The Path to Exit for Retail Tech Companies Is Abysmal

First, don’t.

If you’re in retail tech, you’re hosed.

The returns you want are best found serving customers that want to use technology: tech adoption in retail is and will always be a slog so long as the retailer demographic is the < 80 IQ person.

But if you’ve given up and realize you’re already screwed, here are your options.

First, you need to steady yourself that your business is only worth 1-2x revenue.

Why?

1. You’re not growing fast enough organically. Retailers DO NOT self-discover, so the amount you spend is directly proportional to how much you’ll grow. If you don’t have a lot of money to throw at sales, you’re not going to grow at all.
2. Your margins are terrible. Retailers pay relatively nothing for solutions, and literally demand 1000x ROI (although they do not know the meaning of the acronym). This means that even your server costs will eat a disproportionately large amount of revenue, and since retailers are too dumb + lazy to actually use any solutions, your support costs will kill you i.e. most investors expect SaaS to be 80% margin because cloud computing costs + support are 20% of revenue, whereas for tech companies serving retail it’ll end up being 50% margins if you’re lucky.
3. There is no moat to your business. What could you have possibly built for tens of thousands of dollars that a larger competitor couldn’t build themselves? Maybe you save them a few quarters of work, but that’s about it.

The truth is, nearly every solution in retail is a feature, not a company. Only the ERP/POS has the pricing power necessary to be a platform.

Don’t believe it?

The best litmus test is this:

Who dictates terms on the high-margin payment processing? If the answer isn’t you, you’re not a platform.

And we don’t mean some irrelevant sliver of total merchant payment volume like online ordering or catering: we mean who controls that fat tail of the 80/20.

A lot of companies delude themselves – or intentionally delude investors – into believing they’re a platform when it’s not the case. The former is a lack of self-awareness while the latter is full-on fraud.

Who wants to pay 1-2x revenues for your business?

Private equity needs EBITDA to lever debt.

Very, very few tech vendors in retail have EBITDA worth a damn.

Why?

Because the top line is massively compressed: A let’s-just-say-for-the-sake-of-the-example bank will pay at least 10x what a retailer would for the same solution.

And it has nothing to do with margins between the bank and the retailer: it has to do with the buyer having the IQ to understand and impute the value to their own lives.

Once you get over the diminutive revenue a retailer pays, you have to deal with a disproportionately high COGS (as alluded to above) because, on a relative basis to revenue, your cloud hosting costs look huge, but mostly your support costs are massive from all the handholding required to have a retailer use your solution… because people with an IQ of 76 struggle to undertake basic arithmetic, even if they are – inexplicably – occupying a c-suite role at a retailer.

Literally the hiring process in retail goes like this:

Person 1: okay so how do we choose a CEO?

Person 2: who’s the oldest?

Person 3: I’m 61. I dropped out of kindergarten and spent 33 years frying foods on the front line.

Person 1: What a genius!

Person 2: I can’t wait to serve under you!

Sometimes there are lower middle market PE firms that are desperate to put money to work so they can earn their management fees, and they’ll acquire a business based on the top line and then cut the crap out of it to make EBITDA. This is a short-term passable PE strategy, but as a founder you need to understand that once you sell your majority stake to these investors, this is what happens.

The path to going public is untenabele.

Look at Olo: one of the “most successful” restaurant tech companies by location penetration (~80K) but it’s only worth 2x revenues in the public markets.

And it took them 17 years and a global pandemic to get there.

Lots can and is being written why this is, but it underscores the improbability of going public, even with $200M of revenue, which Olo nominally presents as true recurring revenue (Olo mishandles of gross payments revenue to obfuscate true performance), when you’re unfortunate enough to serve retailers.

So what are the actual likely outcomes?

An exit to a strategic.

And because retailers pay so little for anything, there are only a small handful of companies that have enough scale to potentially acquire your business.

There are a lot of subsegments within retail, so this could become confusing.

Since we often write on the worst retail subsegment (restaurants, where IQs are 10-15 points lower than your average retailer) we thought it easier to sum it up in a graphic.

Not included are a few back office tools that could theoretically be large enough to acquire an asset, but because they’re owned by a PE and are right at the precipice of $100M ARR, their boards are telling them that they need to find an exit for themselves first.

We have seen this play out on several occasions with Revel POS as an example (BTW, how greedy was WCA&S to not unload that investment in the 2021 valuation bubble?).

That’s the thing: it’s so hard to make any return selling to retailers that investors become irrational themselves.

The secret?

Don’t invest in retail tech to begin with.