SpotOn, which has raised $130M to date, was not an overnight success. In fact all public optics would make it seem like the company has gone from idea to 9-figure entity in less than three years. But those on the inside tell a different story.
In 2000, as the US economy reeled from a technology recession, twin brothers Matt and Zach Hyman started CardPayment Solutions. “We initially got into the payment space because we loved the idea of being able to offer a merchant better service and better rates and still leave room to build a great business. In 2000, small businesses across the country were paying much more than they are today to accept credit cards,” says Zach Hyman. Three years later, at the ripe old age of 27, the Hyman brothers exited the business to iPayment.
But they didn’t stop here.
Now armed with a half-decade of payments learnings and an eager investor in iPayment, they sought to do it again. “iPayment was an early investor and owned 20% of the business. In 2009 we bought back their stock by selling them a large portfolio and doubling down on our business to fuel growth,” shares Zach Hyman.
Yet during their time running CentralPayment, along with friend and now-SpotOn co-founder Doron Friedman, the Hyman brothers had an idea.
In 2011 we noticed merchants were very attracted to software solutions to help their business. Companies like Belly Rewards and FiveStars had created digital loyalty solutions that some of our clients were starting to use. These loyalty companies lacked the proper economics because they didn’t have payment revenue to offset the distribution costs involved.
Zach Hyman
So they carved out a separate entity. Their initial thought was to push their loyalty solution through their existing payments distribution channel, Central Payment. But it didn’t work. The problem, as they soon discovered, was getting payments reps to sell anything that wasn’t payments processing. “It turned out that training existing payment sales professionals to properly sell software was an uphill battle,” explains Zach.
For a brief interlude, we’ve always rationalized Zach’s findings like so:
- Payments processing make so much money that selling anything else is a distraction
- Payments processing is commoditized and takes very little time to understand. Software, meanwhile, is much more complicated to learn, and that’s time you can’t be selling payments
But the Hymans found a way to grow the software business regardless.
In 2017 their software had enough traction that they spun it out entirely: SpotOn Transact, Inc. The Hymans seeded it themselves with $20M and viewed it as the next evolution of payments. “We were excited with what we accomplished during our time at CentralPayment but we now clearly realized that the SMB community was desperate for competitively priced software and integrated payment solutions that could help them grown, run, and manage their business.”
In 2018, Matt and Zach sold their final stake in Central Payment at an $840M valuation and turned their full attention to their software darling: SpotOn. Things were going so well, in fact, that the two founders reached back into their pockets to lead a $20M seed round in April of 2018. From there SpotOn took a $40M Series A in mid 2019 and a $50M Series B in March 2020.
How did they grow so fast?
For starters they started with a small, tight knit group of software sales employees. They trained these teammates on software, painting the vision for how software should pull payments, and how symbiotic the relationship should be. That eventually scaled to today, where SpotOn has over 500 W-2 employees selling their products. All the while each one of these sales reps has a different pitch than your traditional payments bro: value. Yes, SpotOn makes money on processing, but at its core it’s a software company. Remember, SpotOn wouldn’t even exist if it weren’t for its loyalty software:
In 2019 SpotOn acquired two companies, eMagine POS which had 1,000 restaurant installations and has now grown to over 2,500 locations, and Lifeyo, a DIY Web Development company.
60% of SpotOn’s revenues do emanate from payments today, but the other 40% are SaaS-derived. And those SaaS revenues are climbing. Why? Put simply, SpotOn developed a model more similar to the models of Shift4 and Heartland than those of Toast and Clover:
No payments lock-in.
Here’s how SpotOn is winning.
First, there’s no processing contract for SpotOn merchants, and no random fees. If a merchant wants to leave, they can. It’s the same for SpotOn’s software too: if you don’t want it next month, you don’t have to pay for it. There’s also a dearth of fees and gotchas: no across the country fee, PCI / PCI non-compliant fee, statement fee, monthly minimum fees, batch fee, annual fee, regulatory fee, termination fee… you get the idea. In fact their only fee is for their software platform and it starts at $25 a month when used with SpotOn’s processing (it’s $195 a month otherwise).
Second, a merchant can choose whatever processor they want and can even keep their existing POS and still use most of SpotOn’s solutions. SpotOn wants to earn the payments business on value, not at the point of a bayonet. 90% of SpotOn merchants choose SpotOn as their processor, but some don’t. “This is how we win against competitors like Clover, Square, and Toast,” explains Zach. “We want merchants to control their destinies and not be at the whim of a payments provider with a long term contract. By demonstrating value we’re convinced merchants will eventually choose us for their POS, too.”
Third, as is the case with Shift4 and Heartland, merchants who choose SpotOn for processing will receive a discount on other services. “The payments revenue stream does allow us to be more flexible with financing, and we pass that through to merchants in the form of savings.”
Lastly, all merchants get access to Spoton’s basic software platform: marketing, review management, analytics, mobile processing, and a virtual terminal. Optional products include loyalty, appointments, and web development – all of which SpotOn develops and supports in-house. In this bundled fashion SpotOn merchants are getting more value for less thanks to consolidated distribution, where SpotOn pays close attention to the hospitality market. “We don’t walk in selling savings: we walk in selling services and solutions that help merchants grow their business.”
So basically merchants are swapping junk fees for value. What an idea…
SpotOn seems to be successfully executing what payments execs love to talk about on earnings calls but aren’t doing in reality. A simple litmus test is the fake-fee bonanza that plagues this industry: if your payments provider gets caught in our Payments Statement Obfuscation Series, odds are that they’re never going to care about providing any real value.
SpotOn’s successes have put them in a position where they’re actively hiring while other payments companies are letting people go. They’re seemingly willing to be on the belief that merchants, when they reopen, will flock to value over commoditized processing.
And real value, as SpotOn has demonstrated, takes time to develop. Software is not easy.