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.
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