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The Roundup: Breaking Down Q1
plus some links
Quarterly, I take a quick look at some of the top public vertical SaaS companies. Plenty can do a better job at breaking down the financial performance and the key risks/opportunities there. I instead try to focus on some of the product and organizational strategy.
The big news out of Procore is their new turn to financial products as a way to achieve growth. Construction finance has been a tough nut to crack. There’s various reasons for this, but mostly construction doesn’t fit nicely into the B2B fintech paradigm. Progress payments can throw a wrench in financing initiatives and the total cost of projects seems best suited for bank relationships.
That said, there aren’t many fintech adjacent initiatives Procore is leaving off the table. And they seem particularly excited about Procore Risk Advisors - their new insurance brokerage.
Insurance looks promising for several reasons.
First, as they highlight probably 5-6 times in their earnings call - this comes with no balance sheet risk, a very important factor given the implied risk of other fintech initiatives.
Second, this seems like one of the core fintech areas where you can largely buy that Procore has the necessary data to enhance a fintech offering.
Insurers roughly are trying to grasp a GC’s risk of project failure. In turn, that informs the premium, the friction in the underwriting process, and more.
That’s really massive for Procore for two reasons: 1) It stands to reason that construction firms looking to track their projects in granular detail (i.e. that use Procore) are already quite good firms to insure and 2) Procore has massive amounts of project data as a result to help make the underwriting process more seamless.
In theory, Procore can speed up underwriting (and possibly handle it entirely themselves), pass along the necessary data to carriers, and get revenue share on the fees as a result. And since insurance happens at the project level, there’s essentially no reason this wouldn’t become the go-to product for construction firms to use as they win new projects.
No balance sheet risk, a partnership driven model, and really interesting implications for product usage.
There’s a million reasons why we can’t build stuff faster. But it’s this sort of incremental innovation in a cumbersome process that can alleviate back office ops while also creating valuable product lines for Procore.
Toast is growing revenue 55% YoY. A lot of that comes down to how efficient their GTM motion has become.
Toast believes that SMB flywheels are inherently local. Restaurant owners interface with others in their city. Referrals ensue and sales cycles regionally accelerate Thus, Toast’s strategy is pretty simple: drop reps into one of these hyper-local contexts and as the reps get more experienced, localized flywheels develop that make conquering an entire geography possible.
These flywheels then enable highly efficient cross-sells with other Toast products, until Toast has effectively penetrated the operational layer of every restaurant in a region.
Their product suite gives them the right to win, their GTM strategy enables them to actually win.
The other big news is the launch of Toast Tables - their direct booking solution. Tock and Nick Kokonas pioneered the category and now Toast is getting in the game.
Kristin Hawley at Expedite puts it this way:
Toast’s entry into the reservations space marked a turning point for reservations. Not because it caused a massive shift in the way people book tables, but because it positions direct reservations as an alternative to the largest networks. At the time of launch, Toast’s survey data found that third-party reservations networks represent just 3 percent of restaurant discovery
According to Toast CEO Chris Comparato, Toast Tables powered 450,000 bookings in March, before it was officially announced. For comparison, OpenTable, the undisputed reservations leader, seats about 31 million diners per month. Still, it’s an impressive debut for a technology company that counts many, many restaurants as customers already.
The theory behind direct bookings is pretty simple: the networks actually don’t generate reservations for restaurants. They’re incidental to the process. Consumers start their search on Google for local restaurants and end up booking a reservation on Resy or OpenTable by default - because restaurants don’t have direct booking experiences.
Toast Tables is looking to rectify that and the prospects look really good.
The big news out of Shopify this quarter was the sale of their logistics business to Flexport.
There’s sort of an interesting lesson here: enabling online commerce is incredibly lucrative, the logistics coordinating the movement of those goods to the consumer? Much less so - at least in Shopify’s case.
In the process of arming the rebels, margins still matter. And every single domestic logistics player is struggling with margins.
Shopify was trying to make starting a DTC company as easy as possible. Make it easy for the rebels to handle every bit of the operation, the rebels grow, and suddenly your TAM looks far bigger. This looked especially attractive as a way to displace the current incumbents, whom were slow to adapt to an ecommerce world.
That’s all changed now and while Shopify isn’t moving away from arming rebels, we are reaching a new equilibrium point where ecommerce is priced in to retail. Shopify is an enterprise-grade solution now and the Banana Republics of the world are moving in to the ecosystem. Everyone has an ecommerce strategy. Less lucrative product lines involving fulfillment are just not important enough to justify the operational complexity - especially when the incumbents were never going to use your fulfillment product anyways.
At this point, Shopify’s moat is so deep that any new DTC startup is going to choose Shopify anyways and their TAM is now unconstrained as every major retailer is moving to Shopify.
That in turn means Shopify is moving into POS in force and omnichannel operational software to support their rebels-turned-kings launching into traditional retail channels and continue to attract the incumbents.
In addition, they’re spending plenty of time on the consumer discovery front with their Shop App. It’s a great app but remains to be seen if consumers start their shopping journeys there or much like OpenTable, end their journey there instead. Those feel like very different value proposition and with very different ramifications for Shopify’s ability to build a rival to Amazon as a discovery engine.
Bain Capital put out a great piece highlighting 50 emerging Vertical SaaS companies.
Filevine released their next AI product: Fields
I’m revisiting Equal Venture’s great piece back in March on the opportunities within insurance
Veeva is notably left out of this breakdown. They grew revenue 4% YoY and are continuing to double down on their existing strategy.