This is our first anonymous mailbag. We didn’t have time to get an article out last Friday so we consolidated the good questions into one post this week.
Why do you hate Toast POS?
This couldn’t be further from the truth. We base our opinions on data. When the data changes so too do our opinions. To-date, our articles on Toast exist to provide information to all of Toast’s stakeholders; few people understand how the sausage is made and we aim to clear that up.
We write our opinions to help Toast employees understand what happens if revenue numbers aren’t met. Down rounds, layoffs and more have happened to companies who didn’t satiate investor expectations, and it’s important these people understand what’s possible so they’re not collateral damage. Not everything is rainbows and sunshine in the real world.
We write our opinions to help Toast merchants understand how payments contracts work. There’s no such thing as free, and all companies exist to make money. If you’re paying less now, you’re paying more later. You need to be aware of how that works.
We write our opinions to help Toast make better decisions. Maybe Toast leadership reads our articles and sees how the market perceives them. They are welcome to leverage our industry experience to make necessary changes.
Toast is undoubtedly doing the market a great favor by forcing modernization. Remote access, APIs, and rapid feature development are all positives for the industry. Innovation is always good for the consumer. God bless free markets.
Are POS dealers finished?
POS dealers are certainly dwindling, but they aren’t dead. The ones that survive will learn to become business advisors and will use software tools to help their merchants compete. This will keep their customers solvent and justify the dealer’s revenues.
Too few dealers have the IQ or desire to do this, however. And there’s no doubt that direct sales and ecommerce via self-discovery are removing POS dealers from the upper and lower fringes of the market, respectively. Over time, the market where dealers can successfully survive will be a fraction of what it is today.
But there can and will exist successful dealers in the mid-market. They’ll be smaller, more consolidated groups that have organized processes, are leveraging automation, and run objectively on data. They will be no different than having local McKinsey experts at your fingertips, and they will be very successful.
Is Shift4 selling itself?
Every company is for sale. Always. It comes down to price.
Shift4 has taken private equity (PE) financing. PE groups raise capital from limited partners (LPs) and traunch them into funds. These funds have lifespans of about 5 years. PE groups aren’t eager to roll an investment from an existing fund into the next fund unless it’s outperforming on internal rate of return, or IRR. The reason is that partners at PE companies make most of their money from carried interest (carry), which is the profit from selling an investment. And PE groups usually don’t pay carried interest until gains are realized (after the hurdle rate is cleared, of course) and it’s hard to earn carry if you haven’t realized a gain, isn’t it?
When Prospect (a PE group) sold Harbortouch to Searchlight (current PE ownership) it realized an IRR of 14%. Shift4 may have produced higher returns since then but they’d need to be about double for Searchlight to consider rolling Shift4 into the next fund.
If Shift4 were selling itself it wouldn’t be a horrible time: multiples are at an all-time high (chart below) and large processing strategics Elavon, TSYS, and Worldpay haven’t developed a material POS plan yet (our guess is that they’ve been sitting on the sidelines to see if the bundled POS-payments experiment would pan out). Through its POS roll ups Shift4 now sits on top of 100K restaurant/retail doors. This is surely enticing to one of the larger payments providers, and Shift4 is already riding the TSYS rails.
It’s possible that Shift4 is on the market. If you want to find out for sure, call FT Partners, the investment bank that facilitated Harbortouch’s last transaction with Searchlight.
Catch you next week.
