{"id":18866,"date":"2024-05-07T10:40:30","date_gmt":"2024-05-07T15:40:30","guid":{"rendered":"https:\/\/reformingretail.com\/?p=18866"},"modified":"2024-05-07T10:40:31","modified_gmt":"2024-05-07T15:40:31","slug":"exposing-olo-part-3-sinking-40-of-olos-enterprise-value-into-a-failed-acquisition","status":"publish","type":"post","link":"https:\/\/reformingretail.com\/index.php\/2024\/05\/07\/exposing-olo-part-3-sinking-40-of-olos-enterprise-value-into-a-failed-acquisition\/","title":{"rendered":"Exposing Olo Part 3: Sinking 40% of Olo’s Enterprise Value into A Failed Acquisition"},"content":{"rendered":"\n

In the continuation of our Olo analysis<\/a>, let\u2019s catch back up.<\/p>\n\n\n\n

Olo had gone public.<\/p>\n\n\n\n

We contend that Olo management was now fully aware that the company\u2019s growth prospects were materially capped, and that it was nonsensical to be public at all.<\/p>\n\n\n\n

Yet instead of facing this reality and maximizing shareholder value, company management decided to spend what is now tantamount to 40% of Olo\u2019s enterprise value on the acquisition of Wisely, a restaurant marketing tool.<\/p>\n\n\n\n

When we first saw the deal we thought it made a lot of sense<\/a>.<\/p>\n\n\n\n

However, despite owning Wisely for 2.5 years, we don\u2019t 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. <\/p>\n\n\n\n

We\u2019ll get to why Wisely hasn\u2019t been more successful later in this article, but for its $187M acquisition price, you\u2019d expect Wisely to be throwing off > $25M in revenue today, but Olo doesn\u2019t break out revenue by product lines (we\u2019ll demonstrate why we think this is intentional in later analysis).<\/p>\n\n\n\n

How did we get that $25M ARR number?<\/p>\n\n\n\n

A 10x revenue multiple and 25% IRR. <\/p>\n\n\n\n

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\u2019re north of $25M ARR. <\/p>\n\n\n\n

We acknowledge that Wisely was acquired for > 20x multiple, but that\u2019s because the company was growing 200% YoY. Given that, there\u2019s no reason Wisely shouldn\u2019t be doing $25M ARR today if it were well managed.<\/p>\n\n\n\n

(Note: software lives and dies by the rule of 40, which is rather arbitrary, but 25% IRR is sufficient and actually beneficial to Olo\u2019s case since it\u2019s more conservative.)<\/p>\n\n\n\n

Instead, you have a number of red flags with Wisely\u2019s acquisition, as it\u2019s NOT producing $25M ARR.<\/p>\n\n\n\n

The first red flag is that Wisely’s founders hung around for what appears to be the bare minimum before leaving 15 months later.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

What would catalyze such a quick departure?<\/p>\n\n\n\n

Our research points to two culprits:<\/p>\n\n\n\n

    \n
  1. The management team at Olo.<\/li>\n\n\n\n
  2. Restaurants.<\/li>\n<\/ol>\n\n\n\n

    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.<\/p>\n\n\n\n

    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<\/a>.<\/p>\n\n\n\n

    It\u2019s so asymmetric that you can\u2019t even make this stuff up.<\/p>\n\n\n\n

    Olo\u2019s management team knows this or should know this<\/em> after operating in the space for 20 years and is therefore obligated with a duty to be forthright with shareholders about their growth prospects.<\/p>\n\n\n\n

    Let\u2019s look at a totally different acquisition in the same, terrible restaurant industry: PAR acquired Punchh<\/a>, 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).<\/p>\n\n\n\n

    This points to the biggest<\/em> culprit being Olo\u2019s management, both in their decisions on what assets to acquire, and post-acquisition execution (or lack thereof).<\/p>\n\n\n\n

    The second red flag was\/is the legitimate technical hiccup between Wisely and Olo.<\/p>\n\n\n\n

    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.<\/p>\n\n\n\n

    But this was literally<\/em> impossible<\/em> with Olo up until very recently (and some accounts still<\/em> can’t get the payment token data to work, we’re told).<\/p>\n\n\n\n

    It’s why, per Linkedin, all of Wisely’s sales people left: they wouldn\u2019t make quota selling Wisely.<\/strong><\/h4>\n\n\n\n

    And for what it’s worth, Wisely was a much<\/em> harder<\/em> 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.<\/p>\n\n\n\n

    Olo had an obligation to understand this as part of their diligence. <\/strong><\/p>\n\n\n\n

    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. <\/p>\n\n\n\n

    Why prioritize Olo Pay? <\/p>\n\n\n\n

    Olo Pay allowed Olo to misleadingly recognize higher revenue growth on a stagnant base of customers through gross payments revenue recognition<\/strong>, not net revenue recognition. This inflates NRR, ARPU, and every other software metric of importance. <\/p>\n\n\n\n

    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. <\/p>\n\n\n\n

    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”<\/a> of several senior executives (Olo’s founding sales leader and Chief Customer Officer) as Olo was realigned.<\/p>\n\n\n\n

    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<\/a> – but that again points to Olo management issues. <\/p>\n\n\n\n

    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<\/a> with Five Guys but Five Guys is notorious for spending $0 on marketing.<\/p>\n\n\n\n

    It\u2019s not even a secret: see this article<\/a> titled, THE FIVE GUYS SECRET TO RESTAURANT MARKETING WITH NO AD BUDGET, where the opening sentences read as follows:<\/p>\n\n\n\n

    \n

    Both McDonalds and Five Guys Burgers and Fries compete on a daily basis to offer the public hamburgers and fries. In 2014, McDonald\u2019s spent more than $988 million<\/a> on advertising. Five Guys Burgers and Fries, in the same year, spent exactly $0<\/a>.<\/p>\n<\/blockquote>\n\n\n\n

    So why does Five Guys need Wisely?<\/p>\n\n\n\n

    Was it a concession so that Five Guys would renew their Olo contract? <\/p>\n\n\n\n

    Olo\u2019s management has a duty to be honest, not hyperbolic.\u00a0<\/strong><\/p>\n\n\n\n

    A more candid reflection of Olo\u2019s position might look like this:<\/p>\n\n\n\n

    Despite ~$1T in top line US restaurant sales, there are a pathetically<\/em> 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).<\/p>\n\n\n\n

    Call it 5.<\/p>\n\n\n\n

    Compare this to healthcare, which despite being 4x the size of restaurants has 30x as many companies worth more than $1B.<\/strong><\/h4>\n\n\n\n

    Why?<\/p>\n\n\n\n

    Because retailers refuse<\/strong> to invest in technology and innovation.<\/p>\n\n\n\n

    They shell out the bare minimum required, then wonder why:<\/p>\n\n\n\n

      \n
    1. Their margins suck<\/li>\n\n\n\n
    2. The available technology never performs (hint: because you can’t buy a trip to Mars for $0.39)<\/li>\n\n\n\n
    3. Investors refuse to invest in technology that serves them (because they don’t allocate capital rationally)<\/li>\n<\/ol>\n\n\n\n

      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.<\/strong><\/p>\n\n\n\n

      Is Olo\u2019s management team really<\/em> responsible for eking out the revenue to go public or was it the beneficiary of an act of God?<\/p>\n\n\n\n

      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.<\/p>\n\n\n\n

      Hindsight has proven that Olo\u2019s management cannot be trusted with capital. Some obvious analysis:<\/p>\n\n\n\n

        \n
      • Larger restaurants use mParticle or similar for CDP, the solution that Wisely positions itself to offer.<\/li>\n\n\n\n
      • Mid-market (< 500 units) will pay very little for CDP, further demanding that the vendor run it for them as a service without compensation.<\/li>\n\n\n\n
      • SMB (< 10 units) can\u2019t spell CDP.<\/li>\n<\/ul>\n\n\n\n

        Even though Olo\u2019s management spent 40% of today\u2019s enterprise value on Wisely with nothing to show, who\u2019s been terminated?<\/p>\n\n\n\n

        Nobody.<\/p>\n\n\n\n

        Because of Olo\u2019s perverse voting structure, there\u2019s zero accountability to shareholders.<\/p>\n\n\n\n

        This is where we\u2019ll end this analysis. <\/p>\n\n\n\n

        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. <\/p>\n\n\n\n

        But we\u2019ll posit that none of the litigation has gotten to the heart of the matter. <\/p>\n","protected":false},"excerpt":{"rendered":"

        In the continuation of our Olo analysis, let\u2019s catch back up. Olo had gone public. We contend that Olo management was now fully aware that the company\u2019s 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 […]<\/p>\n","protected":false},"author":1,"featured_media":17822,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"image","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[5,4],"tags":[],"class_list":["post-18866","post","type-post","status-publish","format-image","has-post-thumbnail","hentry","category-solutions","category-merchants","post_format-post-format-image"],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p81nA2-4Ui","jetpack_featured_media_url":"https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2024\/02\/man-8537038_1280.png?fit=889%2C1280&ssl=1","_links":{"self":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/18866","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/comments?post=18866"}],"version-history":[{"count":1,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/18866\/revisions"}],"predecessor-version":[{"id":18867,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/18866\/revisions\/18867"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media\/17822"}],"wp:attachment":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media?parent=18866"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/categories?post=18866"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/tags?post=18866"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}