The problem with being public is that you need to consistently generate strong returns in front of everyone.
In the mid 2010’s, investors aligned on the idea of rule of 40 for software companies: companies’ growth + EBITDA needs to be 40%. So you could grow 0% and with 40% EBITDA margins, or grow 100% with -60% EBITDA margins.
Oh, and you only needed ~ $100M of ARR to go public.
As the pandemic hit the bar to be public went higher. Not so much that rule of 40 went out the window, but the minimum ARR reached $500M.
For example, look at Klaviyo, a data platform for ecomm merchants that has been one of the very few software companies to go public in the past 5 years:
We delivered another quarter of strong financial performance with revenue growth of 34%, operating cash flow of $38.8 million and free cash flow of $34.2 million… Total revenue of $235.1 million, up from total revenue of $175.8 million in the third quarter of 2023, representing year-over-year growth of 34%… Operating loss of $(13.3) million, representing operating margin of (6)%, compared to operating loss of $(302.2) million in the third quarter of 2023, representing an operating margin of (172)… Projecting $7M of EBTIDA in Q4 2024
So here’s a SaaS company growing 34% at what is effectively breakeven on $900M of revenue and they’re trading for… 10x revenues.
This context is important for our subsequent analysis.
Olo went public in 2021.
Their revenues are both sub-scale and conflated: Olo disingenuously commingles GROSS payments revenue with SaaS revenue to inflate their true revenue numbers and, perversely, upward-adjust their SaaS metrics of NRR, ARPU, and ARR.
This is incredibly nonsensical: of the ~3% that a merchant pays to take cards, Olo would be lucky to realize true revenue of 10-15 bps of the total dollar amount processed (~$0.01 for every $100 processed on Olo Pay), and that could be overly optimistic given that Olo needs to hit billions in volumes on Adyen, their payment partner, to achieve buy rates that are low enough to earn margin.
Olo finds itself in a difficult position because their core products lack any real staying power:
- Online ordering is a borderline commodity. SMB merchants get this directly from their POS providers or from an entity like DoorDash, often for free. Upmarket sees many headwinds for Olo as POS companies – who have real staying power – are starting to take online ordering market share.
- Payments processing is the definition of a commodity. The “value adds” Olo would like restaurants to believe it makes available through Olo Pay are available to anybody that wants to leverage the aggregate tokens of a large processor or, a network token.
- Olo’s GDP/CDP is making no inroads as far as we can tell. It’s not that restaurants don’t need data solutions, but that they’re too dumb to understand the fundamental tenets of being a creature with opposable thumbs.
Despite this logic, Olo’s leaders have intentionally avoided any hard conversations in service of their shareholders, instead hiding behind their majority ownership of the company’s voting shares along with their clearly-inside-dealing investor friends.
Now we get to DoorDash.
DoorDash does nearly $10B in net sales (you can’t compare this with Olo’s sales because Olo doesn’t report net sales thanks to their payment obfuscation to make themselves seem more performant than they are).
In their last quarter, DoorDash earned $163M in net income, a first for the company.
DoorDash consequently has an enterprise value (EV) of $69B, which is just a tad more than Olo’s EV of $900M (which really should be about $400M).
DoorDash acquired Bbot in 2022 to build on its POS aspirations, knowing full well that it would need to further entrench itself in the restaurant stack to make more money.
Interestingly DoorDash has not gone after payments.
At least fully (keep reading).
We’ve been told it’s because DoorDash has optimized for partnerships to secure distribution, and it’s partners – often POS companies – don’t make any money with the exception of payment processing (cuz restaurants are dumb but also “the world’s super-best genius negotiators” and vendors thus steal from the restaurant through the payment stack), so it’s a bit of a sacred cow.
Yet payments isn’t even a product, and DoorDash could stand that up whenever they wanted.
In fact, for their Storefront product, DoorDash is charging 2.9% and $0.30 a transaction, probably netting themselves 25 bps on every transaction, which is infinitely more than Olo Pay, where Olo appears to still be diluting itself in search of inflated ARR growth from payments.
What is DoorDash Storefront?
Storefront is a free online ordering solution that:
…turn[s] website, social media, or Google Page visitors into paying customers, allowing you to build your brand and acquire new regulars directly on your own channels. Online Ordering can also integrate with your POS, middleware provider, gift card, or loyalty program partners. While other companies charge monthly fees for this service, with Online Ordering, you only pay for payment processing (2.9% + $0.30 per order).
When you add this online ordering system for restaurants to your website, orders will show up on your DoorDash tablet or POS integration. Customers can pay for these orders using their credit card, Apple Pay, or DashPay. Then, delivery orders will be either fulfilled by Dashers and pickup orders will be collected in your store by customers.
Think about this at a high level:
Storefront replaces Olo + Olo Pay for the ~cost of Olo Pay.
DoorDash is giving Storefront away for free, effectively.
And they’re taking bread-and-butter Olo clients.
Doordash’s Storefront website has a list of merchants using their free online ordering:
WNB Factory: 89 locations.
Wayback burgers: 170 locations.
Lefty’s: 33 locations
3Natives: 40 locations
Lettuce Entertain You: 130 locations
Taqueria Arandas: 44 locations.
The < ~20-location restaurants are mostly getting their online ordering directly from their POS (Toast, SpotOn, Square, et al.), not from Olo (despite Olo positioning these restaurant brands in their annual report as as high value “emerging enterprise” that “choose Olo”).
When we asked other enterprise online ordering providers why DoorDash wasn’t further upmarket given that restaurants can’t help themselves when something is lower cost, we were told it’s because DoorDash doesn’t effectively integrate with loyalty programs yet, which is a major driver for enterprise brands
We have no idea how Olo can compete here.
POS companies and DoorDash are already gobbling the lower end of the market.
In the enterprise segment of the market, POS companies have built our bought online ordering ordering software to compete with Olo, and DoorDash will enter soon enough.
Olo needs to go private to tighten itself up.
Both the management team and voting shares need to be wiped clean if you want any chance of fixing this thing.
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