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As COVID-19 rapidly spread across the Commonwealth of Massachusetts, it quickly grew apparent to Boston’s life science community that there was a dire need for efficient, affordable, accessible and equitable testing.

Boston’s life science community needed efficient, affordable, accessible and equitable testing. As a response, Project Beacon was launched.

In collaboration with GV and the Broad Institute, F-Prime launched Project Beacon, a social benefit organization focused on increasing the capacity, availability, accessibility and affordability of COVID-19 testing in Massachusetts. Project Beacon is now a leading testing provider in the Commonwealth. Since October 2020, Project Beacon has worked with the Commonwealth of Massachusetts to create six Regional Express Covid Testing Sites in Massachusetts, as well as support the Commonwealth’s Abbott BinaxNOW and Pooled Testing efforts for K-12 schools.

In March of 2021, we caught up with F-Prime Venture Partner and Project Beacon Executive Director, Muz Mansuri, Ph.D., to get the latest on this bold initiative.

Q: How did Project Beacon get started?

We saw a failure of COVID-19 testing in the Commonwealth and the necessity for someone to step up to meet the need. Boston is an epicenter of biotechnology and life science innovation. As a community of scientists, investors, and researchers, we felt the urge to answer the call. Our founders wanted to provide robust standardized test results with fast turnaround so we could enable people to go back to work and stay at work.

Q: What is the driving force behind the organization?

We are powered by our mission to help the Commonwealth and its residents safely reopen society and return to work, while reducing disparities by ensuring equitable access to testing across Massachusetts. We’ve always had a particular focus on those who cannot access testing or technology.

Q: How is Project Beacon accessible and affordable?

We serve diverse communities throughout Massachusetts and as such, our testing website is translated into at least seven languages. By charging a little more to organizations with the means to pay for testing and by collaborating with vital partners, we’ve been able to offer the Commonwealth the best price in the marketplace.

Q: How many tests has project Beacon provided?

As of the start of March 2021, we’d performed more than 325,000 tests for the Commonwealth in the various Express sites and over 40,000 tests for private employers, schools and vulnerable populations. We are now actively supporting pool testing to get K-12 children back to school. This effort is ramping up quickly.

Q: What was the greatest challenge in starting this initiative?

At the beginning of the pandemic, testing solutions available off the shelf only catered to the top of the market, and as a result, there were inadequate options for those unable to pay. Often, these groups had the highest need. As a technology-driven company, we’ve made higher-end options available to the general public at more affordable prices.

Q: What is your ultimate goal for Project Beacon?

We want to go out of business. Our vision of success is a world in which we no longer serve a purpose, as that means the pandemic will be behind us.

*Project Beacon was acquired by Ginkgo Bioworks in January 2022. Project Beacon has facilitated more than 1.5 million COVID tests since its inception.

“Our goal is to go out of business.”

—Muz Mansuri, Executive Director

Announcing our Investment in ConnexPay

Managing payments on behalf of their customers is essential to powering the best customer experience possible.

If you’ve ever purchased a trip with Booking.com, a gift from Etsy, or insurance from an agent, you’ve experienced the critical role that brokers, agents, marketplaces, and other intermediaries play in our society. Far from being simply middlemen, these intermediaries own the customer relationship and more importantly customer experience, providing essential value to customers such as a brand they trust, price comparison, product recommendation, or simply coordination across multiple parties to simplify the purchase experience.

These groups are massive contributors to the economy — travel agents, freight brokers, and insurance agents alone control over $1.5T of spend in the U.S. — and yet their customer experience often falls short when it comes to managing payments. Right at the point of purchasing, many intermediaries are forced to turn over the customer to the party providing the product or service (e.g. a travel agent passing your credit card details to the hotel or airline for processing), sacrificing control of the customer payment experience at the most critical time and losing the ability to manage refunds, chargebacks or ongoing purchase updates thereafter.

We believe intermediaries are a critical backbone of commerce. Managing payments on behalf of their customers is essential to powering the best customer experience possible. We’re excited to announce our investment in ConnexPay, a company that puts transparency and control of payments back in the hands of these important businesses that own the customer relationship. ConnexPay has built a powerful platform that tackles the infinitely complex problems intermediaries face when it comes to payments — accepting consumer cards, paying suppliers, routing payments intelligently, managing fraud, chargebacks and refunds— and exposes it all with a simple set of APIs.  This elegant and truly end-to-end solution empowers intermediaries to facilitate the payment for their customers by becoming the merchant of record with the flip of a switch, thereby improving profitability, reducing fraud, speeding reconciliation, and removing the need for pre-funded accounts and credit lines.

This problem is particularly apparent in the travel industry, where ConnexPay got started. Online and offline travel agents remain an enormous force in travel, processing ~$740B in total global spend each year. Travel is paid for immediately on booking, yet travel agents and OTAs (Online Travel Agents) typically have a one to two day lag awaiting funds settlement from travelers. Further, agents want control over the customer experience, latitude to negotiate supply in advance from suppliers, and the ability to take commission directly out of the payment flow versus reconciling on the back-end with suppliers. ConnexPay solves all of these problems by helping agents become the merchant of record, supported by its unique solution granting instant funds availability.

Illustrative payment flow for an intermediary with ConnexPay:

It’s an elegant solution, and one which we are especially excited about having long searched for disruptive businesses in travel payments. In the same way our planes aren’t flying any faster than when we were kids, payment tech in travel has hardly evolved to the digital world. From our own portfolio, we’ve seen first hand the incredible value of integrated vertical payments solutions (e.g. Toast, Flywire) and the opportunity for technology disruptors in travel and hospitality (e.g. OTA Insight, Avantstay). Our ongoing search for solutions improving the bewildering, complex world of travel payments led us to ConnexPay.

At the outset of the COVID pandemic, we started talking about investments in terms of scratches and scars. Urban exodus: scratch or scar? Work from home: scratch or scar? Time and again, the travel industry has shown resilience coming out of every existential crisis it has faced, man-made or otherwise. Some might believe global travel will never fully recover; we believe our increasingly globalized world is nowhere near the ceiling on tourism and business travel. With the hopeful news of a COVID-19 vaccine, we like many others are dreaming about life when we can travel once again.

 

While ConnexPay began in travel, its growth during this challenging period for the industry only strengthened our belief in the value of their solution. We’re equally excited the team is demonstrating success beyond the travel sector and into insurance agencies, freight brokers, and e-commerce marketplaces. We’re especially thrilled to be partnering with ConnexPay Founder and CEO, and payments industry veteran, Bob Kauffman, whose leadership roles at US Bank and Elavon propelled the vision for ConnexPay. Bob has attracted a talented team of payments experts, including Jacob, Beth, Julie, Kunal, Judson and many more. Thanks for welcoming F-Prime Capital as part of your story!

Tapping into the future of warehouse robotics — Part 2

Several new or re-imagined robotics categories are seeing significant investor interest and market adoption.

In part 1 of the series, I discussed some of the guiding design principles for the next generation of warehouse robotics start-ups, including scalability, resilience, ease of integration, and ROI. Building on these principles, several new or re-imagined robotics categories are seeing significant investor interest and market adoption. Each category is fundamentally changing how warehouses deliver operational efficiency, invest in technology, and perform workforce planning.

Automated storage and retrieval systems (AS/RS): Supply chains are increasingly being built around local micro-fulfillment centers that ensure faster delivery times and lower-cost operations. This is particularly true in the grocery industry, where delivery times are most critical. These centers often deploy automated storage and retrieval systems that combine high-density goods storage with automated item retrieval using a built-in gantry system. Providers such as Autostore, Attabotics, and Fabric leverage machine learning to deliver higher throughput solutions in a much smaller footprint than traditional AS/RS providers. These solutions are adept at optimizing both the strategy for storing goods and the strategy for retrieving goods to minimize order fulfillment time. For example, Autostore’s Cube Storage Automation System can store up to 15,000 SKUs within 604 square-meters.

Automated guided vehicles (AGVs): Movement of goods between shipping, receiving, and storage locations in warehouse facilities is often enabled by automated guided vehicles. Traditional AGV solutions travel along predefined routes, typically painted lines on the floor. However, newer providers such as Fetch, Vecna, and Otto Motors are leveraging autonomous navigation capability to provide much greater adaptability for changing use cases and routes, resulting in faster deployment time and greater dynamic movement. Fetch has turnkey and extensible systems that safely find, track, and move anything from parts to pallets in warehouses, factories, and distribution centers

Inventory drones: Modern warehouse efficiency requires high-quality data on the movement of goods in and out of the warehouse. Traditional methods of inventory data collection are commonly human-centric and infrequent, leading to errors and limited real-time visibility of what is in a warehouse at any given time. Companies such as Vimaan, Gather, Flytbase, and Ware are building autonomous inventory management drones. Gather’s drones can accurately scan and catalog aisles 15x faster than humans, 30x cheaper and with zero downtime.

Parcel-handling Robots: Goods and parcels typically enter and exit a warehouse through a parcel-handling process. Unloading, unpacking and re-loading completed orders into a sortation system or delivery truck are requirements in nearly every distribution facility. Parcel handling is a labor-intensive job with high rates of turnover. Handling larger boxes and packages has a unique set of requirements that companies such as Pickle Robot, Plus One Robotics, and Dexterity are beginning to solve. Advanced technology and motion planning allows these systems to move parcels in production environments, designed to work alongside their human counterparts and operating collaboratively.

Pick-Assist Robots: As the scale of distribution facilities continues to grow, collecting customer orders has become extremely labor-intensive. Workers walk upwards of 10 miles a shift picking items off shelves in the order fulfillment process, expected to collect an order every 33 seconds. Not only is this process highly inefficient, as most of the time is spent walking from location to location, it can also lead to frequent worker injuries. Companies such as Locus Robotics and 6 River Systems are providing robots that replace unproductive walking time with autonomously navigated goods carts. Workers can focus on transferring goods from storage shelves to carts, and the robot does the ‘walking’. Worker productivity is enhanced by 2–3x, reducing dependence on labor and the risk of worker injuries.

Piece-picking Robots: Given the prevalence of the ‘piece-picking’ activity throughout the warehouse, many view this use case as the ‘holy grail’ of warehouse robotics. Order fulfillment requires the handling of individual items at various points of the fulfillment process, ultimately resulting in the packaging of goods in an individualized order. Picking up items and packaging might sound like a trivial task for humans, but it’s deceptively difficult for machines to efficiently calculate how to grab the next “thing.” RightHand Robotics, Kindred, Berkshire Grey, and Soft Robotics are building robotics solutions leveraging computer vision, machine learning, and special grippers to pick and transfer individual items, often from highly unstructured scenarios — e.g. miscellaneous goods in a storage bin.

Enabling Solutions: Along with various use-case specific offerings, there is also significant innovation around the enabling technologies that will accelerate the deployment of new robotics solutions. Companies like Veo Robotics, Scalable Robotics, Freedom Robotics, and Ready Robotics are creating tools to simplify the implementation of customer-specific use cases and are also making it making it easier to deploy solutions that can safely operate in the presence of people.

The pace of automation adoption across the industry is accelerating as offerings reach maturity and buyers feel increased pressure to improve operational efficiency. The global warehouse automation market is already worth over $10 billion today, and it is expected to double in size over the next 5 years as new technologies continue to see adoption. The combination of capabilities and guiding principles will significantly expand the scope of automation available, lower barriers to adoption, and enhance the potential for operational efficiency.

Tapping into the future of warehouse robotics — Part 1

Changing consumer preferences have created radically different needs for modern warehouse operators.

Warehouse and distribution facilities exist at the center of e-Commerce supply chains, with automation a foundational enabler for driving efficiency. Warehouse automation handles many repetitive tasks related to movement of goods that might otherwise be performed by a human. Traditional forms of automation such as conveyors, sorters, and various forms of robotics are highly effective in applications that require handling of bulk goods or fixed stock-keeping units (SKUs) where the process to be automated is highly structured and predictable.

However, changing consumer preferences have created radically different needs for modern warehouse operators. They must dynamically fulfill and assemble individual orders consisting of rapidly changing and diverse SKUs as use cases move away from bulk deliveries. Today, the primary source of competitive advantage is operational efficiency, minimizing fulfillment costs and maximizing delivery speed.

Amazon is driving much of the innovation in the e-Commerce sector, constantly pushing greater order flexibility, faster delivery times and lower costs for consumers. They were one of the first to adopt more advanced warehouse automation as an enabler for improved order handling capabilities when they acquired Kiva Systems for $775M in 2012. Last year, they had over 200,000 robots in their warehouses working alongside humans. Most recently they acquired Canvas, a company specializing in “spatial AI” where mobile robots can autonomously navigate in dynamic situations.

According to McKinsey & Co., US e-commerce purchase volume rose from 16% penetration at the start of 2020 to nearly 35% at the end of Q1, driven by the COVID-19 Pandemic. That’s 10 years of growth in just three months. Retailers around the world had trouble fulfilling orders due to customer demand, logistical delays and trade tension.

To accommodate, Amazon hired 175,000 new employees in March and April and is opening new fulfillment centers leveraging human and robotic technology in new locations at an accelerated rate. For the entire warehouse industry, operators discovered that automation is a core enabler for not only operational efficiency, but also ensuring business continuity during workforce disruptions brought on by social distancing needs.

Design principles for the next generation of robotics start-ups

At F-Prime Capital, we are fortunate to have learned from many warehouse robotic companies and seen first-hand how automating certain activities enables humans to focus on higher-value activities. A new generation of robotics start-ups are disrupting the warehouse automation market by offering a fundamentally different value-proposition to warehouse operators. These guiding principles enable start-ups to quickly overcome barriers to adoption and build capital efficient businesses than was historically possible in this sector, and they are a major reason for the increasing investor excitement in the space.

1) Scalability: Traditional automation solutions are deployed as monolithic solutions — they basically transform the entire process that they are replacing. While they can be effective, it is a high capex decision that often requires a multi-million-dollar upfront investment. In addition, if there are any changes in the process — e.g., product changes, workflow changes, or volume of demand changes — such solutions typically cannot adapt without significant further investment.

Many of the newer generation of warehouse robotics are designed to operate within the existing flow of work. In other words, they can operate alongside a human to increase productivity, or they operate within existing workcells. For example, pick-assist robots work alongside a human to reduce walking time. In doing so, the solutions can be deployed incrementally (e.g., supporting only a portion of the staff or replacing only a subset of workcells) and can be scaled up or down as needs dictate. This not only eliminates the need for massive upfront investments, it also enables more adaptability as processes change.

2) Resilience: Typical automation solutions are designed to perform repetitive tasks with high accuracy and high speed. They rely on simple sensor inputs, such as barcode scanners or binary I/O devices, to measure the world around them and perform their pre designed task. However, they expect the operating environment to be highly controlled, and in case something unexpected happens, a human operator is required to reset the system.

Advances in computer vision and machine learning have given modern robotics much greater environmental ‘awareness’. These solutions are more resilient to changes in the environment and provide an operating envelope in much less structured environments. For example, mobile robots can automatically avoid obstacles and piece-picking robots can automatically adjust their picking trajectory based on the orientation of the object to be picked.

3) Ease of Integration: Integration of warehouse automation is one of the biggest obstacles to adoption and can often lead to a multi-year cycle of refreshing or adding automation solutions. Given that traditional solutions are monolithic in nature, they require an ‘all-or-none’ deployment decision that leaves little flexibility for integration with existing forms of automation. Such solutions also lead to a desire to do more customization for each deployment, which further inhibits integration with other solutions.

With newer forms of automation focused operating within the existing flow of work, they are also focused on building standardized solutions with out of the box integrations to existing automation solutions. This can include the warehouse management system operating the warehouse or the complementary automation systems that exist up and downstream in the workflow. The ease of integration enables more rapid experimentation with new solutions, and it drives much faster time to value for the operator.

4) ROI at lower costs: For warehouse operators, automation decisions are fundamentally driven by capital budgets and return on investment. As new robotics companies enable more scalable deployments, upfront costs are inherently lower. Falling sensor costs and falling costs of industrial-grade robot arms are also helping reduce deployment costs. Many players are even starting to experiment with ‘as-a-Service’ business models which convert capital costs to operating costs and allow for shorter term deployment. Such models are enabled by standardized solutions which allow providers to reuse solutions for differentiated customers.

RightHand Robotics

F-Prime Capital is excited to announce its investment in RightHand Robotics (RHR). In addition to its world class team led by Yaro, Leif, and Lael, RHR exemplifies all the best design principles of the next generation of robotics companies. RHR has also shown what it takes to create a successful business in the warehouse logistics space — demonstrated success across a range of customer segments and use cases, multiple referenceable production deployments, and a broad set of partnerships with both adjacent technology providers and system integrators. You can see a small glimpse of what RightHand has accomplished in this video case study with Paltac, one of its anchor customer deployments.

In part 2 of the series, I will discuss the broader category of warehouse robotics start-ups and some of the emerging use cases that are starting to see success.

PropTech Investment Themes and Our Investment in Snapdocs

Real estate is the world’s oldest, largest and arguably most resistant asset class to disruption. Yet the forces at work today are striking, fueled by talented entrepreneurs changing long-held notions among real estate participants.

With our investment in Snapdocs, I wanted to share our broader investment thesis for real estate and specifically our views on the digitization of real estate transactions. If you too love the real estate sector, then I hope you’ll read on.

Our investment thesis

For several years at F-Prime Capital we have been investing against the changing landscape in real estate. We have drawn from our experience in equities and FX, where we recognize how transparency, data and standardization drive greater liquidity, fractionalization and the disruption of intermediaries and see the same trends emerging in real estate.

We are finally seeing these in force in real estate. Data has never been more accessible — more vendors, data variables and APIs — leading to transparency in acquisition and portfolio management. iBuyers like OpenDoor and REITs like Invitation Homes have leveraged this to prove there is more standardization in real estate than previously thought, placing offers on homes in minutes and in bulk, based on data-driven underwriting models. All this comes at a time when consumers are changing their attitudes on home ownership, partly out of necessity and partly out of generational shifts.

F-Prime PropTech Investment Themes

F-Prime’s investment themes in real estate

I wrote about the changing nature of home ownership and how we see the home becoming more semi-liquid and fractionalized (Theme #4). In this post, I wanted to share how we see the real estate purchase process digitizing (Theme #3) and why we led the Series B in Snapdocs, the emerging leader in digital mortgages.

Digitization of the mortgage: the problem

It’s a big market.

First, for context, the mortgage industry is big…really big…with annual transaction volumes of 4.7M first-lien mortgage originations (purchase) and 2.2M second-lien mortgages (refinancing), for a total origination value around $2T annually. While residential real estate transactions are subject to broader macroeconomic factors, especially interest rates, the base spending on transactions including all parties has exceeded $42B annually for the last 20 years.

U.S. Mortgage Originations

Source: MBA; Freddie Mac

It’s painful.

Anyone who has bought a home knows the pain of finding a mortgage, sharing personal financial documentation and reviewing up to 100 pages of documents. For me, the Closing process is the most frustrating part, often involving seven people, dozens of signatures and several hours of time in a lender or closing agent’s office. For first-time home buyers this can be especially emotional, stressful and bewildering.

I love the “Closing Day Tips” from The Balance financial blog….sure, take the entire day off!

The main problem is the large number of participants involved in the process, including real estate agents, loan officers, title companies, notaries, correspondent banks, securitization agents and government backed-agencies like Freddie Mac and Fannie Mae (GSEs). It was never easy, but it was simpler when a borrower’s local bank made the loan and held the loan to maturity. That changed with the introduction of the 30-year mortgage in the 1950s, GSEs and securitizations. Today we still have a single unit — the mortgage — yet dozens of participants are involved. One of Snapdocs’ early insights was that point solutions could not address these problems and that the industry needed better workflow and collaboration tools.

It’s a huge time commitment, but it’s also costly. The typical purchase mortgage has a 2–4% fee drag or $6,000 — $12,000 in fees paid to intermediaries, adding up to the $42B in industry fees across and purchase and refi. This is not counting the ~5% in real estate commissions paid by the seller.

Progress to an all-digital experience

Fortunately, new technology vendors have improved the upfront stages of the mortgage process. Finding a home itself became a more digital process a long time ago with players like Redfin and Zillow. New takes from Compass and Homey have pushed the digital search process, engagement and offer even further into digital realms. We won’t eliminate a buyer’s desire to see a home in person, but we’re already moving it to self-service with digital lockboxes and cameras.

Though not perfect, finding a mortgage has dramatically improved from ten years ago. Today most mortgage searches start online and online mortgage companies like Better, Quicken and Homelight offer faster, digital experiences with mortgage quotes tailored to the individual borrower. Even Financial, one of F-Prime’s portfolio companies, soon will extend its API-first approach from personal loans to mortgages and leapfrog LendingTree and Bankrate with mortgage offers based on deep integrations with lender underwriting models pushed out to borrowers wherever they start their online journeys.

Applying for and originating a loan have also taken big steps forward thanks to players like Roostify and Blend who have built new, all-digital borrower onboarding platforms and loan origination systems. Anyone who has provided a year of bank and brokerage statements to a lender appreciates replacing that with a Plaid-supported automated data pull. These platforms, and other home-grown systems like Quicken’s, need wider deployment, but many lenders have invested in these systems and feel ready to tackle the next challenge — closing.

We believe mortgage closings are next. Closings matter in small and big ways. For one, it’s the culmination of a highly regulated process where mistakes in documents or process cost time and risk regulatory violations. Closings are also the culminating moment in the borrower experience, both legally and emotionally. Lenders work hard to win and retain borrowers, yet for this critical borrower experience, lenders are mostly cut off from the process with little visibility. Instead, nearly all other industry participants come together in a short-fused, pressurized setting, including many new participants inserted at the last moment, such as, title agents and notaries.

As an inherently networked workflow, the industry needs a collaboration platform on which all closing participants can engage as first-class citizens, but with permissions tailored to their roles. Borrowers should be able to review, notarize and sign documents digitally, with the benefit of machine learning models that automate document production, error detection and signature annotation. The industry is just beginning to embrace all-digital closings, with digital mortgages (eNotes) produced at the end. Players like Snapdocs have the opportunity to build foundational industry infrastructure.

While invisible to most of us, the post-closing life of a mortgage — the secondary market — is where things get really interesting. Wholesale lenders and the securitization market have always been the tail that wags the mortgage market, and they have built around the idea of holding the paper mortgage as proof of ownership. So, what happens when there is no paper? Fannie Mae has documented the requirements for its digital mortgages (eNotes), and digital mortgage registrations increased 5x in 2019. Granted that’s only 95,458 actual mortgages, most of which are from Quicken, but having the largest mortgage lender in the country pushing digital mortgages is exactly the way industries change. In addition, one of the world’s largest exchange operators, ICE/NYSE, acquired eMERS in 2018, the industry’s de facto eNote registry, revealing a sophisticated player’s intention to lean into digital mortgages and the downstream securitization market. Adoption is still early, but we see an exciting and open field for new players to make smart strategic decisions that position themselves for an enduring role in the secondary market, including as electronic registries, custodians and sources of data analytics.

TL;DR

The real estate sector is receiving a huge dose of technology. One of our favorite investment themes is the digitization of mortgage. The front-end processes are well underway — borrower application and underwriting — and the closing and secondary markets are on the verge as well. We are excited to be working with Aaron King and the team at Snapdocs where they can build foundational industry infrastructure and improve the closing experience for all of us.

Photo by Scott Webb on Unsplash

6 Investment Trends That Could Emerge From the COVID-19 Pandemic

There is still capital to be deployed in categories that interested investors before the pandemic, which may set the new order in a post-COVID-19 world.

Some epidemiologists have estimated that COVID-19 cases will peak in April, but PitchBook reports that dealmaking was down -26% in March, compared to February’s weekly average. The decline is likely to continue in coming weeks — many of the deals that closed last month were initiated before the pandemic, and there is a lag between when deals are made and when they are announced.

In the earliest days of the COVID-19 pandemic, Rocio Wu explores how the rapidly unfolding situation may affect prevailing investment trends for TechCrunch.

Originally published in TechCrunch. Read the full story here.

Will China’s Coronavirus-Related Trends Shape the Future for American VCs?

Despite early signs of a recovery among some investors and consumers who remained largely optimistic, the COVID-19 outbreak will likely have a significant impact on China’s tech sector as a whole.

For the past month, VC investment pace seems to have slacked off in the U.S., but deal activities in China are picking up following a slowdown prompted by the COVID-19 outbreak.

In the earliest days of the COVID-19 pandemic, Rocio Wu looks to the Chinese market to see if American investors can anticipate the virus’ effect in their own markets.

Originally published in TechCrunch. Read the full story here.

Toast, the Restaurant Industry and an Exceptional Case for Vertical Payments

Two weeks ago Toast announced its $400M raise on a $4.9B valuation, and for the first time, I feel that people outside the restaurant industry realized just what an amazing company Toast has become. It is an exceptional example of vertical payments and well on its way to becoming an industry platform.

At F-Prime Capital, we invested in the first institutional round of capital in 2015, and before and after, we have looked at dozens of other industries for vertical SaaS + payments opportunities. Few combined the magic ingredients that made Toast so successful. We got a lot of things right about the restaurant industry in our original investment thesis and got lucky on others, but overall we have learned so much more about building vertical software businesses.

This post is about why the restaurant sector has been an ideal industry for vertical payments and how Toast executed against it so well. I hope it also helps founders building vertical payments businesses in other industries to distinguish good from great verticals, how timing matters and how to judge how high the ceiling can be. I’ll organize the rest of my thoughts into Market, Team, and Timing.

In the beginning…

As with all breakout successes, the story starts with a great team and great execution. Chris Comparato, Steve Fredette, Tim Barash, Aman Narang and Jonathan Grimm are superb operators and have built an amazing team around them. They were united first by Steve Papa, Founder/CEO of Endeca, where they helped build Endeca to a $1.1B sale to Oracle. Then Steve backed them as their primary investor until 2015 at Toast. Talk about founders giving back and creating new founders.

Rock, paper, scissors. Market, team, timing.

It does not happen without a great team, but never underestimate market and timing. They make the difference between good and great companies.

Market

#1. High velocity sales cycle meets architectural shift to the cloud. Restaurants form and fold all the time. Successful restaurants add new locations. On average, 10,000–20,000 new restaurants start every year. Selling into the restaurant industry gives a startup a lot of shots on goal, often without the need to displace any vendors. In addition, the restaurant industry tended to refresh on-prem point-of-sale (POS) systems every five to seven years. That was both an indictment of on-prem, server-based software, but also a natural result of POS terminals obsoleting as technologies and security improved (e.g., EMV).

That said, Toast launched as all industries were moving to the cloud and this refresh in the restaurant industry was going to be different. Square had already introduced cloud + tablet-based POSs in 2009 to coffee shops and mom-and-pop stores, and nearly all quick-service and full-service restaurants would refresh to a cloud-based solution. Enter Toast with a purpose-built, all-in-one cloud-based solution.

#2 Era of the Payment Facilitators (Payfacs). By 2012 when Toast launched, the payment facilitator (Payfac) model was flourishing and this allowed Toast to redefine the POS business model and literally alter the competitive playing field. By embedding payments into their software stack, they were given two levers for charging customers — SaaS licenses and payments interchange. Restaurants were going to pay someone interchange, but now Toast could give them their core software platform for running the restaurant while also monetizing the payments. Providing an all-in-one solution offered value to both the restaurant and Toast.

A bonus of vertical payments in the restaurant industry is the low-risk profile. Compared to a marketplace like Etsy or Stripe’s broad customer base, restaurants are relatively easy to KYC, chargeback risk is low and transaction monitoring is more predictable.

#3 Geographic density leads to viral growth. Consumer businesses search for viral growth, but few enterprise businesses enjoy the same, though there are notable exceptions (e.g., Atlassian, Slack, Asana). Early on we found that achieving density in a city actually stimulated organic growth and higher sales productivity. Restaurant owners dine at other restaurants. Waiters and waitresses move from restaurant to restaurant. This was a remarkable phenomenon to watch and a beautiful characteristic of the restaurant industry.

Team

#4 I will be a platform when I grow up. With the shift to the cloud, Toast had the chance to re-define the product category from standalone POS terminals to a true software platform with APIs and a world of best of breed partners and applications. Not only did this allow Toast to offer more value to restaurants, but it planted the seeds of its own enhanced role as a platform layer in the industry.

#5 An enterprise team for an enterprise-grade market. I’ve found that quick-service (QSR) full-service restaurants (FSR) have just the right amount of enterprise complexity. Managing one, if not many locations, presents ample complexity, including: menus, cook stations, staffing, customer CRM, inventory, procurement, etc. Coming from Endeca, the Toast team built with an enterprise software mindset and an obsession for customer success. This is one of the main reasons it’s been difficult for Square to move upmarket.

I say ‘the right amount of complexity’ because I have found other attractive verticals, like hotels, are sufficiently big beasts, built around all-encompassing property management systems and are hard to displace without feature parity. Too much complexity and a startup has a hard time penetrating.

#6 Android, not Apple. Many of Toast’s competitors went to market with Apple tablets. They were the rage and looked beautiful. But we all know the cost of that brand. Toast understood that Android-based devices would follow a much faster cost curve while offering an order of magnitude more options for supply and configuration. While that choice seemed obvious to Toast, not all competitors saw it that way, including Revel and Touch Bistro.

Timing 

#7 The restaurant sector got hot. It didn’t hurt that venture firms would go on to invest $3.4B in restaurant tech startups starting in 2014. Led by online delivery services like GrubHub and DoorDash, hundreds of startups formed to serve restaurants, both enabled by cloud-based POSs, which permitted easier integrations, and reinforcing the role of POSs as the new platform layer.

#8 Access to cheap capital. What a time we’re living in. Good teams understand the capital markets. Toast recognized that it could raise a lot of capital based on its strong unit economics, impressive go-to-market execution and large market opportunity. When you see an opportunity to be a platform, it is rational to press your advantage and gain market share.

The Future is Bright

As exciting as the first five years have been, the restaurant industry is still in the early innings of its shift to the cloud and vertical payments. Older, incumbent vendors like NCR and Oracle/Micros constitute most of the POS market.

This first phase has so much upside left. Mirroring the phenomenon I described of density leading to viral growth, the restaurant POS will have a winner-take-most outcome. Even incumbent vendors enjoyed that. Peak market shares were ~30% for NCR and 21% for Micros, with Toast on its way to winning its own significant market share.

The second phase involves the POS as a platform — the software central nervous system for the restaurant. Toast already has become a hub for third-party applications like staffing and inventory management. In five years, restaurants will not have two, three or four tablets on the counter for GrubHub, DoorDash, Caviar and others.

At the same time, Toast and others will offer additional services themselves. Toast acquired payroll provider Stratex and launched Toast Capital in December. I’m especially excited to see the suite of FinTech services Toast will offer to restaurant owners and employees. The POS is a fraction of the addressable market at each restaurant. As a public company, Square has continued to grow net revenue 60% Y/Y even as it surpasses $1.5B. The unit economics of QSR and FSR are several times more attractive than the smaller retailers that comprise Square’s customer base.

The restaurant industry has proven to be an ideal market for vertical payments and the ceiling for players like Toast is very high.

 

10 Rules Entrepreneurs Need to Know Before Adopting AI

It is in the ethos of established tech companies to build generic solutions for customers across industries. But for challengers, the more they can focus on solving core business problems, the more successful they will be.

Although adoption of artificial intelligence (AI) and machine learning (ML) for the enterprise is still in the early days, the technology has matured enough for entrepreneurs to start gathering inspiration and evaluating opportunities for potential applications.

Business leaders are just beginning to adopt artificial intelligence and machine learning into their operations. In this story for Harvard Business School’s Working Knowledge, Rocio Wu offers insights into how entrepreneurs can start riding the wave.

Originally published in HBS Working Knowledge. Read the full story here.

Founders Diaries: The stories keep getting better….

We have been enthralled with the response of the Boston start-up community.

We are hosting our next Founders Diaries event on Monday Feb 10 with Jeremy Allaire of Allaire Corp/Brightcove/Circle fame – we would love to see you there! Register to attend here.

How time flies….

It has been 3 years (!) since we launched the Founders Diaries event series, and we have been enthralled with the response of the Boston start-up community. What started as a single inspirational talk by Robin Chase from Zipcar and a data-heavy blog post from our team has become a much larger tradition, and one we have been fortunate to share with 1,000+ attendees to date.

Accomplished start-up leaders like Michael Simon from LogMeIn, Steve Papa from Endeca, Paul Sagan from Akamai, David Cancel from Drift, and a multitude of others have been extraordinarily generous in sharing their trials, tribulations, and victories on the way to building foundational Boston companies. Those gathered have shared in laughs, heart-wrenching stories (Akamai losing a co-founder to tragedy on 9/11, whose memory inspired the team for years to come), ‘wows’ (LogMeIn’s picture-perfect early growth #s in spite of early rejection from investors), and tales of culture reigning supreme (Datto’s Austin McChord wins the award for most creative in-office competitions/races). We are deeply appreciative of not only our speakers but those who come to listen, ask questions, and share their own stories over apps and drinks.

Up Next: Good things come in 3’s…

Our next distinguished speaker, Jeremy Allaire, earns the unique commendation of having started 3 (3!!) successful start-ups, displaying a relentless determination to build products, hire teams, and close customers across decades.

Jeremy started his entrepreneurial journey as Co-Founder/CTO of Allaire Corporation, where he led the company’s product and GTM strategy and helped grow the business to 1M customers, $120M+ revenue, and a sale to Macromedia in late 2000. After serving as CTO of Macromedia, he then moved into online video distribution as Founder/CEO of Brightcove (from inception through the IPO), building a $130M+ revenue company that today powers video on ~25% of the top 10k websites worldwide and receives 250M+ unique visits per month. In his latest act (we won’t dare call it final at this point!), Jeremy co-founded and serves as CEO of Circle, a crypto finance company that makes it possible for people everywhere to create and share value in a way that is affordable, open and empowering.

From web application servers to online video to crypto, Jeremy has identified and harnessed trends in a way that few can.

Empowering the next generation….

When first examining the data on ‘large exits’ ($400M+) in Boston from the past 25 years, what stood out most is how certain companies serve as fertile ground for successive entrepreneurial endeavors, similar to the ‘Paypal mafia’. The initial assessment (including valuable crowdsourced additions) highlighted Akamai (40+ alumni start-ups), Genzyme (28), and Hubspot (28) as launchpoints for entrepreneurial leaders. Jeremy’s companies similarly stand out. Allaire Corp, Brightcove, and Circle have collectively produced 33 alumni start-ups from their employee ranks (counting founders/early start-up CEOs).

A few fun facts about these alumni adventures (listed here – contributions welcome!):

-8 multiple-time entrepreneurs on the list

-6 alumni companies had 2 or more co-founders from the Allaire Corp/Brightcove/Circle mafia (‘no new friends’, as they say)

-JJ Allaire (Jeremy’s brother) co-founded Allaire Corp and has founded three subsequent companies: Onfolio, FitNow, and R-Studio

-Notable outcomes include EqualLogic ($1.4B to Dell; co-founded by Paula Long) and Imprivata (IPO then $544M sale to Thoma Bravo; Patrick Morley led as early President/CEO); both are Allaire Corp alums (Paula in engineering, Patrick on the business side)

-The group also includes a few high-potential, high-growth companies including Mux ($32M raised from YC, Accel), RStudio (millions of users, the default IDE for R, recently became a public benefit corp), Vested (an early-stage company re-imagining employee stock options), and Hummingbird (taking a new approach to RegTech, an area near/dear close to our heart)

-David Orfao served as President/CEO of Allaire Corp through its sale to Macromedia before co-founding General Catalyst, a leading VC firm; General Catalyst has funded at least 7 of the Allaire-related alumni start-ups (here’s to paying it forward!)

Alumni Start-ups: Notable Exits

 Alumni Start-ups to Watch

 

Despite all the entrepreneurial activity and success to date, we are sure to see even more in the future from those in the ‘Allaire’ mafia (we are watching you, Circle alumni, for great things)!

Join us….

We hope you’ll join us on Monday February 10th to hear Jeremy’s wisdom, and maybe even cross paths with an alumni founder! Please sign up here to attend – see you there and at future gatherings!

– Team F-Prime

Kudos to Nisha Rangarajan for key research and analysis in support of this post.

Sources: LinkedIn, Pitchbook, Crunchbase, and VentureFizz.