Investment Memo · Bessemer Venture Partners
Investment thesis
Capturing slightly more than 1% of the restaurant POS transition market would make Toast a $100M revenue business.
The benefit of a massive market is that with a little more than 1% market penetration Toast could be a $100M revenue company.
Why the firm invested
The deal team recommends a $17.5M investment in Toast's $24M first institutional funding round.
We recommend a $17.5M investment in the $24M first institutional round of Toast, a Boston based company selling restaurant point of sale (POS) software.
Market
The US addressable market consists of about 1 million restaurants, representing a $5B to $10B market opportunity for Toast.
There are approximately 1 million addressable restaurants in the US, and with current ARR / location around $5,000 and upside with additional product features potentially approaching $10,000, we estimate the market size at $5 – 10 billion.
Product
Toast's Android-based tablet solution competes effectively against cloud competitors and legacy incumbents Micros and NCR.
Toast’s Android tablet-based cloud solution is beating out other new systems head to head and more impressively attacking on prem proprietary hardware incumbents Micros and NCR, who together make up 50% of the market.
Toast's Android-based architecture provides hardware flexibility, lower costs, and fewer software versioning issues than iOS alternatives.
Toast’s Android-based architecture allows restaurants to be much more flexible in their hardware choices (iPads are simply not enterprise grade and come in far fewer form factors than Android), has fewer software versioning issues than iOS and the upfront hardware costs are cheaper.
Traction
November was a record month for Toast with $800K in new ARR, a 7% increase in ASP, and 0.3% gross churn.
November was a record month with $800K of new ARR, a 7% increase in ASP, 0.3% gross churn, and most ramped reps above quota.
Toast achieves ~75% blended gross margins across its recurring subscription revenue and payment processing margin.
Together, subscription fees and payment processing margin have blended gross margins of ~75% due to Toast’s US-based support services (another differentiator from competitors like Revel, who rely on cheaper offshore support that many customers hate).
Business model
Toast monetizes via five streams: software subscriptions, payment processing margins, hardware sales, implementation services, and consulting fees.
Toast makes money in five ways: subscriptions, a rake on payment processing, hardware sales, services and consulting fees.
Risks the investor named
The POS market is noisy and crowded, posing a risk that Toast fails to emerge as a dominant next-generation winner.
Competition is noisy and Toast fails to emerge as one of the few next gen winners
What founders can learn
- What actually moved the decision: Bessemer Venture Partners wrote that The deal team recommends a $17.5M investment in Toast's $24M first institutional funding round.
- The traction evidence that carried weight: Bessemer Venture Partners wrote that November was a record month for Toast with $800K in new ARR, a 7% increase in ASP, and 0.3% gross churn.
- How the market was framed: Bessemer Venture Partners wrote that The US addressable market consists of about 1 million restaurants, representing a $5B to $10B market opportunity for Toast.
- The risk the investor named out loud: Bessemer Venture Partners wrote that The POS market is noisy and crowded, posing a risk that Toast fails to emerge as a dominant next-generation winner.
- How the model was assessed: Bessemer Venture Partners wrote that Toast monetizes via five streams: software subscriptions, payment processing margins, hardware sales, implementation services, and consulting fees.
Source and provenance
Investment Memo published by Bessemer Venture Partners on greatmemos.com. Read the original
