One of the trends we’re seeing at Tearsheet is the emergence of vertical players — companies that just go very deep into an industry to solve its particular payments and commerce problems. If you’re able to do this, it’s a sign of beauty. You’re not just powering individual businesses — you are building for an entire industry.
Toast is doing just that. It handles everything from point of sale to loyalty and gift cards to online ordering and payments — all for the restaurant industry. The company work with small neighborhood restaurants on the corner to chains like Jamba Juice. Fresh off a recent $250 million investment round in March of 2019, co-founder and president Steve Fredette joins us on the podcast to talk about how his team built a unicorn by getting their hands dirty solving restaurant owners’ biggest and most nagging problems. Toast didn’t get everything right in the beginning (they actually started Toast as a consumer payments app for restaurants) but as a company, they’ve learned from their mistakes and have introduced community components to their platform’s offering. Lastly, we talk about Toast’s product roadmap for the next year and where Steve sees opportunity for investment.
The genesis of Toast
My last two or three years at Endeca, I was doing mobile apps for retailers — Android apps, iPhone apps, and mobile websites. So, I knew a lot about the transformation that the ubiquity of mobile phones was bringing to retail. All of a sudden, people were bringing their phones into stores. They could access pricing from the dot com website and many times this was different from the pricing in the store. The IT teams within retailers were often different for brick and mortar than they were for online.
Mobile really created a big disruption in retail commerce. All of a sudden, people wanted to see a product in a store and order it online. Or, they wanted to buy online and pick it up in a store. So, we were seeing all this multichannel and omnichannel stuff that was transformative for retail. When we started thinking of our own ideas, we wanted to anchor ourselves into doing something in mobile commerce. We understood the problems merchants had and the technology and how to build it. We also saw Endeca’s success with a vertical strategy, a vertical focus.
Our premise was that we wanted to do mobile commerce with a vertical focus — it was just a matter of choosing which vertical. As we did our market research, we wanted to do a vertical that was heavily SMB-focused. Personally, we just had some passion in wanting to help democratize technology for small businesses. Food, as an industry, resonated with us as founders. I like food more than I like fashion. I like to cook and go out to eat.
Lastly, we wanted to go after a big industry. We knew we wanted to grow a venture capital-funded company, so it needed to be a multi-billion dollar opportunity. We saw the rise and fall of Groupon in the restaurant industry and that highlighted to us just how big the restaurant vertical is and how underserved it was by existing market players. Groupon was adopted quickly on the marketing side, but it wasn’t the right solution.
The same thing was happening time and again on the technology side. We’d go in and pay attention to the technology restaurants were using. We’d see these old systems that looked like they were built in the nineties, which they were. Restauranteurs weren’t happy with their point of sale technology and everyone was excited when we started talking about building a more modern system.
We knew a lot less about payments when we started. It’s a very fragmented space. There are ISOs upon ISOs. No one liked their payment processor, either. It wasn’t a very trusted industry. It felt like everyone was talking about hidden fees and their lack of trust in pricing. They were seeing what Square was doing with its flat fee of 2.75 percent. It was transparent but also a very high rate for restaurants. Square showed there was a better way without hidden fees. It was simple to qualify for people doing small volumes at farmers’ markets and craft fairs.
Solving marketing and distribution challenges
Coming from Boston as our home market, we just went door to door in Boston and Cambridge. We hired college interns to help and it worked. There was an early sense that we just needed to scale this model across 50 cities in the US and we’d have a multi-billion dollar business and that’s where we are today.
It’s always worked for us to have people in-market who understand technology and restaurants really well and who can be consultative in terms of helping customers understand what they need.
Along the way, our marketing has built a strong brand for us. Our blog has 35,000 subscribers. We’re borrowing a page from the Hubpot playbook with our inbound marketing. Being in Boston, it’s hard not to have an inbound playbook. Our first three marketing hires were Hubspot alumni, so it was easy for us to borrow people who knew how to do that.
It was quite impressive at the time. When we started hiring people from legacy players, they were very impressed that we made marketing work. Historically, those businesses never had any marketing. When you looked at their websites, they also looked like they were built in the 1990s.
Investing in the future
We have a couple of themes that are worth calling out. It’s a tight labor market right now for restaurants and it’s tough to hire and retain great staff. So, we want to look at anything we can do to help our customers. I was speaking to a customer the other week and he said his business was doing great. He had a line out the door. He would add more tables outside but he couldn’t because he couldn’t hire enough staff to make that work. We want to put a lot of R&D dollars into anything that can help.
The other thing is on the guest side: How do we help attract and retain guests into the restaurant? There are a lot of changes in the industry on the guest side, including third party delivery and just changes in consumer expectations. Millennials want to use technology differently and their food profile tastes are different.
We look at the next five years and want to invest a billion dollars in R&D to bring great technology to restaurants. This funding round gets us started down this path. Big chains like Panera are talking about investing hundreds of millions of dollars on new technology. There’s a lot of money being spent on restaurant tech and we’re excited to impact a lot of our customers. There’s a huge amount of opportunity.