Understanding Toast’s expected IPO through the lens of Olo’s 2020 results

Boston-based Toast has been on a roller coaster over the last year.

From raising $400 million in February 2020 at a nearly $5 billion valuation, the company cut staff in March after COVID-19 turned its business upside down. Toast had recorded 109% revenue growth in 2019.

Toast’s ups and downs were hardly over. The company has since recovered greatly since those early-COVID layoffs. Evidence of that comes in the form of the company’s reportedly-pending IPO and reportedly possible $20 billion valuation.

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It feels like every IPO these days is blasting final private valuations out of the water, but Toast’s ascent from layoffs to an IPO in under a year is an impressive turnaround. And that’s if it prices flat at $5 billion. Anything higher is just cream for the software unicorn.

Until we get the S-1, we won’t know the full details. That said, another company that operates in a similar part of the restaurant technology market is going public at the moment, and we have its S-1 filing: New York-based Olo.

This morning, while we await the numbers from Toast that should prove as interesting as Airbnb’s own COVID-19 recovery, let’s peek at Olo’s results to get a taste of the market that Boston’s leading startup dealt with in 2020.

Olo’s IPO

Olo isn’t a company that has been very loud in recent years; The New York-based software company last raised capital in 2016 when it picked up $40 million in a Series D.

It’s business has three parts, per its S-1 filing. First, Olo offers white-labeled ordering software. And its service also helps restaurants handle delivery options, what it calls “dispatch.” Finally, Olo’s software, in a nearly Yext-like fashion, delivers restaurant information to online platforms.

Toast, as a reminder, offers point-of-sale services, along with online ordering and delivery services similar to Olo. Notably, Toast has been expanding its software lineup, adding payroll management recently among other offerings, including email marketing tools.

But both companies generate software (SaaS) and consumption (transaction-based services) incomes from the restaurant space, so if one had a big 2020, it’s likely that the other swam in similar waters.

So how did Olo do in 2020? Very well.

Olo grew from $50.7 million and an operating loss of $5.1 million in 2019 to revenues of $98.4 million in 2020 and operating profit of $16.1 million. Growing nearly 100% while swinging to operating profitability is impressive. (We’re not looking at net income for Olo, as its net results a mess of warrants and other noncash costs like “accretion of redeemable convertible preferred stock to redemption.”)

The company’s cash generation also exploded in 2020. After consuming just over $4 million in cash for its operating activities in 2018, Olo generated $2.4 million in the same category in 2019. Its operating cash flow then expanded in 2020 to $20.8 million. And, to add one more metric to the pile, Olo’s free cash flow came to $19.5 million last year.

How did Olo manage all of that? Two things. First, gross margin improvements. The company expanded its gross margins from around the 70% mark during the four quarters of 2019, to numbers of above 80% in the final three quarters of 2020. And its market grew rapidly.

Looking at the company’s growth over time, you can see when COVID-19 hit even without checking the dates. Here are its historical revenue results:

  • 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.

That’s one hell of a growth run. And the company swapped from break-even or worse in 2019 to consistently profitable on a quarterly basis starting in Q2 2020. You can see why Olo is going public now; its business looks flipping amazing.

So, back to Toast. What we can say is that the restaurant software world from the perspective of Olo was flat wild last year. That should explain, in part, how Toast went from layoffs to a possible valuation quadrupling in under a year.

But of course what Olo managed won’t be matched perfectly by Toast, as the companies do have different products and business philosophies. (Notably the integrated-payments model at Toast reminds me of Shopify and its payments tech, while Olo’s open-SaaS setup rhymes with BigCommerce’s own approach.)

What is clear, however, is that Olo showed how well Toast might have performed last year. And if Toast’s recovery was anything like Olo’s ascent, it isn’t impossible to grok why its old $5 billion valuation might be a bit too small here in 2021. The $20 billion number I reserve judgement on for now.