Touchbistro, a cloud POS based in Toronto, Canada, is fresh off a $16.3MM Series C. Their press release contains a lot of useful information if you know how to read in between the lines, so let’s dig in.
We should first look at the size of their latest financing round. According to Crunchbase, Touchbistro (TB) has raised a total of $35MM over a number of rounds. Traditionally there’s the Seed/angel round, Series A, B, C and so on until exit.
Crunchbase has TB’s Series B pegged at $13MM. Here’s why that’s important.
This is a screenshot of Facebook’s fundraising.
Do you notice that round sizes increase pretty dramatically with each consecutive round? We acknowledge that Facebook is now the 5th largest company in the world and not every company will mimic their growth rates, but the trend holds for any fast growing company: round sizes should increase substantially in every consecutive round as the value of the company grows. When companies raise venture financing, they give up between 20 and 30% ownership, so we would expect a larger amount of money to buy 20 to 30% each time a company goes to the well.
In fact, TB saw similar fundraising patterns early on, from a $1.5MM Seed to a $6MM Series A to a $17MM Series B… then braked to a lower $16MM Series C. If TB is giving up the same ownership percentage for a smaller amount of money on their Series C than they did on their Series B, they’re not growing fast enough to make their investors happy.
It’s entirely possible that TB’s Series C was secondary capital – meaning founders or early investors are cashing out their shares – or that TB got a better deal on their Series C (i.e. sold less of their company on the Series C than they did the Series B), and TB’s CEO said they raised less to lower dilution, but there is evidence that points to the contrary.
Raising money is difficult if you’re not growing fast enough. Just about any company would prefer to work with top investment firms Sequoia, Accel and Andreessen Horowitz. If none of these work, companies will head down the line. If all those doors are closed, companies will head overseas.
TB did just that with their Series C, heading to Japan to work with Recruit. Now it could be argued that Recruit has a strategic value in that it has access to 100,000 restaurants, but that’s all the way in Japan. If you think cloud POS has problems developing features to move upmarket in English-first markets, think about the headache with foreign languages and cultural barriers. It’s also telling that their existing investors didn’t lead this round: they either don’t have the liquidity to do so, or they don’t believe enough in the asset. At least they participated in this round, but that doesn’t get us through the next thorny issue.
The secret to SaaS success, at least according to those in Silicon Valley, is T2D3: triple, triple, double, double, and double. This phrase means how quickly annual revenue should grow for a SaaS business to reach an annual revenue run rate (ARR) of $100M in five years: the metric necessary for IPO (and venture returns).
At the end of year one the company should be doing over a million in ARR, at which point the investor invests (have we mentioned investor don’t take risk?). Triple that to let’s say $5MM in year one (it’s the first year investors have their money in but the second year of the company’s operations), and triple to $15MM in year two. Now double ($30MM) for year three, double again for year four ($60MM) and double one last time for $120MM, enough to take public.
Unfortunately, TB mentioned,
In the last year, the company has grown its recurring monthly revenue by 150 percent and deployed more than 15,000 iPads in over 9,000 restaurants around the world.
150% isn’t in the card deck for acceptable venture-backed companies. Which is why TB is going to do something so crazy I can’t believe they mentioned it.
Alex Barrotti, TB’s CEO, said that, as the company’s POS solutions process GMVs of almost US $5 billion annually, there is opportunity to monetize the data it collects. Potentially, the company can provide insights to restaurants based on what’s been successful at other establishments, and make comparisons on sales.
So for example, am I selling the right price for a hamburger? Could I see my own hamburger sales over the last 30 days, and tie it into providing my data anonymously into a bigger picture to see what are hamburger sales overall?
This tells us something.
TB is basically burning money building non-core features, especially with the notion that they’re going to normalize item-level data to reveal such insights. Why would they be distracted with this unless their core business was slowing down? Even if we assume their ~9,000 locations are enough for statistically accurate tools, SYSCO, Nielsen and others have applied considerable resources building software to clean restaurant data with virtually zero success until the involvement of outside expertise.
Do you know how many ways merchants are going to misspell hamburger? If you have 100 merchants it will be spelled at least 101 different ways. There’s no such thing as universal product codes or even stock keeping units in restaurants. The data is very dirty, thus making it expensive and time-consuming to do what TB’s CEO thinks he wants to do.
But still, this is a specific gripe to a much larger problem: POS companies are constantly getting themselves into business conundrums by building non-core features. Their efforts end up clunky, inferior, pricey, and politicized until market forces spell certain death.
The whole idea of cloud POS was to avoid the crap practices of legacy POS.
We hope TB’s CEO will read this before he splashes his dilutive money on wasted efforts. We know his investors don’t know anything about the market, but as CEO he should learn from the mistakes of the POS companies he plans on replacing. Unless, of course, he’ll raise another round of financing to bail TB out of these ones.