In the continuation of our Olo analysis, let’s catch back up.
Olo had gone public.
We contend that Olo management was now fully aware that the company’s growth prospects were materially capped, and that it was nonsensical to be public at all.
Yet instead of facing this reality and maximizing shareholder value, company management decided to spend what is now tantamount to 40% of Olo’s enterprise value on the acquisition of Wisely, a restaurant marketing tool.
When we first saw the deal we thought it made a lot of sense.
However, despite owning Wisely for 2.5 years, we don’t see Olo placing Wisely in many accounts, and the larger accounts Wisely does have are malcontent. This is flabbergasting considering that Olo is mostly penetrated into large restaurant brands.
We’ll get to why Wisely hasn’t been more successful later in this article, but for its $187M acquisition price, you’d expect Wisely to be throwing off > $25M in revenue today, but Olo doesn’t break out revenue by product lines (we’ll demonstrate why we think this is intentional in later analysis).
How did we get that $25M ARR number?
A 10x revenue multiple and 25% IRR.
If Wisely was acquired for $187M, a 10x revenue multiple would be ~$19M of ARR. Add two and a half years of 25% IRR and you’re north of $25M ARR.
We acknowledge that Wisely was acquired for > 20x multiple, but that’s because the company was growing 200% YoY. Given that, there’s no reason Wisely shouldn’t be doing $25M ARR today if it were well managed.
(Note: software lives and dies by the rule of 40, which is rather arbitrary, but 25% IRR is sufficient and actually beneficial to Olo’s case since it’s more conservative.)
Instead, you have a number of red flags with Wisely’s acquisition, as it’s NOT producing $25M ARR.
The first red flag is that Wisely’s founders hung around for what appears to be the bare minimum before leaving 15 months later.
Departure is common, as entrepreneurs want to start new things instead of working for someone else, but it was also a very quick earn-out period relative to traditional earn-outs.
What would catalyze such a quick departure?
Our research points to two culprits:
- The management team at Olo.
- Restaurants.
The former will become a recurring theme of these articles, as it will be made clear that they are bungling nearly every aspect of running a public company to the detriment of the shareholders.
The latter is just the truth: restaurants are a terrible group of customers to serve. They expect the world and then want THE VENDOR to pay them for delivering the value.
It’s so asymmetric that you can’t even make this stuff up.
Olo’s management team knows this or should know this after operating in the space for 20 years and is therefore obligated with a duty to be forthright with shareholders about their growth prospects.
Let’s look at a totally different acquisition in the same, terrible restaurant industry: PAR acquired Punchh, a loyalty marketing platform in mid-2021 and since then Punchh has more than doubled revenue to $64M, representing a 29% IRR (we can ascertain this because PAR reports business lines separately and transparently).
This points to the biggest culprit being Olo’s management, both in their decisions on what assets to acquire, and post-acquisition execution (or lack thereof).
The second red flag was/is the legitimate technical hiccup between Wisely and Olo.
Olo, with its Stripe payments partnership, struggled to produce the payment tokens Wisely needed to be successful. This is how Wisely (and others) track unknown customers, and Wisely’s strongest value proposition that made it competitive to brick and mortar retailers.
But this was literally impossible with Olo up until very recently (and some accounts still can’t get the payment token data to work, we’re told).
It’s why, per Linkedin, all of Wisely’s sales people left: they wouldn’t make quota selling Wisely.
And for what it’s worth, Wisely was a much harder product to sell than online ordering, where Olo is THE known quantity. Wisely required a lot more setup, a lot more integration work, and wasn’t a guaranteed budget item in every restaurant: something that Olo became in 2020 when many restaurants could literally only conduct commerce through online ordering.
Olo had an obligation to understand this as part of their diligence.
Third, Olo prioritized Olo Pay over Wisely, even though as PAR has shown it is possible to grow a restaurant marketing company substantially if well operated.
Why prioritize Olo Pay?
Olo Pay allowed Olo to misleadingly recognize higher revenue growth on a stagnant base of customers through gross payments revenue recognition, not net revenue recognition. This inflates NRR, ARPU, and every other software metric of importance.
Olo is the only payments-embedded software company we could find that recognizes payments revenue like this; Lightspeed (LSPD), PAR (PAR), Shopify (SHOP), Square (SQ), and Toast (TOST) all recognize payments net, with clear delineation between software and payments lines of business.
Therefore we were not surprised when those on the inside told us that Olo Pay took preference to Wisely on the sales effort, and the reshuffle even resulted in the sudden “departure” of several senior executives (Olo’s founding sales leader and Chief Customer Officer) as Olo was realigned.
The reporting and handling of Olo Pay will lead us into the next article in this series, but these three core issues have plagued the Wisely acquisition. One might argue that Olo has underfunded Wisely – leading to Olo losing a top-3 Wisely account in Bojangles – but that again points to Olo management issues.
In its current embodiment Wisely might generously contribute $10M to ARR, and the CAGR is low single digits, or perhaps even negative: Olo promoted their Wisely deal with Five Guys but Five Guys is notorious for spending $0 on marketing.
It’s not even a secret: see this article titled, THE FIVE GUYS SECRET TO RESTAURANT MARKETING WITH NO AD BUDGET, where the opening sentences read as follows:
Both McDonalds and Five Guys Burgers and Fries compete on a daily basis to offer the public hamburgers and fries. In 2014, McDonald’s spent more than $988 million on advertising. Five Guys Burgers and Fries, in the same year, spent exactly $0.
So why does Five Guys need Wisely?
Was it a concession so that Five Guys would renew their Olo contract?
Olo’s management has a duty to be honest, not hyperbolic.
A more candid reflection of Olo’s position might look like this:
Despite ~$1T in top line US restaurant sales, there are a pathetically small number of restaurant vendors that are worth more than $1B (this number depends on how you classify companies like UberEats or DoorDash, the latter of which technically serves multiple retail segments).
Call it 5.
Compare this to healthcare, which despite being 4x the size of restaurants has 30x as many companies worth more than $1B.
Why?
Because retailers refuse to invest in technology and innovation.
They shell out the bare minimum required, then wonder why:
- Their margins suck
- The available technology never performs (hint: because you can’t buy a trip to Mars for $0.39)
- Investors refuse to invest in technology that serves them (because they don’t allocate capital rationally)
Olo had been around for ~17 years before it got the tailwind needed to go public… and that tailwind was a once-a-century global pandemic.
Is Olo’s management team really responsible for eking out the revenue to go public or was it the beneficiary of an act of God?
Thus, if Olo is to spend shareholder money acquiring solutions, they need to be very confident in their abilities to deliver value. This is not an industry with any wiggle room for mistakes.
Hindsight has proven that Olo’s management cannot be trusted with capital. Some obvious analysis:
- Larger restaurants use mParticle or similar for CDP, the solution that Wisely positions itself to offer.
- Mid-market (< 500 units) will pay very little for CDP, further demanding that the vendor run it for them as a service without compensation.
- SMB (< 10 units) can’t spell CDP.
Even though Olo’s management spent 40% of today’s enterprise value on Wisely with nothing to show, who’s been terminated?
Nobody.
Because of Olo’s perverse voting structure, there’s zero accountability to shareholders.
This is where we’ll end this analysis.
The next article in the series will discuss the class action and, to some extent, the derivative suits against Olo as a byproduct of some of the above.
But we’ll posit that none of the litigation has gotten to the heart of the matter.
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