough item level data can be cobbled together (a very non-trivial problem in the fragmented world of brick and mortar outside grocery), the cloud POS companies will start tapping into the large co-op marketing budgets we’ve discussed previously. But they won’t get to billions in new revenue over night.

The data revenue will start at the lowest level of data: syndicated data. Syndicated data delivers aggregate insights across market swaths. For example, syndicated data would tell you that product A sold more than product B last month. Further filters on syndicated data could show you things like what geographies product A performed best in, and at what prices.

As POS companies start to discover that data must be cleaned and organized to grow in value, you’ll see POS product development changes that force merchants to more uniformly code things like discounts and promotion. You might even see heavy standardization of menu items from drop down lists, so merchants don’t have the opportunity to misspell “pizza” for instance. From here, the value of syndicated data increases another notch: can you analyze discounts and promotions to determine if they’re creating lift on item sales?

This cycle will continue as more item level data comes into the syndicated data pool and cleaner data attributes are added to transactions. Even if legacy POS companies do not make the necessary updates to survive, cloud POS providers will continue to grow market share and add data. At some point, however, the syndicated data market will reach its maximal value. At that juncture, customer data must be added to continue climbing the revenue ladder- data that POS companies have neglected to collect. Here’s how that happened.

In our humble opinion, PCI compliance is a masterful ruse pulled off by the card networks. To “reduce fraud”, the PCI council – which functions like a body of the five mafia families in Visa, Mastercard, Discover, Amex, and JCB – pushed through onerous requirements for cardholder data downstream. In effect, the merchants and the card issuing banks must foot the bill for any fraudulent transactions.

If I may quote a payments colleague, “Enacting PCI compliance standards is like trying to prevent bank robberies by ensuring the tellers are dressed appropriately. My assertion is bolstered by the fact that most breaches have occurred with merchants who were recently deemed PCI compliant.” PCI also has an added side effect of limiting the number of parties who access personally identifiable information (PII) coming from customer card transactions.

POS software developers responded to the PCI guidance (it’s guidance, NOT law) by changing their software to dump all customer card data, in effect removing their software from the scope of PCI. This loosely translates to merchants being out of PCI scope by selecting POS software that has made this product decision (don’t hammer on the details; I’m just sharing a directional overview).

To further this thought, EMV has introduced an additional wrinkle in the customer data chain. Instead of customer names and truncated card numbers appearing, you’ll now see tokens unless you’re fortunate enough to have built your own tokenization scheme – something that only the largest processors could afford. EMV again consolidates data into the hands of the card networks, who have built large data businesses on said data already.

This is where the payments companies will be brought into the data discussion. Since POS companies have not been, and are not currently, collecting PII, they will need to involve the processors (or the card networks) to match transaction timestamps at the merchant check level with timestamps from the processing stream, marrying the two data sets.

I can’t emphasize the importance of joining both data sets to tap into the full potential of co-op advertising budgets. Taking the data separately, here’s what you’re given:

POS Data Stream: SKU Data. Useful for basic syndicated data. Maybe tens of millions in potential revenues at scale, but no POS company will pull this off independently.

Processor/Network PII Data Stream: Customer Names, which can give you Demographic Data. Maybe a few million from low-margin retailers who want to know their customers and where else they’re shopping.

We can think of them graphically like the below.

But married together, the data taps into the high-margin supplier dollars because you’re combining item data (which suppliers care about) with demographic data (which consumer insights marketers care about). Now we’re talking about billions – possibly in the tens – of new revenue over the next decade.

This is much more a function of the amount of data available than the willingness of suppliers to pay for it. In other words, will SKU and PII data be available across enough verticals and geographies at a deep enough level to give advertisers confidence that the data is reflective of the overall market? This is why SKU data is going to have to come from a multitude of POS companies: no one company has enough to grab the big dollars.

The chart below helps us build visuals around the relative opportunity.

When processors are made aware of these opportunities, they will simply buy POS companies. After all, Heartland was able to buy POS companies with 15,000 merchants for nothing more than $20M. That’s a drop in the pocket for payments companies churning out hundreds of millions in annual profits.

Remember, 90% of commerce still happens in the physical world, but lack of sophistication has made tapping that data extremely difficult. When, not if, that changes, there will be all sorts of new Googles, Facebooks and Amazons minted. The payment companies could make sure it’s them.

POS Companies Should Pay Attention to Instacart. But They Won’t.

20 Sep

Instacart was one of Silicon Valley’s catalysts for the on-demand delivery model. It sought to deliver groceries directly where customers wanted them, and they raised nearly $300M at a $2B valuation to do it.

Now, of course, investors are demanding profitability with growth, so much of the on-demand market is in decline. Investor dollars are down, and the startups clinging on are looking for positive unit economics.

Instacart has likewise started focusing on profitability. Apoorva Mehta, their CEO, talked with TechCrunch about how they will reach profitability in 2017. His secret is to focus on a revenue stream that Instacart simply neglected – but we evangelize constantly.

Instacart’s three revenue sources are as follows:

  1. Partnerships with grocery stores to drive them additional traffic
  2. Charging the customer for deliveries
  3. Data advertisements for consumer packaged goods (CPG) suppliers

Instacart has finally stumbled upon the CPG bankroll. Money for market intelligence. Money for advertisements. Money for everything. Because CPG companies have 5-10x the profit margin that retailers do.

At discovering the magnitude of money available – which is currently in the tens of billions – Instacart realizes they could totally change their business model. The money from CPGs could, “decrease costs to the end customer, maybe make it free.”


Let me repeat that. Apoorva is acknowledging that there’s so. much. money. from CPGs that he could make his billion-dollar empire a loss leader to acquire data which he then monetizes. Like Facebook spends billions on a free consumer platform for ad data. Like Google. Like Zenefits. Give the product away for free and monetize the data.

It’s almost as if POS could make the core product free and earn more money in other ways…

Nope, can’t think of any billion-dollar companies doing that.

It Took 30 Years to Go from Cash Register to POS. Going to Cloud POS Will Only Take 5

13 Sep

Brick and mortar industries have never been known as innovative agents pushing boundaries of what’s possible. And why should they: they earn very low margins if they’re lucky, have high rates of failure, experience difficulty finding and attracting quality employees, and see very little economies of scale that other industries – like manufacturing – enjoy.

It’s why few investment dollars chase brick and mortar innovation.

It’s why ivy leaguers work someplace else.

It’s why low quality products continue to exist a full 30 years later.

In the 1970′s the first real pen-and-pad replacement arrived on the market. It was an electronic cash register (ECR), and it coincided with the growth of desktop calculators. By the 1980′s ECRs were given computing guts and useful memories. Systems became faster and more reliable. In the 1990′s register companies started releasing software to work on the Windows operating system.

It’s now 2016. It’s been at least 35 years since the first ECR hit the market. It’s been 25 since point of sale software has been available. Yet it’s speculated that 25% of restaurant operators still use cash registers (we don’t really know because the industry is so damn fragmented nobody can share a good number). Knowing that a POS and the data it generates are integral to running a successful business, how is it that 25+ year old technology is still being used?

There are a few distractions to my point, so let’s get them out of the way.

1. Cash and tax. If you use a cash register, you can avoid paying ungodly sums to the government.

2. Cost. POS was not cheap until Cloud arrived. Asking a merchant to spend $10-20K, plus support, when they only earn $100k/year is a little ridiculous.

3. Something else I haven’t thought of.

The reason there’s been such a slow migration of common-sense operational technology in brick and mortar is because the only entity that’s affected is the business. If the business decides to use a cash register instead of a POS, does the customer know? No. Do the business’s owners, employees, suppliers and partners suffer because there’s no objective data to determine how to improve the business? Sure. And maybe the business goes under faster. But ultimately the only real stakeholder in the leap to POS is the business owner.

That’s why we’re here, 30 years later, wondering how the hell it is that so many brick and mortar merchants use comically-inane solutions that other industries jettisoned decades ago.

But cloud POS is going to bend the adoption curve like you won’t believe. And to demonstrate my point, we’re going to use an example everyone should relate to.

In 1985, as the oil industry took a nose dive, a businessman named David Cook opened a movie rental store in Dallas, TX. He decided what movies to stock based on geographic trends, and soon had a handful of locations across the state. In 1987 he sold a large portion of the business to Wayne Huizenga, the founder of Waste Management. Wayne moved headquarters to Fort Lauderdale, FL in 1988 and had opened more than 400+ locations. By the early 1990′s, the company had grown to 3,400 stores. A 1994 merger with Viacom put the combined entity at a staggering $8.4B market cap.

In 1997 a particular customer, Reed Hastings, received a $40 late fee for his rental of Apollo 13. In true entrepreneurial fashion, he launched a by-mail DVD rental service on April 14, 1998. Under his model, customers would pay a monthly subscription and DVDs would be mailed with free return shipping; customers could return them whenever they wanted. Reed called this company Netflix.

In 2000 Netflix approach Viacom to sell its assets for $50M. Viacom laughed: it’s movie rental business earned $800M on late fees alone. Reed left with his tail between his legs, and in 2004, Viacom announced it had grown to 9,000 global movie rental stores with 60K employees. That was getting to be even too much for Viacom to manage, so it spun the movie rental company back out at a separate market cap of $5B.

Luckily Mr. Hastings did not give up, and at this point Netflix was really humming. In February 2007, they announced they had delivered their billionth DVD and started streaming content online as DVD rentals slowed. The $5B movie rental company? They stocked bluray DVDs in-store, killed their online rental efforts, and doubled down on physical retail.

Unfortunately the market was not so rewarding. On February 10, 2010 the company ceased operations in Portugal. An audit in March of 2010 showed a billion dollars of debt. Board members started resigning, the stock price fell to less than a dollar per share, and it was delisted from the NYSE.  In August their CFO resigned with a pending bankruptcy.

That is the tale, and forewarning, of Blockbuster.

What’s the learning?

First, it’s that brick and mortar still takes a long time relative to other industries. Google reached a billion in revenue in just about 4 years (founded in late 1998).

Second, and most importantly, it’s that even brick and mortar changes can be expedited with customer pressure.

Unlike the decision of upgrading from a cash register to a legacy POS, where we agreed the beneficiary is less notably the customer, in the battle between Netflix and Blockbuster the customer was key. Blockbuster ignored what was best for its customers at its own peril (though in reality the bloated corporate culture, egos and physical assets made the tough decisions impossible). Consumers were more inclined to opt for the convenience of mailed DVDs and online movie streaming than they were for the hassle of visiting a physical location.

Cloud POS companies will leverage consumers with their connectivity, making it obvious that non-cloud merchants are creating additional barriers for customers. Just like Netflix vs Blockbuster, leveraging entities outside the merchant will create additional market pressure to expedite change.

It’s no secret that convenience is driving more and more of the economic stack. This means a growing trend in last-mile delivery, online ordering, and enabling commerce from an aggregate platform. For instance, looking at a list of the top Android apps shows that Walmart is the first retailer on the list, coming in at number 83. Nobody wants to use an application for only one brick and mortar merchant; the scale just isn’t there. Instead, consumers are finding businesses through apps like Google Maps, Yelp and others.

Cloud POS companies will use all of this to their advantage and start syndicating merchant information to drive more commerce. Updated menus and item pricing. Updated hours of business. Updated specials and promotions. Online ordering. Reservations. Delivery. All of this will start to become available from the apps that consumers actually use, resulting in new revenue for cloud POS merchants while the merchants of legacy POS scratch their heads and wonder why they’re being left out.

You’ll see a compounding effect where it’s not just the operational benefits cloud POS brings, but market pressure from customers to interact with merchants “above store” on consumer platforms like Google, Yelp and Apple. Whenever something is consumerized at scale, merchants adopt it in droves – even if it’s at their own detriment a la daily discount phenomenon of 2009.

It took Netflix roughly 12 years to replace Blockbuster. What Blockbuster did have in its corner was money and market share: it was a $5B company after its Viacom spinout. With the exception of Micros and NCR (whose entire organization is not worth $5B, let alone its POS division), most POS providers are much smaller. They might have 20,000 installs on revenues of $4M, and no POS company has the market share that Blockbuster commanded.

Given that we’re already 3 years in on cloud POS, and that legacy POS providers don’t have the balance sheets to artificially dyke the natural evolution of the POS market, I feel comfortable saying that we’re 5 years away from cloud POS representing more than 50% of the market.

The consumer platforms have enormous marketing budgets, and they will wield them to educate merchants on the value of choosing POS solutions that work with their platforms. After all, more merchants = more users = more money for the platform. When you size up the market potential of the outcome in having more merchants on their platforms, the legacy POS companies are fighting a battle that’s already been lost.

But I’ve been wrong before. I’m still amazed at the infinitesimal progress brick and mortar industries have made relative to their peers. Maybe a recession or two changes the timeframes. But make no mistake about it: the market is forcing brick and mortar’s hand. If it were up to them they’d still very much be renting movies down the street.

How YC is Just as Duplicitous As “Venture” Investors

13 Sep

In August the most recent batch of YC portfolio companies was announced. There were 44 in total on day 1. Techcrunch compiled a compendium for those curious. When reviewing the list, there were a few apparent things.

First, YC is trying to include more foreign companies.

Second, there is a more pronounced trend towards minority-founded startups, or startups focusing on minority groups of customers.

Third, YC has added a lot of unconventional, feel-good companies doing non-profit work.

But all of these are irrelevant in comparison to the most obvious trend:

YC has become a growth equity “accelerator”

Conventionally-speaking, an accelerator is a formalized program where smart people with grandiose ideas work hard for a few months to nail a product and find customers. If successful, the accelerator introduces this newly-minted company to prospective investors that can carry the enterprise through their next stages of development. In return, the accelerator takes a chunk of equity which usually accompanies a cash investment at the beginning of the program.

The purpose of an accelerator is to assist startups in finding what’s termed product/market fit. Pre-accelerator, the startup is just a handful of people who know each other and have a few ideas about what might make a company. The accelerator provides access to entrepreneurs, lawyers, bankers, and potential customers to refine their ideas and build a product. The good ones will ship something to customers and have small traction numbers to demonstrate on post-accelerator demo day. The early signs of promise, hooray!

This means that accelerators are supposed to find and guide companies early in the process of making a company.

Apparently that’s become complete lip service. Instead, “startup” applicants should be growing companies with bottom lines. This is in total conflict with even YC’s published philosophy:

Our goal is to create an environment where you can focus exclusively on getting an initial version built.

Ain’t nobody building a damn product in YC anymore. Let’s stop bullshitting and admit that YC is a growth equity vehicle masquerading as an accelerator – just like “venture” capitalists are pretending to take risk in “startups”.

YC convinces these companies they’re indigent, disrespected “startups” that need the security blanket of YC to make them stars… for 7% of their growing, no-risk company at a $1.7M valuation. It was previously 6% at a $250,000 valuation, so earlier companies were really getting hosed.

But is it fair? Let’s go through it.

Of the list of 44, I’m going to comb through traction where it’s listed. I’ll pull out an annual revenue run rate (ARR) to help us understand business valuation as a revenue multiple.

Flex: charges $20/mo for modern tampons. Have 20,000 customers enrolled and 70% margins. Back envelope math: $400,000 in monthly revenue, $280,000 in monthly gross profit. ARR = $4.8M

JustRide: 7,000 monthly rentals through the platform, of which they take 25%. Assume the average daily rental is $50, that’s $350,000 in monthly booking revenue with $87,500 in gross revenues. ARR = $1.05M

Airfordable: $500,000 in sales and now profitable since launch. Growing 53% MoM. ARR = > $500,000

ZeroDB: partnering with a UK bank that gives them $1M ARR. ARR = > $1M

Skylights: in 100 flights across 4 airlines, bringing in $1M ARR. ARR = > $1M

Techmate: $30K monthly revenue growing 25% WoW. Assuming growth slows to half of that on a weekly basis over the next year… ARR = $3.4M

Lookalive: $120K in monthly merchandise value, growing 25% MoM. ARR = $1.75M

MessageBird: 13,000 customers including Uber, Skype and Domino’s Pizza. They admitted using YC as a springboard to get into the US market, but YC appears to be their only investment to-date. They forecasted $35M in revenue this year with $3M EBITDA and were profitable their first year. ARR = $35M

Burrow: $150,000 in pre-sales (product not live yet) and 40% gross margins. ARR = $1M

Miso: 700 customers use the service at least weekly. Assume the average cleaning costs $30, that’s $84,000 in monthly booking revenues. They’ve also targeted 10% WoW revenue growth. ARR = > $1M

Sixa: $101,000 in monthly revenue. Even if we assume no growth, ARR = $1.2M

ConstructVR: had $7K in monthly revenue at the start of the program with another $50K committed. ARR = $684K

Simbi: $100K in monthly services exchange hands with a 95% MoM growth rate. Simbi likely takes 10%-15% of all activity. Calculating for growth, ARR = > $1M

Mentat: growing 40% WoW with most recent monthly revenues of $70K. They also are finishing a pilot with City of NY University that will be a $5M ARR deal by the end of 2016. ARR = $6.5M

SimpleCitizen: $40K in monthly revenue since launch. ARR = $500K

Yoshi: announced profitability very early in their life. Estimate ARR = $500K

Coub: trumpeting 800M video views per month. If there’s one impression per video at $0.50 per impression, that’s $400K per month. ARR = > $5M

OMG Digital: it’s on pace to be Africa’s biggest consumer website by September with 3M unique monthly visitors. If we back into digital ad impressions ARR = $1M

Wallarm: already profitable earning $100K MRR. Even if it doesn’t grow ARR = $1.2M

The Athletic: 2000 subscribers paying $7/mo, growing 18% per week. Assuming that growth rate holds, there’s a ridiculous ARR = $21.8M

Smartsite: on pace for ARR = $2.4M

I’m removing the 6 companies that have no business being in a capitalistic portfolio except to assuage investor guilt. Of the 38 companies remaining, 21 appear to be solidly growth equity companies.

Some of these companies may have raised money before entering “early stage accelerator” YC, but the majority did not. Reaching $1M ARR organically most assuredly means that you’re profitable, and thus a growth equity investment.

Public SaaS revenue multiples fell earlier this year to an average of 3.3x forward revenues, but they appear to be on the rise again and are somewhere north of 6x. And this is for public companies. Translation: these companies are growing 20%-40% a year, not the 400%+ that early stage companies are growing.

So even if we exclude the rapid growth multiple, the average YC startup should be valued at 6x $1M ARR = $6M… not the $1.7M YC is placing on them.

Let’s take it a step further. We’re going to project next year’s revenues as 4x today’s revenues from these “startups’” 400% YoY growth. So T0 is this year and T1 is next year. We won’t project further out than that because it’s going to make the model too complicated.

For our discount rate – the rate you’d expect to earn on your money if you put it somewhere else – we’ll use a range from 10% (what’s used for public SaaS companies) to 50% (what’s used for really early deals). You can read more about how to arrive at these numbers here, but I’m not turning this article into an investment banking tutorial.

We’ll then project the present value of said companies using last quarter’s public SaaS multiple of 3x forward revenues, and today’s multiples of 6x.

Behold! YC is investing in these growth equity “startups” for anywhere from a 72% discount to a 92% discount.

Now, YC will say they introduce portfolio companies to investors (who will only look to further abuse you) and customers. And if you’re going to be a billion-dollar company in < 3  years and just need money to get there, this might be worth it. But for everyone else? Please.

I’m disgusted for founders everywhere. The valley loves engineering founders because not only do they remove early product risk, they can be easily duped by shark investors pretending to have the entrepreneur’s interests at heart. I hope that founders realize by the time they can get accepted to “early stage accelerators” these days they can establish a non-dilutive line of credit from a commercial bank.

In an homage to Maddox, 12,073 investors read this post and spit out their Louis XIII at the thought of entrepreneurs finding it.

This is the Most Brick & Mortar Merchants Will Ever Pay for Your Product

13 Sep

As is easily fathomable, we do a lot of advisory work for startups looking to get into brick and mortar. Our first piece of advice is: don’t. If you want to build a large, billion-dollar business, go find another place to apply your efforts. Sure, the opportunity might look huge in brick and mortar because of the lack of basic progress, but there’s a reason progress hasn’t come.

Once we get past that awkward reality, we can talk about reasonable outcomes for this sector. How fast will it grow? How large can it get? How should resources be allocated? And, will venture investors ever care?

The simplest thing to understand is the business model: how will you make money? Most entrepreneurs think they can bilk the merchant. And why not? If I’m showing $XYZ in monthly value, surely the merchant will pay a fraction of that in return.

But as I’ve mentioned earlier, the common-sense practices of SaaS don’t apply in brick and mortar. This mistake is partly why founders come here disillusioned: Large # of Merchants x Large Value Produced = Ridiculous Sized Business! If only.

How much will a merchant pay for things?

The first consideration is if you’re Saving or Making. Merchants will always pay more for services that offer the opportunity of increased revenue. They’re often horrible at understanding the math behind such endeavors – as shown with the Groupon/daily deal craze – but for whatever reason this positioning strikes the right neural signals within a merchant’s brain. Can those customers be served well and turned into regulars is moot: more revenue (at whatever cost) = good.

Saving a merchant something (money, time, headache, etc.) can be summed up with a phrase I heard from a very well-respected merchant services provider: “A merchant will walk over a dollar to pick up a dime.” Merchants have a finite amount they’re willing to pay for anything that is in the Saving category. There’s an asymptote in a merchant’s head that signals, “Do not pay more than $XYZ no matter how much value it creates.”

There’s also another nuance to the Saving category – merchants will pay more if it’s clear that the value is being created with insight from outside the merchant’s four walls. There’s an implicit hierarchy – for no logical reason -  that external visibility is somehow worth more. The structure from lowest to highest value looks like this:

  • Merchant’s own data
  • Data from merchant’s customers
  • Data from merchant’s competitors

If it can be positioned that outside data is being used to create the Savings product, it is worth more to the merchant.

In summary, we produce the following chart of understood values.

Now it’s time to get tangible: what will a merchant pay in dollars and cents?

To get a sense for what’s realistic we need to look at the free market.

On the upper end of the Making scale we have OpenTable, who averages > $600 per month per merchant. Some merchants have claimed their bills to be in the thousands. Regardless, merchants are scared of leaving OpenTable and the demand the platform creates, so OpenTable can charge whatever they want and merchants will pay it.

We also have the high fees associated with online ordering: from the ~15% charged by Grubhub to the 30% by Uber and Amazon. Assuming a million-dollar business does $80,000 in monthly volume with 30% of their bookings coming from online ordering, that could be between $7,200 and $3,600 per month.

On the lower end of the Making scale we would have smaller reservation and referral services, like Yelp’s SeatMe ($99/mo), or loyalty services by a FiveStars ($250/mo).

On the Savings side of the business there is a plethora of products to point to. Most, however, fall under a critical – and perhaps mental – ceiling:

Merchants will not pay more than $100 per month

Why $100 per month? We think that merchant acquirers have positioned credit card processing as a necessary expense of doing business. In turn, the processor earns an average of $100/month for accepting cards.

That’s why a host of solutions providers in the Savings category charge less than $100 per month. Here are screenshots of softwares from scheduling to wait lists.

But there are always companies pushing the envelope. One of the most recent is Upserve, the company formerly known as Swipely.

Swipely was started by Angus Davis, a technology executive who sold his previous company to Microsoft for $800M. In 2009, Angus’ vision was for consumers to share their purchases in a new kind of social network.

When that didn’t seem to gain much steam, the business pivoted into a credit card loyalty platform. It then further evolved into a stand-alone merchant acquirer that would give away its analytics and loyalty products in exchange for the processing revenue. Undoubtedly, Swipely provided astronomically more value than conventional processors.

As Swipely worked on scaling its new business model, it released a sizable number of its employees in mid-2015. In late Q1 of 2016, Swipely rebranded to Upserve, fully unveiling the quality of the analytics products it had traditionally offered for “free” alongside its processing business. In doing so, Upserve (though I prefer the name Swipely to be honest) stated they were targeting more established, full service restaurants. This ultimately coincided with an acquisition of Breadcrumb, a cloud-based POS focused on the fine dining restaurant segment, from Groupon. That it was an all-equity deal with no cash could be telling.

Upserve has a very aggressive pricing model for products that are very much in the Saving category.

But it’s not that clear cut.

In the rebrand, Upserve starting packaging its analytics with its processing and including it in a bundled package. So that $99/mo figure we see above is actually for processing AND the analytics – kind of.

Upserve previously charged 0.18% + $0.10 per swipe. The new package has Upserve charging $0.10 per transaction, doing away with the 0.18%. To put that into tangible dollars per month, the average Upserve merchant probably does $1M in annual revenue. Broken over 365 days a year, that’s $2,740 dollars per day. Since Upserve does target higher end, full-service restaurants, you’re looking at check averages of $15 to $30. That means there could be anywhere between 100 and 180 swipes per day. At $0.10 per swipe, that’s between $300 and $540 in monthly processing revenue in addition to the $99/mo fee.

In the old model, using 0.18% of each transaction, the same merchant would pay an average of $150 per month in processing. So now, in effect, the merchant is getting Upserve’s analytics for free**.

Are they worth it? It’s hard for me to say without being a customer myself, but their products represent the first time anyone has bothered to integrate to multiple restaurants systems – including the POS, reservation and loyalty systems – to pull cohesive insights above the store in any meaningful fashion. Previous efforts at multi-point integration were for rudimentary email marketing and other laughable half-measures. If other processors are charging merchants that 0.18% without analytics, moving to Upserve is a total no-brainer.

But is it too little, too late?

It’s no secret that venture capital has 10-year funds, but realistically holds their investments for much shorter periods of time. You can find copious data on the specifics, but a good rule of thumb is only five years if the startup is showing signs it won’t reach IPO ( > $1 billion in enterprise value), and a mean of seven years if it will.

Given that Upserve first took institutional (i.e. venture capital) money in 2009, we could be nearing a desperate time of revenue growth.

The last money in at Upserve was $20M, likely at a $75M valuation. These later stage investors typically look for 3x cash on cash, meaning that Upserve will need to hit a value of $225M soon. Is it possible?

Upserve is processing over $7B in payments. That figure sounds large but actual revenue is a fraction of that. Based on their take rate Upserve could be earning north of $15M annually, though that’s not including the payout to their channel partners. Most processors have a “50% profit share” with their channel. How is profit defined? Great question – ask Heartland how their lawsuit with Mercury ends up to find the answer.

Let’s assume that Upserve keeps 2/3rds of the revenue, meaning they’re at an annual revenue run rate of $10M. SaaS multiples have collapsed recently, and they’re stabilizing at four times trailing revenues. Without getting too in the weeds on a valuation model, Upserve could be worth upwards of $80M on revenues, but likely no higher unless the control premium (what an acquirer would overpay to own a strategic asset) is more than 2x. So they’re 2/3rds short of the $225M valuation mark their later investors need.

None of this is to say that the last round of Upserve’s financing didn’t buy out earlier investors, theoretically giving Upserve a longer period of time to reach their venture-caliber returns. But payments is a very competitive landscape in a race to zero. Churn is brutal. That’s why Upserve had to offer additional value to win customers. If that model were working well, I venture they would not have acquired a POS nor started charging for their analytics. I’m an outsider, but this seems sensical to me.

We shouldn’t throw stones at people doing great things, and I hope this article doesn’t come across as a smear piece targeting an innovator. It is, however, intended to be a scrupulous observation, and that observation says that unless you’re generating revenue for a merchant, anything more than $100 per month is too high. Upserve’s math looks pretty solid, but merchants aren’t the most logical demographic. I sure hope Upserve knows what it’s doing.

**There are some special use cases… contact Upserve if needed.