Toast Buys Stratex, Lavu Buys MenuDrive & Sourcery, and POS Marches to Monopolize Stack

If you’re managing capital one of the first things you realize is that it’s more expensive to acquire new customers than it is to sell to existing customers. If you wanted to get technical you can look at customer life time values and costs of acquisition.

The below data comes from Sammy Abdullah at Blossom Ventures, who curates some awesome analysis. His data shows how public SaaS companies leverage customer acquisition costs to sell more to existing customers under a metric called net retention. Formulaically net retention is calculated as beginning of period revenue + upgrades — downgrades — churn all divided by beginning of period revenue. If that formula yields a number greater than 100%, then growth from your existing customer base more than offset any losses from that customer base.

This mathematical reality is the promise of POS: it can be a platform that catalyzes the attachment of a whole gamut of solutions in the “stack”, as we call it, at very compelling costs to the POS company. Think of marketing, loyalty, labor, payroll, accounting, analytics, etc. as layers of this stack.

Micros and NCR were keen to monopolize the stack, and they did so behind their walled gardens. The former has loosened up quite a bit, but the latter is still a bit of a disaster in our opinion, and they’ve not yet produced a functional partner program worth discussing. It’s why most of their resellers worth talking about have picked up and started selling competitive POS systems as they lose all faith in NCR.

As any merchant will tell you, however, the “stack” products offered by both Micros and NCR got worse over the years, not better. It didn’t matter if the POS company built the stack solution internally or if they acquired a company to augment that part of the stack, over time the solution fell remarkably behind market substitutions if it was even relevant to begin with.

The reasons for the dilapidation are pretty simple.

1. Companies cannot do everything well
2. Once you lose the founder of a company, it’s really hard to drive the same level of innovation

But God Bless America if that hasn’t stopped modern POS companies from trying to rewrite the laws of economics.

Upserve, owned by Vista Equity, acquired SimpleOrder to augment their back of house solution stack in 2018. More recently Toast acquired Stratex for payroll while Lavu acquired MenuDrive and Sourcery for online ordering and accounts payable management, respectively.

The first thing these POS companies will do is to try and sell their POS solutions into the customers of their recent acquisitions. So any Stratex restaurant using a POS that isn’t Toast will be getting sales calls to convince them to switch.

But after that, is this a sound strategy?

In the case of Toast they’re needing to grow incredibly fast. It would have taken longer to build a payroll solution than it took to acquire Stratex. Payroll is also a relatively lucrative part of the stack – look at pricing from Gusto, a well known payroll “startup”, as proof (screenshot below). If you assume the average Toast location has 25 employees that’s $339 per store per month. Not quite payments processing levels of revenue, but still very high relative to other stack components. This is the reason Bob Carr got Heartland into payroll under his tenure.

In the case of of Lavu, most POS companies have their own, native form of online ordering. Toast already offers their own, for instance. Lavu has had their own online ordering functionality for some time as well, so was this a way to substantially augment their own product? Were merchants not using Lavu’s native ordering solution or was Lavu unable to charge sufficiently for the product due to lack of feature maturity?

Sourcery is a net-new part of Lavu’s product stack, but the bigger question for Lavu becomes integration. Toast has absurd amounts of money and unlike NCR and conventional payments companies they’re willing to aggressively invest in R&D; so we think Toast can successfully fold Stratex into their POS offering. It feels like a much bigger stretch for Lavu.

In each of these acquisitions we expect a significant drop in product and innovation quality over time. Founders don’t normally stick around more than 12 months after a transaction (or until they hit their earn-out numbers). And when founders leave, so too does much of the entrepreneurial spirit. Will Stratex keep the same pace of innovation as Gusto? Will Sourcery keep the same pace of innovation at PlateIQ? MenuDrive as Olo?

We doubt it.

The ideal relationship for these POS suitors would have been a partnership: one where the POS company fills the void in their stack but doesn’t sacrifice the cadence of innovation that attracted them to the stack solution provider in the first place. Some POS companies are successfully doing this under a white label partnership, and while we may be biased because we operate under this model, we think this is the right approach if you’re really trying to give merchants a superior offering.

But this is only so scalable.

The POS company worries a competitor might buy the prospective stack solution and crash their party. If the solution provider took institutional capital then the POS company knows their investors are looking for an exit anyway. The POS company, if they’ve taken institutional capital like Upserve, Toast, and Lavu all have, are also looking to juice their own numbers in the short term so they can exit for a higher figure. If the solution they acquire falls apart in 2-3 years that’s the new owner’s problem: incrementing revenue or EBITDA now is all that matters, no matter how unsustainable it may be.

So merchants generally get inferior solutions, even if the POS companies tout the marketing line of “seamless integration” and all the other benefits. Yea, yea, spare us please.

We can dream of a perfect world but we’re living in the real one. Short-termism once again comes at the expense of the customer.