What Toast’s IPO Says About Vertical SaaS

Last month, restaurant SaaS provider Toast raised nearly $870 million in a massive public offering that valued the company at $20 billion. That’s a five-fold increase over the company’s $4 billion valuation at the start of 2020.

Toast is the third blockbuster vertical SaaS IPO this year following close on the heels of Procore and Blend’s debuts earlier this summer. All companies are mature players in the vertical SaaS sector — Procore was founded in 2002 and both Blend and Toast were founded in 2012 — and their massive IPOs indicate significant investor appetite for industry-specific workflow software.

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Toast’s IPO shows what’s possible when a modern software developer enters an industry that relies heavily on outdated, legacy software systems. Whereas Procore was selling into the construction industry, one of the least digitized sectors in the world, most of Toast’s customers were already using software to manage their restaurants. As Toast noted in its S-1:

“When technology is used, restaurants have historically relied on legacy systems and narrow point solutions that are not flexible, scalable, integrated, or built specifically for restaurants. These products often fail to meet evolving guest needs, which have continued to shift towards digital channels, and can be prohibitively expensive and complex for businesses with limited or no dedicated information technology staff.”

Selling into a market dominated by legacy software providers creates a unique set of opportunities and challenges for vertical SaaS companies compared to those that are selling into undigitized industries. One significant advantage is insight into the lower bound of the market size based on currently installed software. The restaurant industry had already signaled a healthy demand for software, even if it was feature-poor or challenging to use.

The challenge for companies like Toast is convincing its customers to rip out legacy systems and try something new. In these scenarios, vertical SaaS providers must compete on cost and/or the strength of the product to overcome the inertia of its potential customers. Toast identified five key limitations of existing restaurant tech — inflexible software, lack of easy integrations, not tailored to the needs of restaurants, limited analytics, and poor customer support — and built its core product to overcome these limitations.