Toast has raised more than $900 million and is reportedly valued at over $5 billion. But back in 2011, no one knew this startup would see such meteoric success. It had a few things going for it, of course — founder Aman Narang hailed from Endeca, where he was a software engineer and product lead with a reputation for being able to ship a lot of software quickly.
But the ambitions behind Toast were big and complicated, and enough to give pause to any investor. Kent Bennett was one such VC, and while he had conviction in the founding team, he wasn’t convinced that they could tackle such a big problem.
Toast is a restaurant POS system that acts as a sort of operating system for an establishment, managing everything from online orders, deliveries and marketing to payroll and team management as well as the actual point of sale. Being able to do all that requires building a number of complex products, such as payments.
Early on, Bennett had told Narang not to build a restaurant POS. To him, it was too complicated and nuanced, which is why the systems from the ’90s were still deeply entrenched 20 years later. However, he did offer space in the Bessemer office for the Toast team to work on their product.
“I caught up with Aman and he told me that they did this interesting thing after hearing that a lot of their customers were frustrated by payments platforms, which are separate from the POS,” said Bennett. “Aman said they built their own payments platform. Once again, I was like, ‘You did what? You’re not allowed to build payments.’ But he told me that they built it and it improves their products, and that, by the way, they make a margin on it.”
Bennett said that when they added up the margins from the payments and the POS, it was impactful.
“It hit me like a ton of bricks,” said Bennett. “This is a really good business.”
From there, it became his obsession. And though it took a few more quarters to close the deal, they eventually got there. Bessemer led the company’s Series B financing in 2016.
We spoke to Bennett and Narang recently on an episode of Extra Crunch Live to explore the story of how they came together for the deal, what makes the difference for both founders and investors when fundraising, and the biggest lessons they’ve learned so far. The episode also featured the Extra Crunch Live Pitch-Off, where audience members pitched their products to Bennett and Narang and received live feedback.
Extra Crunch Live is open to everyone each Wednesday at 3 p.m. EDT/noon PDT, but only Extra Crunch members are able to stream these sessions afterward and watch previous shows on-demand in our episode library.
Despite the complexity of the Toast system, or maybe because of it, Narang says the fundamentals are the most important part of communicating the business, especially when fundraising.
“What is the problem and why are you uniquely positioned to solve it?” he asked. “Why are you passionate about it? Because it’s going to be a long journey. Personally, I think there is too much emphasis put on the business model early on, and the TAM. It’s important, but it can’t be the thing. VCs are looking for people that really understand the space they’re going after.”
As an example of this, he named Zoom founder Eric Yuan, who came from Webex and Cisco before starting Zoom. He also brought up the Airbnb founders, whose story is based on the fact that they were trying to rent out their space as a catalyst for the business.
“The most important thing is ensuring the people you connect with understand your depth of passion for the space.”
Focusing on simplicity is not optional for Toast. Narang explained that that same level of simplicity needs to touch every part of the business. That became glaringly apparent when building the product and pricing it.
“We had to build a lot of surface area in our product over the first couple of years,” said Narang. “Everything from point of sale to payments to guest software to employee software. There were 100 SKUs and software and hardware that we had, and simplifying it down to some simple packages that make it easier to buy was crucial.”
Both Bennett and Narang explained that pricing is a topic that never gets much neglect. Teams should always be thinking about the pricing and packaging of their products and how it’s optimized for both short- and long-term goals.
“You have to be very careful not to think too short term, and feel that because you’ve established a brand and reputation, you can optimize aggressively,” said Narang. “You really want to think hard about making sure you’re balancing the profitability of the business with the needs of your customers, because it’s easy to think you can pull this lever now for short-term goals. You can probably get away with it for a year or two, but not forever.”
A great deal of Toast’s success comes down to its priorities over time. The business model, fundraising and the mechanics of financial viability all came as a result of the customer. Even the dedication to building a complex, high-touch product for an industry that is anything but one-size-fits-all is a testament to how Toast navigated the process of building a company.
The obsession with product-market fit then leads into these other pieces of the business that are equally important, but not as a guiding force. That includes fundraising.
“The sooner you can demonstrate early signs of strong product-market fit, the better,” said Bennett. “We see some founder presentations that are very top-down, focused on how big the market is and looking at macro themes. The bottoms-up pitch is much more effective for me. Show me a real customer, the old system they had and the problem, and what you give them. Show me how delighted they are and make it specific.”
He added that extremely strong product-market fit is the pattern investors are really sensitive to, and it leads to a path of lower resistance when it comes to organic growth, referrals, close rates and more.
The same is true for pricing.
Bennett says that the lever of pricing should come second until you have “radical product-market fit” and get the feeling that “the fish are starting to jump in the boat.”
But just as a startup should never stop optimizing the product for the user, pricing should remain an iterative process.
“Universally, across our portfolio, I don’t think there is a single company that would come to us and say, ‘Our pricing is perfect, we absolutely nailed it,’” said Bennett. “It’s a constant topic.”
Again, thinking from the customer’s perspective is paramount. Bennett said that it’s very easy to get wrapped up in the product lines and the margins, which can cause teams to lose sight of the fact that a customer doesn’t want to face a complex decision.
“You’ll often see pricing schemes come out of a very finance-driven place, but that ends up melting the customer’s brain,” said Bennett. “They don’t have time to think in multiple dimensions when it comes to pricing.”
Bennett’s message here is not to ignore pricing. He says he’s seen companies drift for five or even 10 years without thinking about pricing in a way their customers appreciate.
“There are instances of variable pricing versus fixed, static pricing, where the customers feel a lot better based on the way pricing is set up,” said Bennett. “It’s psychological.”
You can check out the full episode below, which also includes the Extra Crunch Live Pitch-Off. Folks in the audience come up on stage and pitch their product to our guests, who give their live feedback.
Extra Crunch Live goes down every Wednesday at 3 p.m. EDT/noon PDT.
Bessemer’s Kent Bennett and Toast’s Aman Narang to discuss how to become a unicorn on ECL
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