Once a month we get a random email from someone asking if we know anyone looking to invest in POS companies. We are grateful that people would ask us, but inquiring persons should really do a little research before wasting their time.
The influx of such curiosity is likely related to a few trends.
First, building a POS is cheaper than ever. 12 months of writing code and going to Best Buy to try it on an iPad are the only barriers to producing a POS system these days. Distribution is still the real achilles heel, but engineers don’t understand that: they think if they’ve built a product, even with little to no market proof, they should be funded. Go look at the local proliferation of cloud POS companies as proof.
Second, activity in the payments ecosystem has a number of POS developers eyeing an enormous opportunity that has never before existed in the history of the POS industry. Many unsophisticated payments company are buying POS assets without understanding the economics of the POS business. Yes, they understand they need a tool to reduce merchant churn, but they know nothing about POS as a business. Every POS company is licking their lips at the thought of a richer payments enterprise saving their struggling outfit.
The truth is that the POS business is a brutal one. There have been hundreds of millions poured into cloud POS companies over the past few years and yet no institutional investor is finding a worthwhile return.
First there was Revel, a company founded by industry outsiders in Silicon Valley. After raising $130M+ there was a very public implosion as a private equity firm assumed control and bought Revel’s shares in a fire sale.
Then there was Lightspeed, who saw its most prestigious backer, Accel, exit its holdings in Lightspeed’s most recent funding round. You can easily read the tea leaves as saying that a sophisticated institutional thought it had seen all the upside they were going to see.
Most recently there’s Shopkeep’s investment from First Data. Shopkeep, whose publicly-reported merchant numbers have remained unchanged over 18 months, is desperately searching for growth to reach suitable levels of revenue for an IPO. Finding themselves short, First Data may be the secondary capital needed to appease earlier investors.
Lastly, of course, is Toast. We have no idea where their story ends but we expect to hear more later this year as Toast runs into fiscal constraints.
With all these big bets failing to yield returns you’d think POS company founders would be more aware of the market situation when they seek funding. Let us break it down for you: if the more sophisticated investors aren’t making any money then the less sophisticated won’t be interested.
None of this is to say that there isn’t potential in the US POS market; quite the contrary. What we’re pointing out is that institutional money won’t be interested until the first wave of POS investments disappears from recent memory. (Or one of these POS companies proves how to 50x investor money in 3-5 years, which isn’t happening.)
In the US restaurant market NCR, Micros, Heartland, and Shift4 (though they should have kept the Lighthouse name) are the market leaders. But that may change.
NCR hasn’t yet delivered any modern solution to its Aloha customers and are thus at risk of losing their market share. Micros has intentionally shifted focus after the Oracle acquisition and one could argue they’re actively trying to lose market share in the lower and middle markets. Heartland and Shift4 have consolidated a number of legacy POS companies and are trying to get those business models to pay dividends.
None of these market leaders is without risk and a misstep could open up the opportunity for any number of new entrants to claw their way to the top. But until that opening presents itself why would an investor risk it? They’re much safer just waiting on the sidelines and seeing how the market plays itself out.
If you want to be a solution that has a chance to make it to the top you need a few key ingredients.
First, build a product worth talking about. Your solution needs to have cloud functionality as well as local redundancy. Nobody with a functioning brain will eschew cloud connectivity (anyone who does is not a customer you want) and once merchants get to a certain size they need assurances that an internet crash won’t cost them customers.
Second, make support as cheap and easy as possible. Rely on remote diagnostics and if you have a reseller network only take on resellers who provide real value. This means you will say no to at least 95% of applicants but remember: a shitty reseller will be a shitty reflection of your brand.
Third, understand the payments dynamics. Smaller merchants are probably okay bundling payments with their POS but larger merchants just see it as a major risk. Sure, you’re going to “match or beat” my rates now but there’s nothing that keeps you from unethically ratcheting up rates or adding fees in the future. Then what do I do? I lose all my data and start again with a new POS? Not worth the hassle.
You’ve got to get your economics right. All of these ingredients are needed to produce a profitable operation, and an investor only needs to look at customer acquisition costs and life time value to know if you’re anywhere close to investible.
If all of this sounds like a lot of work you’re right – it’s very risky. But nothing ventured, nothing gained. You need to hope that the market gives you a break and you execute well given the opportunity… not that investors lose their sanity and hand you money.
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