TouchBistro Adds $120M to Reach IPO, Raises Interesting Questions on Verticalization

TouchBistro recently socked away another large check on a Series E. With 16,000 merchants processing $11B – that’s $690K per location – they seem to be growing fairly well. Yet it’s getting late in the fundraising game, and TouchBistro needs to think about what the future holds. Alex Barrotti, TouchBistro’s CEO, sees this being the last round of financing before an IPO in early 2021. We asked him how he’d use his new capital and he had two two answers.

First, TouchBistro wants to keep expanding market share. TouchBistro was one of the first cloud POS companies to move internationally. Toast has been toeing the waters but TouchBistro put up offices in Mexico City and London over the past two years. Alex sees these market turning to cloud and hopes to ride the tides of modernization.

Second, TouchBistro wants to verticalize the stack. “To compete we need to add more solutions in the stack. Toast is now pushing payroll so we’ll be looking to add payroll. We’re also eyeing loyalty and online ordering next,” Alex shares.

We understand the tempting spreadsheet math behind verticalization but we remain immensely skeptical. The theory behind verticalization is essentially like adding steroids to the CAC to LTV ratio: additional stack solutions increase ARPU and the POS becomes more sticky, lowering churn. In a conversational format the logic goes a bit like this:

The merchant needs a POS and we’ll provide it. The merchant also needs payments so we’ll provide that too. The merchant will come to realize they need labor management, loyalty and marketing, and a number of other features, and we want to be the first place they turn to get those solutions as well. Even if we’re not the best at x, we think we’ll be good enough to win the merchant’s business. And if the merchant is using us for 2, 3, or even more solutions, they’re never going to leave.

POS verticalization theory

We can buy this argument with payments easily enough, as it’s sufficiently commoditized that your dog could become a payments provider tomorrow. But other parts of the stack? Eh, not so much.

Let’s take labor management/scheduling for a second.

Table stakes for labor management now requires a mobile scheduling app for employees, where they can request shift changes and time off from their phones. This demands a non trivial amount of logic to accommodate, notwithstanding the mobile application that must be built. Then you need to stay on top of compliance; if you haven’t been paying attention there are a large number of very bored legislators writing nonsensical laws on wage minimums and predictive scheduling. As counterproductive as we think these measures are, they’re still laws and they must be followed. If those two items weren’t enough, now we must examine the intersection of labor and data science. There’s absolutely zero reason any merchant should be building schedules in today’s business climate. Instead, machine learning should be building schedules for you. You’re going to invest that much R&D into your labor solution?

So we now have three very dynamic areas and we’re just within one layer of the stack. For quick summary:

• Mobile product interface and logic
• Compliance with amorphous labor laws
• Machine learning for scheduling optimization

Chasing these stack solutions can be a bit like going down a rabbit hole. As we’re observed from the first generation of legacy POS companies, this was often to the detriment of the POS. 

As an example NCR sought to add a number of recurring revenue streams on top of their Aloha POS. In doing so one could make the argument that NCR lost their dominant position in the restaurant market: NCR lacks a viable cloud POS to replace Aloha despite the fact that Square launched in 2009 (ask any Aloha reseller about the shortcoming of NCR Silver), and, in the opinion of many, including us, NCR lacks a workable API program. Both of these can be attributed to a lack of focus on their core POS.

While we think partnerships are the best way for POS companies to accrete the value of best-in-class solutions while maintaining focus on their core POS, Alex offers a very fair counterpoint.

We were one of the first POS partners for ReUp, a restaurant loyalty program. After working with ReUp for about a year, Lightspeed bought them out from under us. Not only did we lose the security of a valuable partner but our competition can see exactly what our customers do. So sometimes these partnerships can really be a double-edged sword.

Alex Barrotti, TouchBistro CEO

Alex prefers to view the POS model of tomorrow like that of Salesforce. “Salesforce has their own solutions across a number of product categories. Salesforce users can opt to use Salesforce’s solutions or choose solutions from a third party in the Salesforce ‘app store’.”

For proof of his methodology TouchbBistro recently launched a reservation product in competition with OpenTable. Alex shared that one of his customers reported spending three hours keying reservation data from OpenTable into TouchBistro, and Touchbistro’s new reservation tool fixes that. “There are certainly instances where having a tight integration to the POS makes a product really shine; it’s in these categories where we think the POS can and should have a downmarket product option.” TouchBistro’s reservation tool surprised us in its thoughtfulness of helping merchants claim their own reservation links on Google, removing a default integration with OpenTable that is much more costly for the merchant. 

With all these efforts Alex hopes to get TouchBistro’s revenues to $400 per month per location, or $4,800 per year. Toast, comparatively, is striving to reach $8,000 per location per year based on conversations we’ve had with their insiders. Global Payments also attaches a revenue goal per merchant of $571 per month or $6,852 per year, but with what products is perhaps the better question.

We’ve found Alex to be a very good and reasonable operator, and he will undoubtedly look at the data when he makes business decisions of this magnitude. While Toast appears to be swinging for the fences, TouchBistro has operated in a much more measured fashion, consuming less capital with presumably better CAC to LTV ratios.

Still, we remain skeptical on full verticalization when some layers of the software stack are sufficiently complex and sufficiently competitive. This deserves a much closer look which we’ll save for another article. In the meantime, we’ll wish Alex luck on his way to IPO.