If you’ve had the chance to sit in on startup pitches serving brick and mortar merchants you’ll eventually get to the part that details ROI (it’s after the part about how the market is literal trillions of dollars large). Baked into this ROI is usually some hard number – like physical money saved – and a soft number – like time saved. This latter one is a real doozie.
People in brick and mortar place near zero value on their time. For starters, many merchants have salaried managers. Ownership doesn’t care if the manager has to spend 10 more hours a week entering figures manually: it’s a fixed cost. Further, when they weigh the value of saving $100/mo on whatever software would “save” their manager’s time they always sign their managers up for more work.
Here are plenty of examples:
But perhaps most importantly, people in the industry have no understanding of the time value of money.
Let’s say you’re an entry level private equity lackey making $500,000 a year (new grads make $300,000 and if you’re not a total loser you should be pulling in $500,000 by 25). You decide to quit and start a software company targeting brick and mortar merchants. After your first year you realize that, if you do moderately well and have some decent timing on multiples, you’ll net $5M in a sale in 10 years. Oh, and your annual salary over those 10 years will be a cumulative $300,000, or $30,000 a year on average.
What do you think this private equity analyst does?
Uh, they get out ASAP. Because they can take relatively trivial risk and make $500,000 a year, growing to $5M annually over the next decade in private equity. Oh, and they can invest their net income in other opportunities that would earn much higher rates of return than starting that brick and mortar software company ever would.
Sound farfetched? Look at Digital Dining, a POS founded in 1984 that exited to Heartland in 2015 for $18.7M. Not exactly the kind of IRR that would get anyone with legitimate alternatives out of bed.
A lot of people in brick and mortar have no other options so they’re forced to grind it out. That solution that was going to save them 40 hours a week? Well, it cost more than free, so merchants will pass. Because what else could you possibly do with their 40 hours of your time, right?
Brick and mortar is, in many respects, a lifestyle business. Very few people enter brick and mortar looking for outsized returns. Accordingly merchants move very, very slowly and the ecosystem has responded in-kind. So when merchants get all bent out of shape about the economics of Grubhub or Groupon, what did you expect? If you actually moved more quickly to adopt innovation you’d have better tools and systems to measure the supposed ROI of these initiatives.
But you don’t, and these companies are just exploiting your flaws.
This is why we remain bullish on technology that’s disrupting the brick and mortar merchant (Amazon, ghost kitchens, et al.). The people at these companies have options and know the value of time. So when they do something, they do so to earn acceptable returns for investors. You can’t say the same for brick and mortar incumbents.
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