You can’t understand where we’re going if you don’t understand where we’ve been, to paraphrase Maya Angelou.
It’s no different with Olo: to understand investor frustration, we must take a look at the company’s history.
It’s pretty sensical that restaurants could and should use online ordering: the convenience for both the consumer and merchant are obvious.
But it wasn’t obvious to everyone when mobile phones came out in the late 1990s.
Noah Glass, who would go on to found Olo (initially called GoMobo), wondered why such a platform didn’t exist in 2003.
In 2004, sitting in Johannesburg, South Africa while working for Endeavor Global, Noah met David Frankel, a native South African who sold his bootstrapped telco, Internet Solution (IS), to Dimension Data for $80M a swift 3 years after founding.
Since exiting his business David found himself seeding capital to promising entrepreneurs, and he told Noah he’d write him a $500K check if Noah agreed to forgo Harvard Business School – where Frankel also studied – in the fall and instead pursue his mobile ordering idea.
Noah accepted.
But these two had no idea how recalcitrant restaurants would be.
Borrowing from another article, restaurants spend mere basis points on technology, lagging literally every other industry in IT spend (except maybe construction, but we think that’s because retail IT spend is inflated since they include the cost of payments interchange in their IT budgets).
So it’s not surprising that when David went on to start Founder Collective, his venture capital firm, in 2009, his learnings at Olo led him to shy away from funding companies chasing irrational customers.
As for Olo, Noah has an unparalleled ability to get back up after being beat down.
Data from Pitchbook:
- In 2005 Olo raised $1.75M at a $6.54M valuation
- In 2008 Olo raised $7M at a $14.8M valuation
- In 2013 Olo raised $5M at a $67.9M valuation
- In 2014 Olo raised $10M at a $78.6M valuation
- In 2016 Olo raised $40M at a $231M valuation
Raising $64M over 12 years to be worth $241M: who would sign up for that? Especially when the sole founder would be left with ~10% of the company.
When you look at Olo today, the company’s situation hasn’t markedly improved nearly 20 years later: a valuation of ~$450M when factoring out the cash that was raised in their 2021 IPO.
Toast, for comparison, was worth $10B ~12 years after founding, is legitimately growing >30% annually (this is in reference to Olo financial analysis we’ll reveal in future posts), and their Series A investors are staring at an 111% IRR.
Here’s the imputed IRR for Olo’s investors by year of financing round:
2005: 24.9%
2008: 23.8%
2013: 18.8%
2014: 19%
2016: 8.7%
What’s interesting is that 2016 number.
Why is that investor’s IRR so low?
In 2003 Noah Glass played on Yale’s lacrosse team.
On that team was a fellow teammate named Colin Neville.
Colin Neville went on to work for Raine Group, the investor that wrote Olo the $40M check in 2016.
It’s not uncommon that people from Ivy League institutions reconnect after school, but the timing is also a bit coincidental.
Olo was struggling. I’m not telling you anything you don’t know – you cover the restaurant industry and know how hard they are to serve. We were actively engaged with several potential acquirers and were 99% convinced we’d sell the business if we could get an offer, but none really came in. We were close with NCR, but that didn’t pan out.
Former Olo executive
Rain Group will play a key role in the following articles, so take note.
According to Olo insiders, Olo’s revenue trickled for years. Not for any specific failure of Noah’s vision, but mostly because restaurants don’t spend money on software. It takes multiple decades for common-sense solutions to be adopted by restaurants.
But that didn’t prevent Noah from pushing on.
In 2018 Olo closed the year at nearly $31M of revenue, growing to $51M the following year – a respectable growth rate, though 15 years after starting.
Then in 2020 something amazing happened, at least from Olo’s perspective:
A global pandemic sparked in Q1 2020 made indoor dining illegal in many parts of the country.
Suddenly Olo’s core customer had to pick up an online ordering solution lest they watch their revenues shrivel to zero.
In a mad dash of self-preservation, restaurants across the world turned to online ordering software to stay afloat.
This tailwind allowed Olo to end 2020 with $98M of revenues, complete an IPO in March of 2021, and close 2021 with nearly $150M in revenues.
But insofar as it provided Olo the story necessary to go public, it also eroded what moat (if any) Olo had.
Online ordering is not complicated, but the technological moat to enable online ordering was much more challenging when Olo started: in the mid-2000’s, the dominant restaurant POS systems were terrible, server-based monoliths owned by companies whose business cultures were even harder to work with than their spaghetti code POS products.
Today, enabling online ordering is an API call on a cloud POS. From that API call menu prices are updated, orders arrive on the KDS, and things work pretty smoothly. So smoothly, in fact, that cloud POS companies offer online ordering out of the box.
The first segment of merchants to move to cloud POS were the SMBs, lured by “free POS” subsidized by the lucrative – and hidden – credit card processing fees. These new cloud POS entrants built their own online ordering capabilities, pitching all-in-one solutions to their customers. As COVID hit, these same companies leaned heavily on their online ordering modules, beefing up features that might have been underdeveloped prior to the pandemic.
Naturally this usurped Olo’s TAM downmarket.
As cloud POS starts penetrating upmarket merchants, and as cloud software vendors that support upmarket merchants (loyalty, back office, et al.) start buying online ordering solutions, Olo finds itself exposed to further TAM erosion.
Olo’s core customers are enterprise restaurants clinging to dilapidated, server-based POS systems. Despite restaurants’ best efforts to own a POS system for 30-50 years these restaurants will have to eventually use software built in the 21st century or they will fall further behind.
Note: the 30-50 year timeframe is not even hyperbole. Could you imagine needing treatment to remedy a neurological ailment so grave that it renders even the most banal daily tasks impossible, and you tell the physician, “Yo doc, gimme that treatment using technology from 50 years ago.” This is 100% how restaurants think. POS runs the entirety of a restaurant’s business and their default positioning is “Hey, let’s spend as little as possible on this”.
Olo and its founder Noah, who’s spent his entire career building Olo, are clearly in trouble.
Again.
At this point we’ll posit that Olo’s leadership and board not only know the unfavorable, yet unquestionable position that they are in, but discussed and are discussing these matters at executive levels.
The restaurant industry does not pay for software.
Our TAM is shrinking by the day.
And we decided to go public anyway.
F*ck.
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