Toast's Remarkable Recovery and Potential IPO

The Boston-based company, Toast, has experienced significant fluctuations in its fortunes over the past twelve months.

Initially securing $400 million in funding in February 2020, which valued the business at almost $5 billion, the company was subsequently forced to reduce its workforce in March as the COVID-19 pandemic dramatically altered its operating landscape.

Prior to the pandemic, Toast had demonstrated substantial growth, achieving a 109% increase in revenue during 2019.

From Layoffs to a Potential $20 Billion Valuation

The challenges faced by Toast were far from resolved with the initial adjustments. However, the company has since rebounded considerably from those early pandemic-era reductions.

Indications of this recovery are seen in reports concerning a forthcoming IPO and a potentially substantial valuation of $20 billion.

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Recent IPOs have frequently exceeded prior private valuations, but Toast’s journey from workforce reductions to a potential public offering within a year represents a noteworthy achievement.

Even a valuation consistent with its previous $5 billion estimate would be a positive outcome for the software company.

A higher valuation would simply represent additional success for this unicorn.

Comparing Toast to Olo

Complete details will remain unavailable until the S-1 filing is released. However, another company operating within the restaurant technology sector, Olo, is currently undergoing the IPO process, and its S-1 filing is publicly accessible.

Olo is based in New York.

As we anticipate the release of Toast’s financial data, which is expected to be as insightful as Airbnb’s own recovery from the effects of COVID-19, examining Olo’s performance can provide a valuable perspective on the market conditions that Toast navigated throughout 2020.

Olo’s Initial Public Offering

Olo has maintained a relatively low profile in recent years. The New York-based software provider last secured funding in 2016, completing a $40 million Series D funding round.

The company’s operations are structured around three core components, as detailed in its S-1 filing. Firstly, Olo provides restaurants with branded ordering software solutions. Secondly, its services facilitate the management of delivery options, a function referred to as “dispatch.” Lastly, Olo’s platform distributes restaurant data to various online platforms, functioning similarly to Yext.

Toast, for context, specializes in point-of-sale systems, alongside offering online ordering and delivery services comparable to those of Olo. Importantly, Toast has been actively broadening its software offerings, recently incorporating payroll management and email marketing tools, among others.

Both companies derive revenue from software (SaaS) and transaction-based services within the restaurant industry. Therefore, strong performance by one suggests a similar trend for the other, particularly during 2020.

How did Olo perform throughout 2020? Exceptionally well.

Olo’s revenue increased from $50.7 million, coupled with an operating loss of $5.1 million in 2019, to $98.4 million in revenue and an operating profit of $16.1 million in 2020. Achieving nearly 100% growth while simultaneously attaining operating profitability is a significant accomplishment. (Net income figures are excluded due to complexities related to warrants and non-cash expenses like “accretion of redeemable convertible preferred stock to redemption.”)

The company also experienced a substantial increase in cash generation during 2020. Following a cash consumption of slightly over $4 million from operating activities in 2018, Olo generated $2.4 million in the same category in 2019. This operating cash flow then expanded to $20.8 million in 2020. Furthermore, Olo’s free cash flow reached $19.5 million last year.

What factors contributed to this success? Primarily, improvements in gross margin and rapid market expansion. The company increased its gross margins from approximately 70% across the four quarters of 2019, to levels exceeding 80% in the final three quarters of 2020.

Analyzing the company’s historical revenue reveals the impact of COVID-19 without even referencing specific dates. Here’s a breakdown of its revenue performance:

• Q1 2019: $10.4 million.
• Q2 2019: $12.1 million.
• Q3 2019: $14.2 million.
• Q4 2019: $14.0 million.
• Q1 2020: $16.1 million.
• Q2 2020: $24.3 million.
• Q3 2020: $27.5 million.
• Q4 2020: $30.5 million.

This represents a remarkable period of growth. The company transitioned from break-even or losses in 2019 to consistent quarterly profitability beginning in Q2 2020. This positive trajectory explains the timing of Olo’s public offering; its business performance is demonstrably strong.

Returning to Toast, we can infer that the restaurant software market experienced significant volatility in 2020, based on Olo’s experience. This partially explains Toast’s rapid recovery, from implementing layoffs to potentially quadrupling its valuation within a year.

However, it’s important to note that Toast’s performance won’t precisely mirror Olo’s, given their differing product offerings and business strategies. (Toast’s integrated-payments model is reminiscent of Shopify’s payment technology, while Olo’s open-SaaS approach aligns with BigCommerce’s strategy.)

Nevertheless, Olo’s success provides insight into the potential performance of Toast last year. If Toast’s recovery mirrored Olo’s growth, its previous $5 billion valuation may have been underestimated in 2021. The $20 billion valuation warrants further evaluation.