Grubhub splashed a staggering $390M for loyalty payments startup LevelUp. This comes as LevelUp has raised over $100M since 2009, though some sources told us that LevelUp has raised more than this.
LevelUp is fundamentally a marketing program for local restaurants. What started as a ploy to disintermediate interchange quickly fizzled into a loyalty app complete with a phone scanner that sits on a merchant’s countertop.
We’ve estimated that LevelUp services around 12,000 locations. They publicly announced 100,000 daily orders as part of the press release which we can back into by knowing the typical transaction numbers for online ordering platforms. It was odd how Grubhub’s CFO announced LevelUp’s financials on the analyst call.
LevelUp’s current growth rate implies annual revenue between $30 million and $40 million, Grubhub finance chief Adam DeWitt said on a conference call with analysts.
I don’t know why you wouldn’t just say what the revenue was today, unless you don’t want the market to think that you’ve overpaid for an asset. EBITDA multiples are high, but this could have been a really high control premium – maybe 40x revenue of $10M today.
Now to the juicy parts.
Why did Grubhub acquire LevelUp?
We think it comes down to two simple reasons.
First, LevelUp has a large number of point of sale – POS – integrations. We asked Seth, LevelUp’s founder, to share a number but he didn’t respond. Some of the people we talked to hinted that the number was close to 50 POS integrations, with many of them being bidirectional.
POS integrations are the scourge of progress in brick and mortar. Not only are the integrations a technical nightmare (because legacy POS companies had mostly shit engineering, and we use the term engineering very loosely here), but the POS companies themselves were often run by people who couldn’t rationalize a good business deal if it meant their mothers stayed above ground. We’re not joking: these people proved time and time again that they simply could not run the numbers to objectively arrive at any solid business decisions. And we’re not even considering the happenstance that many legacy POS companies charged ridiculous integration fees.
Second, Grubhub’s business model is predicated on convincing restaurant customers to use their platform for online ordering and delivery instead of using the restaurant’s own site. Grubhub undoubtedly has better interfaces, technology, and SEO. Sometimes they get to this position by screwing over their own customers, mind you. And Grubhub doesn’t seem to share if their rates are economic for their customers, which is highly suspicious.
Either way, Grubhub is surely eyeing LevelUp’s customers as new revenue streams: convince these customers to use Grubhub for online ordering for LevelUp’s merchants and tack on a 20%+ commission for the pleasure. Keep the customer data, re-market to them, and pile more and more fees on top of merchants. How’s that “incremental customer” looking now?
A subtle corollary in all this is the downside of being a dumb pipe. That is, what if you’re a business whose model is to provide integrations to POS systems for third parties like Grubhub? In return for providing an integration, you traditionally charge an (often hefty) fee. Grubhub just said it was too important to own the integrations directly, and they put up the money to do so.
How many more companies will spend this kind of money when POS is moving to cloud, which has open APIs, and consolidation is driving fewer needed integrations? Definitely questions worth considering.
Add comment