The team at SpotOn is on a tear, with a $125M Series D valuing the company at $1.875B after only four years in business. SpotOn’s revenues could have commanded a higher valuation given the 40x+ revenues we’re seeing in public markets (and how Toast figured a $20B valuation), so maybe they were more prudent with the terms.
We’ve been around the offline payments/technology industries for some time, and SpotOn might be the best run payments-software company we’ve encountered – in the realm of Square, which is saying something.
At a high level we attribute their success to a few factors.Experience. Cofounders Matt and Zach Hyman and Doron Friedman have done this before. The Hymans sold Central Payment, a large ISO, to TSYS for a collective $840M, and before that notched a $20M ISO win in their 20’s within a few years. Friedman had also built a very large (9 figure) startup in the card issuing space.
People.
SpotOn has been able to attract amazing talent, with roles like EIR (entrepreneur in residence) and head of cryptocurrency – not things you would see at a conventional payments company, proving that their culture is drastically different than what many outsiders paint SpotOn to be: a payments processing company.
Network.
Having created wealth and success earlier in their careers – and in the same industries – smart and capable people want to work with winners. When Global bought TSYS and undoubtedly starting abusing the Central Payment portfolio do you think customers and employees might have been interested in what SpotOn was doing?
Product.
Unlike other payments processors that pretend to be software companies, SpotOn puts their money where their mouths are. One of their cofounders is a pureblood software founder. They’re investing aggressively in product R&D. Their roadmap is among the best we have seen of any company in the space, and we routinely rub elbows with some large software companies.
Ethics.
SpotOn has been very transparent in their pricing models. There’s no “free POS” gotchas, nor are they stuffing portfolios with Global Paymentsesque fees. This has made decisions incredibly simple and painless for resellers, drawing many of Shift4’s resellers over.
All of these are related to one another and keep the growth flywheel spinning.
But it wouldn’t be a good ReformingRetail article if we didn’t posit some questions.
SpotOn has two parts of the business.
One part revolves around a restaurant POS, which is the anchor product and helps drive a number of add-on softwares and services, of which payments is one. Payments is not mandatory but like Shift4, SpotOn makes it economically compelling to take payments with their POS.
The other part of the business revolves around payments and a host of software and services, but no anchor software, like a POS or ERP. And this is what gets us to a point of introspection.
Over the past decade payments processing, a commoditized, non-product but mandatory service that is incredibly lucrative with literally zero COGS, has accreted to POS and ERP systems. One could say that payments is accreting to software more generally, but the stickiest piece of software (i.e. the software that’s hardest to change out) seems to be the natural resting place for payments processing.
In the offline world that’s very much been the POS.
So the first question we ask about the non-POS division of SpotOn’s business is just how sticky that business is. For example, SpotOn sells to mechanics. These mechanics can get a number of SpotOn tools (loyalty, review management, marketing, et al.) with their payments processing. But will those mechanics stay on SpotOn’s solutions if a more purpose built software – like Shopmonkey – comes in with payments processing (which Shopmonkey offers, by the way)?
Our belief is that payments accrue to the stickiest solution for a merchant, which often looks like a purpose-built POS or POS analogue.
That said, this might also be a short term and myopic perspective.
POS is reaching a singularity, becoming commoditized and, much to the chagrin of POS companies that spent a record amount of money convincing merchants that POS should be “free”, reaching the point where merchants place almost no value on the POS.
In fact we’d go so far as to say that POS is becoming an also-ran solution: a business necessity but not directly tied to generating a business more money.
And this is where things get interesting, and how we expect the battle of POS to play out over the next decade.
POS companies have put themselves on a hamster wheel of development where the end customer believes that the core product has no intrinsic value. Just like getting air conditioning in your car is a standard feature today, POS is increasingly viewed as a table stakes solution.
“So what, it’s a POS?” say merchants everywhere.
You know what generates revenue with hard ROI (or should)?
Marketing software.
And this is where SpotOn is going, or at least betting on the market going, and they’re working hard to get there. And we’re principally in agreement with a few differences that might be chalked up to semantics.
The second question we ask about the non-POS division of SpotOn’s business is just how competitive will that business be. For example, what happens if Shopmonkey also gets into marketing software? If given the choice between two similar marketing solutions, one of which comes with a POS or POS analogue, which is a nontrivial software build, what does the merchant choose?
Maybe it’s irrelevant because the market is so big. In the meantime, keep paying nothing for that POS.
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