{"id":6039,"date":"2020-01-02T06:32:47","date_gmt":"2020-01-02T12:32:47","guid":{"rendered":"https:\/\/reformingretail.com\/?p=6039"},"modified":"2020-01-02T06:32:54","modified_gmt":"2020-01-02T12:32:54","slug":"how-merchants-shoot-themselves-by-avoiding-startup-vendors","status":"publish","type":"post","link":"https:\/\/reformingretail.com\/index.php\/2020\/01\/02\/how-merchants-shoot-themselves-by-avoiding-startup-vendors\/","title":{"rendered":"How Merchants Shoot Themselves By Avoiding &#8220;Startup&#8221; Vendors"},"content":{"rendered":"\n<p>There&#8217;s an old adage that nobody ever got fired for buying IBM. The phrase started about 30 years ago with the implied logic that IBM was a large, established provider and therefore a safe bet as a supplier. Except that if anyone chose &#8211; and staid with &#8211; IBM cloud services over the past decade their company probably collapsed and they lost their job<em> in spite of <\/em>choosing IBM. Even Watson, IBM&#8217;s attempt at &#8220;Big Data&#8221; <a href=\"https:\/\/spectrum.ieee.org\/biomedical\/diagnostics\/how-ibm-watson-overpromised-and-underdelivered-on-ai-health-care\">has failed spectacularly<\/a> in many use cases.<\/p>\n\n\n\n<p>The moral of the story? Things change. And fast. <a href=\"https:\/\/www.inc.com\/ilan-mochari\/innosight-sp-500-new-companies.html\">Two gems to consider<\/a>:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>In 1965, the average tenure of companies on the S&amp;P 500 was 33 years. By 1990, it was 20 years. It&#8217;s&nbsp;forecast to shrink to 14 years by 2026.<\/li><li>About 50 percent of the S&amp;P 500&nbsp;will be replaced over the next 10 years, if Innosight&#8217;s forecasted churn rate holds.&nbsp;<\/li><\/ul>\n\n\n\n<p>Established incumbents often lack the innovator&#8217;s gene. That&#8217;s because these organizations are looking to protect what&#8217;s already working and have little interest in disrupting revenues and cash flows. It&#8217;s the same observation we made about <a href=\"https:\/\/reformingretail.com\/index.php\/2018\/07\/12\/ncrs-aloha-proves-why-pos-companies-should-never-try-to-build-everything\/\">NCR&#8217;s products years ago<\/a> and despite management changes NCR has only seemingly moved more aggressively in the anti-innovation direction (if there is such a thing) by erecting the industry&#8217;s most <a href=\"https:\/\/reformingretail.com\/index.php\/2019\/12\/12\/part-1-omnivore-docs-show-compounded-integration-costs-by-strong-arm-pos-companies\/\">costly and cumbersome integration program<\/a>, in addition to <a href=\"https:\/\/reformingretail.com\/index.php\/2019\/11\/19\/ncr-bought-another-aloha-dealer-our-thoughts-on-what-it-means\/\">prioritizing financially engineering their antiquated product set <\/a>without fixing the core problems. This is not just our opinion but the <strong>belief<\/strong> of Aloha&#8217;s largest customers.<\/p>\n\n\n\n<p>So when an innovator comes along to save merchants from themselves, merchants incorrectly ask: is this company IBM? Is it a company with 300,000-some employees, a market cap of $120B, and I won&#8217;t get fired for choosing them (but I&#8217;ll ignore that the share price has been in steep decline over the past 5 years?)<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1282\" height=\"1022\" src=\"https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?fit=770%2C614&amp;ssl=1\" alt=\"\" class=\"wp-image-6046\" srcset=\"https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?w=1282&amp;ssl=1 1282w, https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?resize=300%2C239&amp;ssl=1 300w, https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?resize=1024%2C816&amp;ssl=1 1024w, https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?resize=768%2C612&amp;ssl=1 768w, https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?resize=370%2C295&amp;ssl=1 370w, https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?resize=270%2C215&amp;ssl=1 270w, https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?resize=570%2C454&amp;ssl=1 570w, https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?resize=740%2C590&amp;ssl=1 740w\" sizes=\"auto, (max-width: 770px) 100vw, 770px\" \/><\/figure>\n\n\n\n<p>That&#8217;s the wrong question. The question set needs to be reframed. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Is this a company that is going to solve my problems today? What happens if my problems change tomorrow? Are they investing in R&amp;D to meet the challenges of the future? <\/h4>\n\n\n\n<p>This is why we laugh when merchants argue about features. Features are a function of time. Features don&#8217;t tell you:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The CEO&#8217;s priority<\/li><li>The quality of customer support<\/li><li>The R&amp;D investments and roadmap of the product<\/li><li>The speed of innovation<\/li><li>The company execution<\/li><li>The transparency and culture of accountability<\/li><\/ul>\n\n\n\n<p>All of these are drastically more important characteristics for a potential vendor than motherf*ing features. Let&#8217;s deconstruct two industry actions as we see them to infer company priorities.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Company: Global Payments<\/h4>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Action<\/strong>: <a href=\"https:\/\/reformingretail.com\/index.php\/2019\/04\/23\/global-payments-increased-processing-rates-again-heres-a-free-tool-to-help\/\">Increases payments rates<\/a> without demonstrating any increase in value. Meanwhile <a href=\"https:\/\/www.heartlandpaymentsystems.com\/customer-engagement\">Heartland Analytics,<\/a> their lightweight software product, appears unchanged despite being in market for two years.<\/li><li><strong>Inference<\/strong>: Global prioritizes payments, not products. <\/li><li><strong>Our take: <\/strong>Woe is the merchant using an actual product from Global Payments.<\/li><\/ul>\n\n\n\n<h4 class=\"wp-block-heading\">Company: NCR<\/h4>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Action:<\/strong> Takes existing, antiquated restaurant products, bundles them as SaaS, tries to convince merchants to <a href=\"https:\/\/reformingretail.com\/index.php\/2019\/11\/19\/ncr-bought-another-aloha-dealer-our-thoughts-on-what-it-means\/\">pay the highest POS SaaS price in the US restaurant industry<\/a>. <\/li><li><strong>Inference<\/strong>: NCR leadership cares about <a href=\"https:\/\/reformingretail.com\/index.php\/2019\/10\/01\/danger-of-converting-a-perpetual-license-merchant-to-saas\/\">financial engineering a win for their personal stock portfolio<\/a> as opposed to solving customer problems. <\/li><li><strong>Our take:<\/strong> It&#8217;s a tough time to be an NCR merchant and the writing on the wall says it will only get worse.<\/li><\/ul>\n\n\n\n<p>We also think merchants need to consider another side of this coin as well: financial reality.<\/p>\n\n\n\n<p>In a merchant&#8217;s mind if a company is losing money it&#8217;s likely to go bankrupt. Sure, that was probably a reasonable assumption in the 1960&#8217;s, but the advent of private equity has changed the game. There&#8217;s <a href=\"https:\/\/www.ft.com\/content\/2f777656-9854-11e9-9573-ee5cbb98ed36\">so. much. money available in the private markets<\/a> ($2.5T) that companies which would have gone belly up a half century earlier are thriving with private dollars funding their growth. You need to remember Amazon was barely breaking even for years, aggressively reinvesting in growth and innovation.<\/p>\n\n\n\n<p>Not only that but business models have changed; investors strongly prefer recurring revenue software businesses over perpetual license businesses regardless of the number of customers. Below we&#8217;ll put this math into a tangible example.<\/p>\n\n\n\n<p>Company A sells marketing software to brick and mortar merchants. They price their software as a one-time fee of $10,000 and some ancillary set-up (i.e. services) revenues. Over the past 20 years they&#8217;ve sold 10,000 licenses, earning $100M in revenues.<\/p>\n\n\n\n<p>Company B sells marketing software to brick and mortar merchants. They price their software on a recurring basis at $3,000 per year. They currently have 1,000 customers.<\/p>\n\n\n\n<p>The economy falters and no merchants buy any marketing software this year. What&#8217;s each company worth?<\/p>\n\n\n\n<p>Company A is worth balance sheet + intangibles (IP, customer accounts). <\/p>\n\n\n\n<p>Company B is worth balance sheet + intangibles (IP, customer accounts) <strong>AND<\/strong> 8x recurring annual revenues, which would be 8x $3M, or $24M as a starting point. <\/p>\n\n\n\n<p>This is how a legacy POS company, like Digital Dining, could be bought for $15M with 20,000+ customers (thought it&#8217;s anyone&#8217;s guess how many of those customers are active since there&#8217;s no remote monitoring) while a new POS company like Mobilebytes had to be acquired for $23M despite having only 1,300 customers. <\/p>\n\n\n\n<p>Sure, Digital Dining would be the &#8220;safer&#8221; bet based upon years-in-market and the number of customers, but if times got rocky which company would a financier put money in? Hint: it&#8217;s the company with higher market value!<\/p>\n\n\n\n<p>Recurring revenue software companies with happy customers and a growing client list don&#8217;t just disappear if they run out of money anymore: there&#8217;s too much capital in the private markets to let that happen. <\/p>\n\n\n\n<p>If you&#8217;re honest in your search and you discover that your problems will <em>only<\/em> solved by one of these &#8220;high risk&#8221; startups, know that they might be in a better financial position than your existing service provider, even if they&#8217;re losing money. The financial markets have a very rational way for rewarding actual value, which is why Watson has not saved IBM yet.<\/p>\n<script async=\"\" src=\"https:\/\/widget.websitevoice.com\/UMwLESBjj1uq-UOHwOeBBw\"><\/script>\n<script>\n  window.wvData=window.wvData||{};function wvtag(a,b){wvData[a]=b;}\n  wvtag('id', 'UMwLESBjj1uq-UOHwOeBBw');\n  wvtag('widget-style', {\n    backgroundColor: '#F5953E',\n    contrast: 'wv-contrast-dark'\n  });\n<\/script><\/p>\n","protected":false},"excerpt":{"rendered":"<p>There&#8217;s an old adage that nobody ever got fired for buying IBM. The phrase started about 30 years ago with the implied logic that IBM was a large, established provider and therefore a safe bet as a supplier. Except that if anyone chose &#8211; and staid with &#8211; IBM cloud services over the past decade [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":6046,"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_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-6039","post","type-post","status-publish","format-image","has-post-thumbnail","hentry","category-solutions","category-merchants","post_format-post-format-image"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2019\/12\/Screen-Shot-2019-12-02-at-12.54.01-PM.png?fit=1282%2C1022&ssl=1","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p81nA2-1zp","_links":{"self":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/6039","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=6039"}],"version-history":[{"count":12,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/6039\/revisions"}],"predecessor-version":[{"id":6110,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/6039\/revisions\/6110"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media\/6046"}],"wp:attachment":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media?parent=6039"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/categories?post=6039"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/tags?post=6039"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}