Lessons from Toast on Multiproduct Vertical SaaS
In the rapidly growing pantheon of vertical SaaS success stories, few companies loom larger than Toast, which provides an “operating system” for the restaurant industry. In September 2021, just a decade after Toast’s founders launched the company as a short-lived consumer-facing restaurant app before pivoting to a point-of-sale solution Toast went public at a valuation well above $30B. Like most public SaaS companies, Toast has experienced a painful drawdown in its market cap over the past year, but at the time of this writing is still valued at a healthy $9B, a clear indication of investors’ belief in its long term prospects. During the height of the pandemic, it would have been easy to attribute Toast’s runaway success to changing dynamics of the restaurant industry, which suddenly needed new technological solutions to serve customers in extreme circumstances. But Toast’s enduring success, even in the face of turbulent market conditions, suggests that something deeper is at play that may reveal the secrets to success for vertical SaaS founders and investors alike.
The reason Toast can justify its $9B valuation is because it is a multiproduct platform. It was able to become a multiproduct platform because it controlled strategic positions in its customers’ workflows. But finding and dominating this control point is neither obvious nor straightforward. For Toast — and any other vertical SaaS company that aims to replicate its success — it is critical to deeply understand their customers’ workflows in order to identify both unmet customer needs and key control points in the flow of information through a business.
We can see how challenging identifying and entering these control points are by looking back at Toast’s origins. In 2011, its founders — Steve Fredette, Aman Narang and Jonathan Grimm — had set out to make an app that would allow restaurant customers to open a tab and pay on their phone. This was certainly a real paint point for customers, but hardly the basis for a multi-billion dollar business. The three founders discovered this the hard way when no VCs wanted to invest in a company that was, indirectly, taking on the massive incumbents that provided restaurant point-of-sale systems. If the company that would become Toast wanted to generate returns worthy of VC investment, it would have to compete with these legacy providers head-on. And that’s exactly what it did.
Toast’s decision to switch its core product from a point solution that helped solve a particular problem for restaurants (i.e., collecting customer payments) to a comprehensive back-of-house management system was key to its success. Toast’s founders clearly recognized that the ability to handle payments was a crucial feature for any restaurant software system, but by becoming a complete system of record for restaurants rather than just a payments solution it could control the payments channel and several others, too.
The impact of Toast’s pivot to a system of record is easily seen in its growth into a multi-product platform over the past decade. In addition to its back-of-house management system, Toast also offers its customers a point-of-sale solution for payments, loans through Toast capital, and payroll services. While entering the restaurant industry as a payments point solution wouldn’t necessarily have precluded Toast from offering these same products, it would have been much more challenging for Toast to provide them if it wasn’t already established as a system of record. For example, consider loans offered to restaurants through Toast capital. These loans are underwritten by the financial data stored in the core workflow software and automatically serviced by taking a small percentage of each sale through the POS system. If Toast didn’t control the data flowing through the core system of record, it would have been much more expensive and risky to underwrite loans to its customers.
The importance of the multiple fintech products enabled by Toast’s system of record was highlighted in the S-1 released ahead of its IPO. In this document, Toast revealed that the revenue from its “financial technology solutions,” which include its payment, payroll, and lending products, dwarfed the SaaS subscription revenue from its core workflow software. In the 6 months leading up to Toast’s IPO, the revenue from financial services was more than 9 times higher than its SaaS subscription revenue.
This trend has continued to this day. In Toast’s most recent quarterly filing, its revenue from financial services in the preceding 6 months had nearly doubled YoY from $581M in the 6 months leading up to June 30, 2021 to $1B in the six months leading up to June 30, 2022. In fact, the revenue from Toast’s fintech solutions accounts for approximately 82% of its total revenue. While fintech was always a part of Toast’s DNA, they were only able to achieve such incredible success in verticalized fintech services by becoming a core system of record for their industry first. Seen this way, the real value of developing a core system of record for the restaurant industry was not so much in the subscription revenue it would generate, but the revenue expansion opportunities it would enable — particularly in financial services. Dominating this key control point in the customer’s workflow was the key to becoming a multi-product platform, which is itself the key to becoming a multi-billion-dollar vertical SaaS company.
Investors have only just begun to wake up to the importance of embedded fintech for expanding TAM in vertical markets, and Toast’s enduring success underscores the truth of this hypothesis. But embedded fintech is hardly the only pathway to a multiproduct vertical SaaS platform. Shopify’s massively expanded feature-set, for example, ranges from ad buying tools to NFT-driven “tokengated” commerce. What unites these seemingly disparate trends is the reality that the best vertical SaaS businesses are key control points in the workflows of their customers, which gives them privileged access to other areas of customer spend. Because vertical SaaS products inherently power day-to-day workflow operations it simplifies the process of adding new functionalities on top of those core workflows and simplifies the distribution of new products. This gives vertical SaaS companies a unique ability to capture larger portions of their customer’s software spend while deploying fewer resources than a competitor that does not occupy a key control point.
Although it is frequently said that vertical SaaS is “inherently” a multi-product software play, this isn’t necessarily true. As Toast’s experience goes to show, it is critical for vertical SaaS companies to identify key control points in their customers’ workflow and start there, rather than working toward building a system of record by starting with a more narrow point solution. While this is not an impossible strategy, our experience suggests that it is far more challenging to start with a point solution and then build a system of record rather than the other way around. What is true is that vertical SaaS has unique advantages over its horizontal peers on the pathway toward becoming a multi-product platform. The multi-billion dollar valuations of Toast, Shopify, Procore, and other multi-product vertical solutions suggest that following this strategy will be the key to achieving venture-scale outcomes in the years to come.
