Who Will Own the Restaurant Vertical?

Who Will Own the Restaurant Vertical?

In its latest State of SMB Software report, our friends at SurePath Captial made a compelling prediction.

We dug into this idea a bit with SurePath founder Mark MacLeod on a recent Above the Cloud podcast. As SurePath notes in the bullet point above, one of the beauties of small-business software is that there are so many SMBs that there are plenty of customers to go around. A player doesn’t have to own a category to be successful.

Even in a vertical category like restaurants, the numbers are vast. According to the National Restaurant Association, there were more than 1 million restaurant locations in the U.S. in 2018. To give a sense of how wide open the category remains, OpenTable has about 48,000 restaurants on its platform.

Mark argues however that restaurants may be uniquely suited to consolidation. He points out that that the investors are plowing funds into the category hoping to find the company that can essentially become the operating system of record for restaurants.

There are several contenders for the crown. Leading candidates include Square (a horizontal play, but dining is a key category), Toast, UpServe, and others. Each comes at the vertical from a different angle, but each is focused on being the software that runs the entire restaurant operation. Mark believes one will eventually emerger as a leader and consolidate the category. Its a process he believes will take at least a few years.

“You need one base product with enough scale so you can build or buy other products to cross-sell to those merchants,” Mark said. “This drives how much revenue you get from them, and you plow that increase back into acquiring more customers. So it becomes like a flywheel. That is the path to owning a market.”

For many players, like Square and Toast, the base product is a point-of-sale terminal or app. For others, like 7Shifts and UpServe, it begins with staff scheduling software with other products layered on top of the base solution until something like a full business management suite emerges.

The companies with the best shot are focusing on managing all of the endless details of running a restaurant.

“Operations is where there is the most opportunity for value creation for restaurant owners,” Mark said.

According to Wave III of the LSA’s Tech Adoption Index small business survey, there is still plenty of upside for tech adoption in the dining and entertainment space. Only 29% of dining/entertainment respondents are using a cloud-based POS system. And 22% have not adopted any new, cloud-based tools for any component of the SMB operating system, compared with 19% for the full (unweighted) sample. We define the components of the SMB operating system as marketing, CRM, payroll, accounting, supply chain, point of sale and communications.

Here’s the video of our conversation with Mark on why he thinks one SMB software player may eventually own the restaurants vertical.

And you can catch the full podcast here, where the conversation is broader than just restaurants.

Here is some background on the key players mentioned in our restaurant vertical discussion with Mark.

Toast. Boston-based Toast offers a cloud-based restaurant management system, with point-of-sale as its base product. It also offers inventory management, analytics, loyalty programs, and integrates with other players in the restaurant space, from OpenTable, GrubHub, 7Shitfts, and others. As Mark noted on the podcast, Toast has been a prolific fundraiser. According to Pitchbook, Toast has raised $247.25 million to date in four rounds, the latest being a $115 million D round in October 2018. The company has a post-money valuation of $1.4 billion.

UpServe. Providence-based UpServe is a true OS for restaurant owners. Founded in 2009 by Angus Davis to offer a staff scheduling solution, UpServe now offers a complete suite for restaurateurs to run their business through the cloud, including POS, marketing and CRM, guest book, server performance management, sales reporting, menu management, reputation management, and more. UpServe has also been a monster at fundraising. While Pitchbook puts it total raised to date at $65 million, a strategic investment from Vista Equity Partners in July 2017 reportedly topped $100 million. However, the amount was not officially disclosed.

TouchBistro. Toronto-based TouchBistro is an iPad based restaurant POS system. The company was founded in 2010 by Alex Barotti. According to Pitchbook, TouchBistro has raised $90.74 million to date. It’s most recent deal was a $54.93 million D round closed in June 2018. Like most SMB software companies TouchBistro has expanded its suite beyond its base product to become a cloud OS for restaurants. the company also offers staff scheduling, CRM, inventory management, floor plan and table management, and analytics.

7Shifts. Saskatoon-based 7Shifts offers cloud-based software for restaurant staff scheduling. The company’s services extend into workforce management (scheduling optimization), team communications, employee engagement, time clock and leave management. 7Shifts was founded in 2013 and has raised $14.7 million to date, according to Pitchbook. It closed a $10 million Series A round on January 24.

New Podcast: “Question Time with Tolithia”

New Podcast: “Question Time with Tolithia”

This bonus episode of Above the Cloud is part of our continuing effort to leverage the amazing content generated at the November Tech Adoption Summit in San Francisco. This podcast was taken from the Q&A segment of Tolithia Kornweibel’s well-received talk at the Summit, where she addresses customer acquisition strategy and Gusto’s mission to empower small business to create great work environments.

Some highlights from the Q&A.

  • Tolithia prevailed in her desire to follow a content marketing strategy over an SEO strategy in part after getting feedback from Hubspot that its approach “took two years to get traction and it was nine years before inbound was a thing.”
  • Word out mouth far outpaces paid referrals as a lead source for Gusto. This is a reflection of Gusto’s gaudy net promoter score. “Our 75 NPS is unprecedented in our category. The next closest is in the 30s.”
  • Getting SMBs to switch providers is challenging. “Payroll is a super sticky product. Even if someone is very unhappy with ADP, switching is a real pain.” However, Gusto has learned how to spot behavioral triggers that suggest a competitor’s customer is open to switching.
  • The sweet spot for Gusto is a small business that “cares strategically or in a family way about creating that great place to work….companies that want to give their employees everything that big businesses can is the right segment for us.”
  • Accountants, a key channel for Gusto, are undergoing massive change. “The boomer to millennial transition is on steroids among accountants.”
  • Sharing customer feedback in real time is part of Gusto’s DNA. “Every day when a salesperson learns something new…a slack goes out just like that. It is just an ethic of our company.”
  • “We talked about Gusto becoming an iconic, remarkable brand….and we actually mean it and think we can do it because of the passionate response we get from our customers.”

You can listen to the full Q&A here, moderated by my Tech Adoption Index colleague Neal Polachek.

Here is the video of the main portion of Tolithia’s talk from the Nov. 7 Tech Adoption Summit.

And as always, we want to thank our Above the Cloud sponsors Boostability, Broadly, DexYP, Google, Mono, and Vendasta.

New Podcast: “The State of SMB Software” featuring Mark MacLeod

New Podcast: “The State of SMB Software” featuring Mark MacLeod

The third annual “State of SMB Software 2018 report from our friends at SurePath Capital Partners paint a picture of a robust small business software market in 2018, with money pouring in to make big bets on companies that are enabling SMBs to in effect run their businesses through their phones.

We asked SurePath’s founder Mark MacLeod to jump on Above the Cloud this week to talk about report highlights and what he thinks the year ahead will bring.

Our conversation loosely followed the takeaways from the report, found on page 41, with a few detours in the conversation. Here are a few items that jumped out from the conversation.

  • The state of SMB software is strong. Demographic trends suggest a growing addressable market for small business software. This could help mitigate rising customer acquisition costs.
  • SMB software can benefit from a recession. When companies begin mass rounds of layoffs, a new class of involuntary entrepreneurs will emerge, and they will be looking for affordable software to run their newly formed businesses. Additionally, as businesses sharpen their pencils, software that helps businesses save money will benefit. Of course, software that fails to meet the “must have” test faces higher churn in a recession.
  • There might be a winner in restaurants. The discussion of all in one software solutions is increasingly a conversation about solutions that specialize in a vertical because their solutions adapt to a vertical’s unique requirements. This is something generic all-in-one suites struggle to do. MacLeod suggests restaurants might be the first category where one company becomes the de facto operating system for restaurants. MacLeod wouldn’t pick a winner outright, but he likes Toast‘s chances and he thinks Open Table is vulnerable to disruption.

You can listen to the podcast below. And we encourage you to access the full State of SMB Software 2018 report.

And as always, we thank the sponsors of Above the Cloud and the Tech Adoption Index.

Conference Video: Building a Challenger Brand

Conference Video: Building a Challenger Brand

One of the most popular sessions at last year’s Tech Adoption Summit event in San Francisco featured Tolithia Kornweibel, head of marketing at Gusto, giving a talk about how the upstart SaaS company has staked out a promising niche in providing small businesses with cloud tools for handling payroll and HR.

San Francisco-based Gusto currently has about 60,000 customers and in terms of market, is still dwarfed by the big three — Paychex, ADP, and Intuit — which together own about 45% of the payroll market. Gusto has made a strategic decision to target businesses with fewer than 100 employees — the classic SMB definition. She says her available market is about 5.5 million U.S. SMBs.

Gusto goes at it with a sense of mission that matches the small businesses they serve, Tolithia said. She cited data showing the majority business owners it serves, “Would still run their businesses if they won the lottery.”

One theme from Tolitha’s talk mirrored one of the founding themes of the Tech Adoption Index — leveling the playing field between enterprise and SMB for what good software makes possible. That’s one of the big promises of the cloud and SaaS and it’s a key focus at Gusto.

“One of the things we really care about is providing opportunities for small businesses to create great places to work,” she said. “And to level the playing field with enterprise companies for whom the industry has created lots of solutions to help empower employees, to engage and reward them. Things that have typically been unavailable, inefficiently delivered or too expensive for small businesses.”

Tolithia also addressed how SMBs want all-in-one solutions for payroll and HR related services, but they do not want to completely outsource these functions. In fact, many very small SMBs have a resource assigned to handle HR, but they need help from experts, which is a key element of what Gusto offers.

“Even though they have a DIY mindset, customer service could not be more important,” she said.

She also addressed the explosion in competition in the cloud HR space, sharing a chart showing little room between the various payroll and HR solutions.

“What differentiates one brand from another? So far, nothing,” Tolithia said.

With everyone fighting on the same plane, it’s important to go to market efficiently and effectively. Gusto has put its emphasis on “generating awareness and engagement among small-business audience that is getting value from us so they eventually choose us.”

As a result, Gusto has pushed aside an influencer approach (even though 1/3 of their business is from accountant referrals) and has not gone too deep into SEO.

Instead, Gusto has built a content marketing strategy that is about “reaching customers where they are and democratizing the value that Gusto has built into the product and giving it away for free.” As a result, Tolithia said about 2/3 of Gusto’s customer acquisition is organic.

You can check out Gusto’s Resources section to get a sense of the content they create for SMBs.

You can watch Tolitha’s presentation below. And we encourage you to check out Tolithia’s slides, as well as those from all of the Tech Adoption Summit presentations.

Finally, we talked about these and other themes with Tolithia when we interviewed her for our Above the Cloud podcast back in August. You can listen here.


Conference Video: The Case for Product-Driven Marketing

Conference Video: The Case for Product-Driven Marketing

We’re in the process of digging into the video vault from last year’s Tech Adoption Summit, held November 7 at a tiny, quirky venue in San Francisco’s Mission District. It was a packed day spent geeking out on the things that drive the small-business SaaS industry — creating compelling brands and customer experiences, building great products, and scaling customer acquisition.

One of the highest-rated and most cited sessions featured Adam Blake, CMO of ThriveHive, a Boston-based provider of SaaS-based digital marketing products for SMBs.

Adam’s thesis is that product-based marketers perform better than their non-product based peers, and product-driven customer acquisition is the key to managing ever-rising customer acquisition costs.

“The elephant in the room is that customer acquisition costs have gone up dramatically,” Blake said. He added that costs are up more than 50%, for both B2B and B2C companies.

He also pointed out that companies that offer free products, a requirement for product-driven customer acquisition, have seen their CAC rise at a much slower rate than those that do not offer free products.

The real eye-opener was the order of magnitude different in close rates across different sale models. Moving from cold calling to selling against product qualified leads yields a 100X improvements in close rates. PQLs in simple terms are prospects that use your free products and signal upsell. Adam offers a more precise definition in his talk.

Have a product-driven customer acquisition strategy isn’t as simple as offering free products. Adam went through a checklist of dos and don’ts for offering free products that deliver on the lower CAC promise. Key among these is to offer a “free forever” product and not just a free trial.

“If you can offer a free forever product vs. a free trial I would encourage you to do so,” Adam said. “The reason is a free trial is way further down the funnel. A free forever product has a much lower barrier to entry.”

Another key was that the free products be completely self-provisioned by the prospect. If you can’t bring each new user on at a very low marginal cost, it undermines what you are trying to do, which is acquire paying customer at a dramatically lower CAC than your competitors.

Adam’s presentation at the Tech Summit was so well received that Adam was invited to give a version of this talk to a much larger and more diverse audience at the upcoming LSA ’19 conference in Dana Point, CA.

You can check his TAS presentation from last November here:

In case you missed it, we covered some of this ground with Adam when he was a guest on our Above the Cloud podcast in September, prior to his appearance at the Tech Adoption Summit. You can listen to it below.

You can also view Adam’s slides as well as those from the other Tech Adoption Summit presentations.