Inside Toast's 🔥 IPO
Inside Toast's 🔥 IPO
Why the company is betting on PLG to fuel its next act
👋 Hi, I’m Kyle and welcome to my newsletter, Growth Unhinged. Every other week I take a closer look at what drives a SaaS company’s growth. Expect deep dive takes on SaaS pricing, product-led growth, public company benchmarks, and much more.
Toast just IPO-ed1 at a >$20B valuation.
Great news for Boston tech, terrible news for Boston real estate.
Toast’s valuation is up from an already astronomical $4.9B valuation back in February 2020 before the height of the pandemic (and ensuing restaurant shut-downs).
Some quick stats from Toast’s S-1 filing:
📈 $494M in "ARR" (I'll get to that later)
📈 118% ARR growth YoY
📈 >110% NDR despite a challenging period for restaurants
Shall we dive in?
💰 In 2021, "ARR" doesn't just mean committed subscription revenue - or software revenue for that matter.
ARR = Annual Recurring Revenue. This means recurring subscription revenue, right?
Not necessarily.
Toast defines ARR as the sum of (1) 12x the subscription MRR & (2) 4x the trailing three-month cumulative consumption payments component of MRR. They believe this metric helps control for short-term fluctuations in payments volume.
Three SaaS revenue streams are exploding, but aren't truly recurring.2 These are usage-based revenue, marketplace fees, and payments revenue (side note: HubSpot just announced a new payments system as of Tuesday).
But SaaS companies are starting to include this non-subscription revenue as part of their ARR. I think that's a good thing as long as the following are true.
It acts like it’s recurring. Net revenue retention should be >100%.
It’s margin-accretive. Device / hardware fees or services revenue usually fail this test.
It’s predictable in the aggregate. Some seasonality is fine and there will certainly be spikes at the individual customer level. Data-centric finance teams tend to get better and better at these predictions over time.
You are transparent and consistent with how you report it. It’s important for folks to understand the potential for growth and profitability in each of these revenue streams.
Where you may land is a newer definition that ARR = annualized revenue run-rate including contractual subscriptions, software usage revenue, marketplace revenue, and FinTech revenue.
💳 Vertical SaaS + FinTech = 💖
Is Toast a software company, a FinTech company, or a hardware company? Yes.
Of Toast's $823M in 2020 revenue, only 12% came from subscriptions while 78% came from FinTech and 8% from hardware.
They've processed >$38 BILLION in gross payment volume & Toast generates transaction fees on these payments.
FinTech revenue appears to be broader than payments, too. Through Toast Capital, they even generate revenue from fees earned marketing & servicing working capital loans.
Take note: only Toast's subscription services are high margin.
Software subscriptions: 67% GM
FinTech: 22% GM
Hardware: -4% GM
Based on this margin profile, I suspect that Toast will be aggressively pursuing two actions in order to maintain a high revenue multiple: (1) increase high-margin software subscription revenue as quickly as possible & (2) improve the margin profile of its FinTech business. More on #1 in the next section.
👩💻 A hardware company can't be PLG... can it?
Once Toast gets a customer to adopt its POS system (and affiliated hardware), there is a tremendous opportunity to cross-sell additional software products over time. In fact, the company sells a dizzying array of software products to help customers run their restaurants efficiently, grow their business online, manage a productive team, and attract & retain guests.
That’s where product-led growth (PLG) comes in.
Toast refers to product-led growth three times in its S-1. Their primary goal is to leverage PLG to sell additional products to their existing customers. While customers might land with POS, PLG can help them cross-sell online ordering, marketing products, payroll, and a host of ancillary products.
It’s also fascinating to see Toast leverage PLG on the new customer side. They allow restaurants to purchase their digital ordering products on a self-service basis via Toast’s website. And they have an interesting pay-as-you-go Starter Kit POS offering (starting at $0) to help attract small restaurants looking to get up-and-running on Toast.
Here’s what else I’m thinking about this week:
I went behind-the-scenes with New Relic on their transformation to usage-based pricing
Blake Bartlett unpacked Notion’s generous new startup pricing program
Sam Richard shared her POV on how to find ‘unicorn’ growth leaders to own your PLG initiative
Disclaimer: I do not provide personal investment advice. All information found here are for informational, entertainment or educational purposes only and should not be construed as investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies.
I think many investors have used subscription and SaaS as an indicator of 'high margin predictable future revenue.' A company with high margin revenue (gross margin) is preferred to low margin and predictable revenue is preferred to unpredictable. Basing valuations on AR multiples seems to me like a very old fashioned way to think. We now have the tools readily available to build much better predictive models. Relying on ARR models seems lazy to me and a poor predictor of future enterprise value. If one does not want to build a predictive model for every opportunity (someone will offer that as a service at some point in the near future) a percentage of net customer lifetime value seems like a much better indicator of future value. By net, I mean net of cost to serve.