VC Money In The POS Industry – What are the limitations?
The purpose of this article: To foster on-going practical discussions of the benefits and limitations of venture funding in the point-of-sale industry.
Venture funding is being deployed all around the world and sometimes it helps generate quantum leaps in business growth, profits or consumer benefits.
What is it doing for the Point of sale industry?
Let’s begin with this spreadsheet showing a few figures from well known POS companies. I’ve taken three easily determined figures – the number of employees, the number of installations and the amount of funding in US dollars, but excluding any funding obtained in the last sixty days as it is unlikely to have been deployed. The amount of funding received is not easily related to the amount of money that has actually been spent. I did not want to ask any companies the size of their bank balance – I didn’t think I’d get a response I could publish. So, while a company may have received $20 million in funding last year – I have no idea how much of it they have spent, or what their burn rate is. On the other hand, venture money is not given to companies to simply sit unused. Many companies are doing fund-raising every 12 to 24 months, and readers can make their own estimates as the bank balance of a particular company. For simplicity, the chart assumes that all funds have been used to acquire those installations.
I included the number of employees, as that is the largest ongoing expense for most businesses. Readers can use that number to help estimate the monthly operating costs of a company. The number of installations can be used to estimate gross revenue. Where there is an unusually high number of employees relative to installations, it’s a good bet that the company is burning through a lot of cash.
One of the key questions is whether venture money is a help or a hindrance or a distraction. Developing great point-of-sale products is hard! It is a lengthy process and it never ends. By the time a company spends six or seven years really building deep features into a product, there is a new platform or operating system that it must accommodate. Whether it was going from mainframes to personal computers, DOS to Windows, or Windows to the tablet, then to the cloud, and now to the smartphone – the ground keeps shifting, and therefore, substantial development costs continue to be required.
In part two of this article I will discuss some things that I’ve heard companies talk about being sustainable competitive advantages and share why that might not the case.
A big Thank You!!! to all the companies that graciously provided this information.
What I see in the chart:
First, it’s interesting to me that the three companies at the top of the list; Lightspeed, Vend, and ShopKeep, have such similar metrics in the area of funds per installation, and Installations per employee. They’ve all been around a while – longer than some others – and have nice sized customer base. That means they have a revenue stream that is proven, and consistent. They are mostly in the cloud and the products have been in the market long enough to have been rigorously vetted. All are well known in the POS industry.
(In the notes below the chart you can see that both Shopkeep and Vend recently received additional funding.)
Revel – the fourth company on the list has received the most funding of any of these and has the most employees. To me that says that their burn rate is the highest, and that they are probably swinging for the fences. The official amount of installations that they have disclosed conflicts with a recent press release. (See yesterday’s interview with Revel’s CTO here.) So, I expect an update on this amount sometime soon. But, even if it were doubled, and the funding were halved, they would still have the highest use of funds per installation on the chart. They also say they are adding thirty employees per month. A very aggressive approach indeed.
Bindo – has received a modest amount of funding and is the youngest company on the chart, but doing well with the capital they’ve taken.
Their cost per install is the lowest and I think that is normal. I believe that the incremental cost to acquire POS clients actually rises for a long time.
TouchBistro – this company is growing very rapidly and received $6,000,000 of funding this past April. The number of installations per employee looks high and I need to do some research to understand why. The company has received numerous awards for it’s app and looks to be an up and comer.
Future POS, Revention, Action Systems Inc – All have a solid base of installations, and were built from the ground up without venture funding. While not getting any of the glamour and the splashy interviews and endless blog posts on tech media sites that some cloud companies get, these are hand built enterprises that are growing and thriving. All have software that is completely field proven. Zero venture capital. Zero hype. Maybe good point of sale software can be rigorously built from deep experience and a closeness to the customer. These companies have survived numerous recessions and business cycles.
Micros – A public company founded in 1977 that was sold in 2014 to Oracle. I don’t have amounts for their capital raising and I included them primarily for benchmarks on the number of employees and installations. Micros is (or was) perhaps more labor intensive then any of the other companies on the list will ever be, now that tablets and other components are so cheap and commoditized. But the sale price of the company should be interesting to anyone trying to value a POS company. They sold the company for roughly $16,000 per installed site. While many of the young companies on this list have an average of 2 terminals per store or less, Micros installations often had many more terminals per site – being used in hotels and casinos for example.
Sooooo – what of all this?
Point of sale is a tough business. People think it is easy at first, but the longer you’re in it, the more you come to understand just how variable retailers and restaurants are. Differing needs and approaches. Expanding into other countries sounds easy until you find out how regulated some countries are, how many different taxes there are and how they work. Point of sale software requires a perpetual amount of programming – and the more you want to grow your POS business to accommodate a wider variety of clients, the more you will spend on R&D.
Venture funding seems to be proving useful for accelerating the growth of some of these companies, yet, we can see that it is not needed in order to succeed. And, maybe, too much money invested in a POS company can be wasteful. POS is an industry where the race never, ever ends. Companies should adopt a pace that is appropriate. Venture capitalists should be cautious about expecting Uber type growth and market share in this industry.
Part two of this article will run tomorrow and will discuss sustainable competitive advantages in the POS industry. In particular, it will dispute the value of the most commonly cited ones as well as arguing that the destruction of a key piece of POS recurring income is coming soon.