Stock Groups

Toast built a $30 billion business by defying Silicon Valley VCs

Chris Comparato, CEO, the Toast, Inc. IPO at the New York Stock Exchange, on September 22, 2021.

Source: NYSE

Not long after selling software company Endeca to Oracle in 2011 for over $1 billion, Steve Papa called Bessemer Venture Partners with a hot tip. He said three of his best engineers were working on something new that Bessemer, which had previously backed Endeca, would be crazy not to fund.

Kent Bennett, who was an associate junior on Endeca’s deal, answered the call. He said that there was room in the Boston office of the firm for his staff. But Bennett knew he couldn’t get his firm, one of the biggest and most successful in the venture industry, to write a check to three engineers with an unspecified project.

CNBC’s Bennett said that he told Papa, “Well, just send them here and they’ll hang out there until they figure out,”.

The three guys and some office space eventually became Toast, a provider of software and hardware to restaurants that held its New York Stock Exchange debut on Wednesday, closing the day with a market cap of over $31 billion. The market cap has now fallen to $28billion. The three co-founders — Steve Fredette, Aman Narang and Jonathan Grimm — are billionaires, and remain top executives at the company.

Fredette, Narang, and Grimm have approximately 2,200 employees. They refer to them as Toasters.

Bessemer eventually ended up investing in Toast in 2015, and Bennett joined the board. However, even though Bessemer is one of the largest shareholders, owning over 12%, his returns would have been greater if he had joined the board sooner.

Bennett said to one of his associates that he had made a mistake by failing. Bessemer was not the only one to make this mistake. Venture capitalists were not interested in investing in restaurants, which have notoriously low margins and strict budgets.

Papa filled that void in 2013 by investing $500,000 from his own funds into the venture capitalists’ company.

Papa was a Toast board member until recent. He said this in an interview shortly after the IPO. I was determined to support them regardless of what. It was capital that they needed to start their venture. Was it clear what the form of this capital was at that point? “No.”

Papa’s present investment in Toast can be quantified as billions. As of Friday’s close, his 12% stake in Toast is worth $3.1 billion, amassed from the initial investment and follow-on funding. Bessemer has a smaller share of Toast shares, with $3.3billion after having invested less than $100m between 2015 and 2020.

No ‘West Coast offense’

Start-up origin stories are part of the fabric of the tech industry. Apple and Google famously started in Silicon Valley garages, Facebook was built by a boy-wonder Harvard dropout, and PayPal came together through an awkward collaboration between Elon Musk and Peter Thiel and included an exhaustive list of engineers who would go on to build other billion-dollar companies.

Increasingly, Silicon Valley stories have become more formulaic, thanks to programs such as Y Combinator, which has turned into a Unicorn factory over the past decade. The start-up incubator has helped spawn Dropbox, Airbnb, Stripe, DoorDash, Coinbase and Instacart, and serves as a direct path to meetings with the top venture capitalist firms.

Toast was founded on the other end of the country, a continent away. They had never intended to leave Boston and lived there as founders. Boston used to be a major venture center in an earlier period, but now the focus has shifted towards Silicon Valley. This is where most of the large exits are taking place. Bessemer maintains offices in both of these locations.

Papa stated that one Bay Area VC expressed interest in Toast’s pitch, but that he wasn’t interested and wouldn’t fly.

Toast’s President Fredette said that Toast’s East Coast roots were an advantage as it can be “a bit unconstrained” by traditional wisdom about grow, expand, grow.

Fredette, speaking from the NYSE Wednesday said that “we used to talk about West Coast offense which was hype more than substance.” “East Coast would have substance first. Not enough hype.”

There was a good deal of ignorance among the founders. Fredette claimed that the founders were so inept at fundraising and general business, that Narang (the chief operating officer) would debate Fredette during investor meetings.

Toast was born out of all the time Fredette, Narang, and Grimm spent in Boston cafes, restaurants, and trying to decide what building to do. After experiencing a particularly long wait time for the check one day, they thought they’d found a problem that could be fixed by paying the check from their smartphone — if only the technology existed.

They developed an app and launched it in 2012 with Firebrand Saints, a bar they frequented in Cambridge. It allowed customers to create a menu at the restaurant, and then link their credit cards.

Fredette explained that Fredette used to visit the cafe often after work, to grab a burger and beer.

Dwelltime was a Cambridge cafe that they opened as they expanded their business in the region.

Bennett was able to demonstrate the product at that cafe. It was successful. Still, Bennett was terrified of putting money into a company that was trying to take on incumbent point-of-sale (POS) vendors like Micros, which Oracle bought in 2014 for $5.3 billion, and NCR.

Bennett stated that it “sounded like suicide.” He recalls telling founders that it would take five years for them to create something worthwhile. While these legacy systems were painfully old, they contained 50,000 functions that made it a complicated roadmap.

Papa soon began flying across the country to assist in securing new business deals.

He was not going to the Bay Area.

Papa stated that “We deliberately chose not to place reps in Silicon Valley.” Papa said that as long as the potential rivals didn’t experience it in action they could “arrogantly dismiss” it.

Papa instead traveled to Grand Rapids in Michigan to visit Gordon Food Service, a 124 year old company. Gordon became an important distributor partner of Toast, and became the main source of food distribution for restaurants all across America.

Papa stated, “We concentrated on the middle part of the country which was mostly ignored.”

The Toast app was initially a mobile app that could be downloaded at Firebrand Saints or a handful of other locations. It quickly developed into a complete, back-end system with Android tablets. At the time, iPads were the far superior product, and were being used by buzzy start-ups like Revel Systems.

Toast decided to go with Google’s open source Android technology. It allowed Toast to build its own hardware and software instead of being limited to Apple’s.

Toast point of sale system


By late 2015, Toast was up to 170 employees, had millions of dollars in revenue and was used in thousands of restaurants, including Costa Vida, a Mexican-themed chain with 75 locations, and Beach Hut Deli, which had 40 locations on the West Coast. Chris Comparato (another Endeca alumni) had just been appointed CEO.

That’s when Bessemer finally took the plunge, leading a $30 million round along with Google’s venture arm at a valuation of about $100 million. Bennett claimed that Toast’s push to accept payments was the biggest change in Bennett’s thinking. Toast was a full POS vendor and received a cut from every transaction. This allowed them to finally have a business that is consistent in revenue.

Bennett stated that they used the margin earned from processing payments to help with software development. In a memo to the firm in December 2015, Bennett wrote that “we’ve stood by anxiously as the team hit obvious product-market fit but punted on raising more equity.” 

Bennett had monthly dinners where he tried to convince the founders to give Bessemer money to get on the cap table. He also recalled telling Felda Hardymon, his mentor at the firm, “I think this will be the biggest business Boston has ever seen.'”

Papa used similar words to try and lure investors. One slide in his June 2015 presentation stated that Toast could be “the next Uber” or “An Airbnb in many billions”, and that the company had “potentiality to make $10 billion+.

Papa acknowledged that “a lot of people place stuff like this on slides, in fairness to VCs.” We have a survivorship bias.

Toast was a very profitable company, even though Bessemer was bullish. Bennett provided a memo outlining possible outcomes as well as the amount that each firm would be paid in each instance. This scenario, which is off the charts “just goes crazy”, would result in an $8.3B company and $700M return for Bessemer.

‘Oh my god, we’re going to lose it’

Toast’s growth trajectory over the next four-plus years was so dramatic that in February 2020, the company raised $400 million at a $5 billion valuation. The company’s annual revenue has risen to $665million, largely due to payment transaction fees. A 10-year bull market that spanned the tech sector, with astronomical valuations across all companies, helped Toast.

It almost collapsed a month later after the mega-financing round.

The Covid-19 pandemic immediately exposed Toast’s glaring risk: Reliance on a single industry. Toast suffered a rapid decline in revenue as the infections spread quickly.

Cash quickly dwindled and Toast was force to slash about 50% of its workforce in April, eliminating roughly 1,300 jobs.

“With limited visibility into how quickly the industry may recover, and facing slower than anticipated growth, we now find ourselves in the unenviable position of reducing our headcount,” Comparato wrote in a blog post announcing the job cuts.

The panic started at the top of the board.

Bennett explained, “Immediately, we stated that we are burning a lot capital and will be closing our business soon if we do not take action.” Everyday I remember thinking “oh my goodness, it’s going to go away.”

The speed at which the rebound occurred was even more astonishing.

Many new technologies were brought in to allow for mobile ordering and contactless payments.

Toast’s POS system was expanded to allow for inventory management, payroll and multi-location menu control. These features were very useful and simplified the job of a manager. What restaurants needed most was an app for takeout that could sync with their existing system, and allow customers and staff to have limited contact.

Toast was the perfect choice for them, as they were looking for innovative products such as curbside notification for takeout and flat-fee delivery, along with mobile software that allowed ordering and payment from their phones.

The third quarter saw a significant increase in revenue compared to the previous year. And for all of 2020, sales jumped more than 20% to $823.1 million. It is now back to pre-Covid levels.

Bennett stated that Toast was a popular consumer brand during the Pandemic. His friends told him of their experiences at Toast-branded restaurants through mobile payments.

Toast mobile payments


“I probably got three-dozen texts this year from friends who were like, ‘this is the piece of bread from your t-shirts,'” Bennett said.

This is the same idea that inspired founders eight years ago, well before technology was available to make it possible. Narang stated that the company had come full circle since Wednesday, stating that “we were too young”

Bennett was surprised at the number of restaurants that use it.

Bennett was waiting patiently for his check to arrive after enjoying a dinner at Pammy’s Cambridge. Bennett noticed the QR Code on his receipt and paid with his card. He could have easily scanned the receipt to see Toast’s payment options.

It would’ve helped me get out of that place a lot faster, he stated.

Papa hears also from close friends. Even those who couldn’t have predicted that the start-up restaurant tech he founded almost a decade ago, would eventually be worth nearly $30 billion.

On Thursday, a friend wrote him: “I recall you telling me exactly what this would all look out over lunch one afternoon in Kendall Square.” “But, I don’t think you mentioned the pandemic. The success story is still remarkable. 

WATCH THIS: Toast and AKA Brands make their NYSE debut

Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.