January 17 saw some published data for Toast’s growth numbers. In the news release they mentioned closing the year with “over $2 billion in sales transactions…” This is code for $2B in credit card processing revenues.

We can use this number to back into a growth metric for Toast. If we assume the average merchant does $500K in annual processing, that means Toast closed 2016 with 4,000 merchants, up from 1,000 in August of 2015. It’s probably more likely that each Toast merchant processes $750K per year, putting their merchant count at a 3,000, which jives with a number we’ve verified with unofficial other sources.

In January of 2016 Toast raised a $30MM series B from investors. Toast also announced an aggressive plan to hire more people, and now claims more than 250 of them, many of which reside in Toast’s upscale new digs in Fenway. They’re also flying employees to the Caribbean.

Sounds great, but what about the math? Many startups have offered free massages and lunch only to be out of business a year later.

Let’s start at the beginning.

It took Toast roughly $7MM to acquire it’s 1,000 merchants over two years (2013-2015). We’ve hashed through a bit of this previously but will revisit with more concrete numbers. In that two-year window merchants are costing Toast $7,000 ($7MM/1,000) to acquire. The general rule of thumb for SaaS is 3:1 – that is, you must make 3x your cost of customer acquistion, and the payback period should be no more than 18 months or there will be trouble.

In Toast’s model, POS software costs $100/mo. They’re giving away the hardware at cost. Their payment processing is also flat rate, which means they’re losing money on a good deal of swipes. Let’s make the math easy and assume they’re making $100/mo from processing.

The average merchant is worth $2,400 a year ($200 x 12 months). Based on 25% annual churn with an average life span of 30 months, that’s $6,000 in lifetime value, which is already more than the $7,000 it took to acquire the merchant. Even for Toast to break even on that merchant in the 18-month payback window, they’d need to earn $390/mo, not including the cost of money borrowed.

**To realize the needed 3:1 ratio that venture capitalists require, they’d need to triple that to $1,167 per month.**

… Okay so maybe Toast has better unit economics post series B.

Using Toast’s published processing numbers we’re agreeing that they have 3,000 merchant accounts. If we assume each of these accounts pays $200/mo, that’s $7.2MM in annual revenue. But how much did Toast spend to get there?

Toast has 250+ employees. By the time you count for fringe and the usual startup benefits I feel confident putting a fully-weighted cost of $100,000 per employee. For 250 employees, that’s $25MM in expenses.

Let’s subtract out the initial 1,000 installs they achieved before the series B. So Toast has grown 2,000 merchant accounts in one year. They accomplished that with 250 employees costing $25MM. If we divide this ($25MM/2,000) Toast’s merchant acquisition cost is $12,500.** It’s nearly doubled!**

We haven’t included additional overhead or marketing, and maybe on a weighted-average basis Toast accomplished this growth rate with 150 employees. Still, even if you give them the benefit of the lower employee count that’s $7,500 per merchant.

I just can’t get the math to work out in Toast’s favor.

Even if each merchant buys all of Toast’s bolt-ons, that’s $400/mo in total revenue. That account would need to be business for nearly five years for Toast to get it’s 3:1 ratio. If your math assumes the merchant will be in business more than 30 months it will fall apart quickly. And merchant’s surely wouldn’t pay much more than that anyway: I can get a legacy POS for $5K and own it outright, so there is a ceiling here.

Still, if we stick with that $400/mo number, Toast’s annual revenues would be $14MM, meaning they’re losing more than $10MM a year.

Unless Toast is earning record-rates on processing somehow, I’m anticipating a major round of financing (which could be really hard to justify with these economics) or a serious slash and burn around the corner. I don’t see how Toast has more than $10MM left in the bank at the end of 2017, and with their spending I don’t know how they make it through 2018.