We believe that many SMB and vertical SaaS companies are starting to exhibit platform characteristics. Some of these companies are beginning to build consumer and supplier networks that are dramatically expanding the SaaS model.
Toast is a pioneer in the space, powering restaurants of all sizes with a technology platform that helps them streamline operations, increase revenue and deliver amazing guest experiences. No one lights up a room on these topics more than Tim Barash, Chief Business Officer and CFO at Toast. I’m also excited to welcome Tim as an Executive Advisor to TCV, where he will be working with TCV portfolio companies and helping us to assess new opportunities.
Dave: Tim, welcome to TCV, and thanks so much for spending time to share your thoughts with us!
Tim: I am excited to be a part of the team — it’s been great to meet with some of the founders of this incredible new class of companies, changing the rules of what has traditionally been considered SaaS.
Dave: Tell us about Toast. What is the company today, what’s its mission, and where is it going?
Tim: Toast is a company that is transforming the hospitality industry with an end-to-end platform, extending from a core commerce engine into guest experience, employee engagement, and financial services. Our mission is to empower the restaurant community to delight guests, do what they love, and thrive. We as Toasters are very passionate about bringing this mission to life for our customers. We launched our core offering in 2013 to the first few restaurants and today are serving tens of thousands of customers while still growing over 100%, with over 1,600 employees globally. It’s been a wild ride these past five years and it’s a really fun space with a creative and diverse customer set.
Dave: You and I recently hosted an offsite on “SaaS as a Platform.” Why is Toast a platform to its restaurant customers? If you’re the CEO of a SaaS company, how do you know that you are or could be a platform?
Tim: Toast really extends all the way from the front of house to the back of the house, bringing restaurants into the 21st century with a cloud and mobility-first operating system, including hardware such as self-ordering kiosks and handhelds for order & pay-at-the-table and guest feedback. We’ve evolved from this core system of record into other high-value offerings, including payment processing, payroll & employee management software, credit and consumer-facing apps, and we’ve had great feedback from our customer base that they want us to continue to solve more problems for them between our first-party offerings and our deep partner network.
I think being the Platform or System of Record generally means you have the most mindshare and time spent on your system relative to others the same user may have. As important is where the data resides; in the restaurant vertical, the core data sets are menus, orders, guest data, and employee data, whereas other verticals like doctor’s offices might be more around scheduling, billing/invoicing, and insurance connectors. If the key personas are logging in multiple times per day and using your tool as the system of record for their most important data, it’s likely there are multiple platform opportunities to exploit to make their lives even easier.
Dave: Let’s first talk about payments. Generically the opportunity in payments is for SaaS companies to start monetizing flow through GMV. Why is this good for your customers, the end merchant, and your customer’s customer, the merchant’s consumer?
Tim: A lot of companies are starting to integrate payments mostly because it creates a much smoother, simpler experience for the merchant. It starts with onboarding and spans ongoing support and easy reconciliation of transactions and payments through the same software. Small businesses generally do not like having to deal with multiple vendors when they can use one holistic solution for what they are trying to get done.
What’s really compelling is what you can do for the merchant and the end user once you have payments integrated by capturing more data. An example is identifying the end user and better understand buying patterns and be able to help small businesses market to their customers in a more targeted and automated way.
There’s also very significant margin enhancement if you can get payments right, which can fuel higher investment levels in areas like Customer Success and R&D to deliver even more customer value by displacing a horizontal payments vendor.
Dave: I know you could hold a master class on just payments, but quickly what are three tips for getting started? Should you make them mandatory, or an option?
Tim: Understanding your strengths and weaknesses as a team here is important — you can get started with a referral partnership or go full bore and become a payment facilitator and handle all the risk, underwriting, and merchant-facing tech. It really depends on the available talent, domain knowledge, and capital access to get something off the ground. Once you’ve decided what to go with, here are three tips:
- Build a dedicated team that understands your payments space at a deep level — there can be a lot of new complexity across product, tech, risk/underwriting, pricing, go-to-market strategy, and customer success that may look and feel different from your existing business. Make sure at least 1-2 people are coming in with real payments or fintech experience. Card-present vs. eCommerce experience will likely be something to think about here.
- Resist the urge to over-monetize or make pricing overly complex — traditionally there have been some bad actors in the payments world and, as a result, a lot of these companies have low NPS and very high churn — great SaaS companies have the opposite, so don’t tempt fate for a few extra basis points.
- If you are doing anything other than an arms-length referral partnership, you should be taking payments-specific risk, fraud, and security very seriously.
Dave: Ok, so once you’ve launched payments, how would you extend next? I know it depends, so maybe talk about where you would go if you were a front office offering and a back-office offering. Or better yet, what is the prioritization framework for the different offerings?
Tim: I think the prioritization framework begins with mission — why does your company exist and what are the biggest problems in your industry that you have an unfair right to help solve? As an example, Toast is the source of lots of employee data and we kept hearing from our customers that, in the current macro environment, labor was their biggest concern, so we had both the market need and the natural entry point to get deeper into payroll and employee engagement.
On back-of-office solutions it’s likely things like payments, credit, payroll, insurance, and B2B/vendor marketplaces can be interesting depending on the platform and vertical. For front-of-house it’s likely more about CRM, marketing tools, loyalty programs, other commerce touchpoints, and the holy grail of leveraging supply of SMB’s to create a two-sided consumer marketplace. That said, there aren’t many companies that have made the B2B2C transition, yet it can be a tremendous value creator.
Dave: Credit is a big step change because it involves a balance sheet and underwriting to risk. What is your take?
Tim: I think this really depends on the execution muscle of your company — if you’ve already gone deep on something like payments, you may have some experience on the fraud and underwriting side, but getting into credit ups the ante in a big way. You need to feel confident you have some really strong players on data science, finance, and risk to go after this yourself. Starting with a partnership with a Kabbage, Fundbox, or OnDeck could be a way to dip the toe in the water before putting your capital at risk or trying to attract outside investors to supply the capital for a credit offering.
If you are going after this yourself, you will almost definitely want to find outside capital to offload most of the risk and balance sheet implications of a credit business, both for optics reasons with investors and because your capital is better put to use hiring engineering, sales, etc. than lending to your customers.
Dave: How about payroll? Big dollars given the per employee model. How do you know there’s real demand for payroll? Given the 50-state nature, would you do this in-house, partner, or buy?
Tim: If I think about this space, the only software business that didn’t have HCM/HRIS at its core that’s done this really well is Intuit, though Square is also starting to gain traction in their new offerings. Payroll/HCM is its own beast with its own ecosystem of products from worker’s comp and healthcare to newer technology offerings like same-day pay and employee management solutions. Similar to payments, capital, marketplaces, and other platform plays, the decision on whether to extend is all about whether you have a natural right to play. For Toast, we have restaurant employees clocking in and out every day on our platform, and managers/owners running staffing reports and approving hours before downloading the data and uploading to a payroll/HCM solution. This made it a pretty natural move to solve this disjointed experience for our customers.
If you’ve got the natural right to play, demand is probably dependent on the complexity in your vertical — if your customers only have 1-5 employees and not a lot of complexity around time and attendance, they may be using an offering from Intuit through their accounting package, or Gusto, or some other inexpensive and easy solution, making it more difficult to displace.
In terms of build/partner/buy, this could be a long slog to build, because of all the regulatory/compliance elements. Depending on your scale, partnering is likely the best way to enter into the space and learn this side of the business. Just be careful as one of the reasons to get into payroll/HCM is that it’s a fairly sticky product.
Dave: Ok, let’s get into the next-level network effects for SaaS companies. Most two-level networks tend to be “Big B to small B” in a buyer/supplier relationship. TCV invested in three of them over the years. To give the theme a plug — Ariba in procurement, CCC in the auto industry, and Avetta in supplier information management and compliance. You sell into large company buyers and help them connect more efficiently to smaller/SMB consumers. Winning into the big buyers gives you a strong value proposition to small suppliers and gaining more suppliers in your network makes you even more attractive to the big buyers. It’s a virtuous cycle.
But every SaaS company, particularly vertical and SMB providers, can look to leverage consumer, employee, and supplier networks. What’s your take?
Tim: It’s a really exciting play that is starting to develop in SaaS. If done correctly, it can be a game changer in helping SMBs get the scale advantages of larger enterprises and change their businesses for the better.
Dave: Let’s take supplier networks first. Who is doing a good job getting into the supplier marketplace?
Tim: I think you just hit a few of the strong players earlier. What CCC has done with the auto parts marketplace is really exciting and a playbook that could be run by a lot of SaaS platforms in other verticals, especially something like construction or home services. I’ve seen a lot of startups try to create the supplier marketplaces in industries such as dental offices, restaurants, and others, but the standalone model can be difficult because they aren’t starting with one side of the marketplace already built up — that’s what’s so exciting about these platform opportunities for existing SaaS companies.
Dave: How about employees?
Tim: There are lot of interesting companies out there. For example, SnagAjob and ZipRecruiter are working on building out the marketplace. I think ZipRecruiter has been a really interesting story as they did leverage existing relationship with employers to create their marketplace. Over time, I think we will see a lot more of these models. There have been a few entrants into the “LinkedIn of hourly workers” space, and time will tell if something like that will be created or if more mindshare will go to vertical-specific SaaS/Employee Network plays. It’s interesting to think about the marginal utility of a horizontal employee network, certainly there are some generalists in this employee population but also a lot of specialization in specific trades and industries.
Dave: Consumers is probably where the big dollars are. Marketplaces regularly capture 10-40% of GMV to deliver consumers. How can SaaS companies partake of the consumer opportunity?
Tim: I think it heavily depends on how valuable the supply side of the marketplace is. There are verticals including food, certain home services, hotels, etc. where quality and user-specific preference is going to really matter. If you have really compelling supply (especially if it is hard to access online), you can get real leverage in building out a consumer marketplace. If it’s something like transportation, it may be harder to have any real edge against a standalone marketplace startup.
If you are in a position to capitalize on a consumer network, I think creating a separate team to go after that opportunity in a big way is likely the right way to go as so many parts of the business will be different than your core SaaS team is used to working on. You want the unfair advantage of owning supply without a handicap of having a team that hasn’t built a consumer business before.
Dave: Well Tim, I know we could go on for hours on this topic. Thanks so much for taking the time today, and great to have you as part of the TCV team. I’m excited to work with you.
Tim Barash is an Executive Advisor at TCV.