After 50% staff cut in April, Toast targets $ 20 billion IPO

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What kinds of challenges has the pandemic imposed on business? It would be hard to find a better case study than Toast, a Boston-based catering software provider.

In February 2020, Toast raised $ 400 million for a valuation of $ 4.9 billion. Two months later, it responded to the pandemic by halving its staff. Last November, Toast’s business had picked up steam as restaurants revamped for take-out – bringing its valuation to $ 8 billion, according to TBEN.

On February 22, the Wall Street Journal reported that Toast was listening to Goldman Sachs and JPMorgan Chase
JPM
to conduct an IPO that could market the company to $ 20 billion.

Toast declined to comment. “Toast does not comment on any speculated financial transactions. We remain focused on supporting the restaurant industry as it recovers from the COVID-19 health crisis and continuing our mission of enabling the community to catering to delight customers, to do what they love., and to thrive, ”a spokesperson said.

With the help of my interviews with the co-founders, here are the highlights of Toast’s journey, from its founding in 2012 to a dramatic turnaround in the past 12 months.

Potential Toast IPO

Toast’s potential $ 20 billion IPO could take place “later this year,” according to the Journal which noted that other options – such as merging with a SPAC – are also possible.

Toast provides cloud-based payment processing hardware and software – performing functions like point of sale, payroll processing, and email marketing – for restaurants.

Toast also lends money to restaurants through Toast Capital – a service that worried me when I learned about it last year due to the high rate of restaurant failure.

Who started Toast and how they created its culture

Toast was founded in 2011 by Aman Narang, Jon Grimm and Steve Fredette, the Journal noted.

Some of its founders had worked together at a Cambridge, Massachusetts-based software company, Endeca. As I wrote in April 2019, Toast raised its first funding round of $ 500,000 from the founder of Endeca, where his co-founders all worked. In October 2011, Oracle acquired Endeca for $ 1.1 billion.

Toast was not successful with its first product, but saw an increase in demand after building a new one. Toast presidents and co-founders Steve Fredette and Aman Narang, as well as CTO and co-founder Jonathan Grimm, pointed out that Toast’s initial product – a paycheck app for a restaurant – has seen difficulties. However, their transition to a point of sale app was so popular that Toast couldn’t keep up with the demand.

They discovered specific values ​​that drove their early growth. As Narang said, “In the beginning, our success was due to our closeness to customers and our concern for the success of our customers.”

Grimm, who grew up in a small farming town in Kansas, said: “We had the confidence to ignore people who told us we would fail because we were in a crowded market. Ironically, this sense of confidence came from what Grimm called “an egoless culture – doing good by the customer – rather than flashy self-promotion”.

Fredette – who tried to compete with Facebook when Mark Zuckerberg was a Harvard student and turned down an offer to be one of its first employees – stressed the importance of “learning what made our initial strategy work and giving example rather than articulating values ​​”.

Rather than defining the culture at the origin of the company, the co-founders tried to understand which values ​​contributed to its success. They identified the employees who “carried the culture” and asked them what values ​​drive Toast.

As Narang said, “When we reached 80 to 100 employees, we identified 10 to 30 of our employees who were most aligned with our core values. We grouped the six core values ​​of the company together by asking, “What does it mean to be successful here? ‘”

They also used the culture to prevent potential employees who did not match its culture. As Fredette told me, he was interviewing a candidate for an engineering job and asked him, “What do you think of our team? The candidate replied: “Everything is fine”. ”

Fredette thought to herself: “He did well on technical matters but why would you say that? If we hire someone toxic, it will spread.”

Toast has seen this crop applied to a huge untapped market. As CEO Chris Comparato – who joined Toast as CEO in February 2015 – explained in our April 2019 interview: “I have an obsession with customer success. Our platform gives restaurants a Boost in sales and operational efficiency of same stores. It provides data analysis and empowers employees to delight customers. ”

Toast was targeting what it sees as a “massive” total addressable market of 700,000 restaurants and it was not focusing on positive cash flow. As Comparato said, “Our biggest competitor is the status quo. We are investing in product innovation over the next five years. We will not let the pursuit of profitability slow us down in our efforts to build the best platform. -form of the industry. ”

Big Toast fundraiser in February 2020

Less than a year later, in February 2020, Toast told me that it was growing very quickly and had raised funds to a valuation of $ 4.9 billion. Toast CFO and Commercial Director Tim Barash told me in a Feb. 25 interview that while Toast is not profitable, it is growing rapidly.

As Barash explains, “Our revenues grew 109% and we are the leading platform in the industry. We have the momentum and the opportunity that lies ahead is so much greater – we are in the second run.

Investors had bought into Toast’s value proposition – between April 2019 and February 2020, its private market value soared 81% to $ 4.9 billion thanks to announced $ 400 million Series F funding February 14th.

Why was Toast growing so fast? The simple answer was that Toast helped restaurants grow faster, increased their margins, and increased their chances of survival. Along the way, restaurant workers and customers were happier, Barash said.

For example, Austin-based restaurant Odd Duck increased annual sales by $ 500,000 and server tips an additional $ 6,000 to $ 7,000 per year with Toast’s Toast Go product.

In February, investors were very optimistic. Mary D’Onofrio, growth investor at Bessemer Venture Partners, told the Wall Street Journal: “We believe TAM [total addressable market] is large enough to support healthy yield even at these prices [20 to 30 times revenue]. ”

Barash summed up the bullish case by telling me about the huge addressable market and Toast’s compelling value proposition for restaurants and their customers. As he said, “We are targeting a huge market; Toast is a market leader [a 2018 IDC MarketScape report concluded this]; we help restaurants achieve better results; and we operate a high-margin, high-retention business-to-business model. Investors in public companies find that while our business is not yet profitable, our margins are sustainable and we can grow efficiently. ”

50% Toast Stick Cups

In April, the pandemic had plunged Toast’s business. As the Journal noted, in an April blog post, Comparato said Toast plans to “cut staff by about 50%, citing a revenue drop of more than 80% in March in most areas. cities ”.

Toast “has also cut executive compensation in all areas, frozen hiring, cut bonuses and pulled offers,” according to TechCrunch.

These cuts were based on Toast’s uncertainty about how the pandemic would affect its restaurant industry customers. As Comparato said, “With limited visibility into how quickly the industry can recover and facing slower-than-expected growth, we now find ourselves in the unenviable position of downsizing.”

Quick Toast Recovery

By mid-2020, business had rebounded for Toast. In November, TBEN announced that a secondary offering allowed current and former Toast employees to sell up to 800,000 shares acquired at $ 75 per share – valuing the company at $ 8 billion – 63% above valuation. last February.

What was behind Toast’s recovery? Toast’s software has helped restaurants quickly transition from on-site dining that the pandemic has drastically reduced to choosing restaurant take-out meals and selling gift cards.

In March, Comparato told its customers that Toast was providing “millions of dollars in the form of a one-month software fee credit for all Toast customers, as well as free access to its software for the online ordering, takeout, gift cards and marketing, ”According to TBEN.

Last November, Comparato was especially happy to see DoorDash go public. As he told me, “We are delighted to see DoorDash continue its IPO at a critical time for the restaurant industry. Certainly, the COVID-19 pandemic has changed the way local consumers and restaurants interact, creating a demand for digital and contactless technologies that will continue into the future. “

DoorDash shares have risen 12% since the company went public in December.

Toast declining to comment on the Journal report, it remains to be seen if and when public investors can join Toast as it transforms the restaurant industry.

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