Selling tech to restaurants made Toast a $5 billion start-up — a month later, the coronavirus struck
- Toast was valued at almost $5 billion in February, coming off a year of 109% revenue growth.
- A month later, states from California to New York had imposed shelter-in-place rules, forcing restaurants to close except for takeout and delivery.
- Toast is using a chunk of the $400 million it just raised to provide free services to new and existing customers.
When the calendar turned to 2020, Toast was one of the hottest names in technology. Shares of the privately held company, which makes software for restaurants, were in high demand on the secondary markets. Existing investors led a $400 million financing round in mid-February at an almost $5 billion, close to double where it was a year earlier.
Then the coronavirus pandemic hit the U.S., and many of Toast's customers had to shut their doors. Suddenly, the eight-year-old cloud software business, which had blossomed as restaurants rushed to modernize their tech systems, found itself in the teeth of an economic crisis and facing the prospect of evaporating revenue.
Toast isn't alone in its current predicament. As residents in California, New York and numerous other states shelter in place to slow the spread of COVID-19, a number of once high-flying start-ups have hit the skids, particularly those with ties to travel, tourism and mobility.
Airbnb was supposed to be gearing up for a public market debut. Instead, the room-sharing company instituted a hiring freeze, suspended marketing and said on Monday it will allow guests to receive full refunds for trips starting on or before May 31, and set aside $250 million to pay hosts for missed bookings. Scooter company Bird cut about 30% of its staff last week and travel software start-up TripActions, valued nine months ago at $4 billion, laid off about one-fifth of its employees.
Toast tells visitors to its careers page that it's paused hiring. CEO Chris Comparato told CNBC in an email that it's looking for other ways to cut spending.
"We have taken initial steps to halt our hiring efforts in response to slowing demand from the restaurant industry, and are focused on fortifying our existing customers and the broader restaurant community with services and support as we collectively navigate this challenge," Comparato said.
While the coming months pose a major financial hurdle for Toast, the company is as busy as ever, trying to help clients survive and preserve the industry for the future. Restaurants that have long been predominantly dine-in establishments are being converted on the fly into takeout-only eateries, complete with online and mobile ordering. And with customers unable to pay for the additional layer of service, Toast is giving it away.
In an email to customers on March 15, Comparato said the Boston-based company was providing "millions of dollars in the form of a one month credit of software fees for all Toast customers," as well as free access to its software for online ordering, takeout, gift cards and marketing.
"We will launch a program early this week to allow you to enroll in these products, and we will waive software fees for them for the next three months, Comparato wrote in the email, which was obtained by CNBC. "We have enabled our team to help you get up and running as quickly as possible."
Toast then went a step further, announcing a suite called Toast Now, consisting of software for digital ordering and gift cards that it's offering for free for three months, even to restaurants that aren't customers.
Toast is fortunate to have padded its balance sheet just before the crisis struck. The $400 million deal was announced Feb. 14, but the lead investors, including Bessemer Venture Partners, TPG and Tiger Global, had committed to the round in January, before the coronavirus had become a big story in the U.S., according to people familiar with the matter who asked not to be named because the details are confidential. Toast declined to comment on its talks with investors.
At the time of the deal, the company said it was coming off a year of 109% revenue growth from the addition of tens of thousands of restaurants. More broadly, the historic expansion in the U.S. economy was leading to the opening of more restaurants, and Toast was unique in providing a point-of-sale (POS) terminal and cloud software suite specifically built for the food industry. Square, for instance, has a competitive product for restaurants, but the company serves small shops of all types.
Shifting from fine dining to takeout and delivery
Like most of its peers, Ethan Stowell Restaurants (ESR) in Seattle has been battered by the coronavirus, laying off over 300 people in mid-March, or about 90% of its staff. The company owns 13 restaurants, including Ballard Pizza, Tavolata, the French brasserie Red Cow and How to Cook a Wolf, which serves upscale Italian-Mediterranean food.
As of last week, six of ESR's restaurants were open for takeout and delivery, and two more were preparing to open under the same conditions, allowing the company to hire back 10% of its employees.
ESR has been using Toast for several years to integrate all of its restaurants — from the casual to the fancy — into a single POS and management system rather than having to rely on a disparate set of older tools, said Michael Pagana, the restaurant group's vice president of development.
The pizzerias were used to doing takeout, but the other restaurants had never focused on it and were able to quickly get a system in place and their menus online using the Toast service, Pagana said. Everything with the ordering process is automated, and anyone who calls in an order is directed to the website. Customers are sent texts telling them when the food will be ready so they can avoid long waits and the restaurant can keep lines from forming.
In addition to the free ordering and gift card software, Pagana said that Toast has stopped charging for its service at restaurants that are closed. The main Toast service costs $75 a month for a single terminal with volume discounts available.
Pagana said that the value of Toast's technology will be even greater when the virus passes and people are able to go out again, because the world's not going to revert back to the way it was. A lot of people will still prefer some level of social distancing.
"When mission accomplished is declared, this is probably going to be the new reality for us," said Pagana. "It's not going to be the happy, go lucky we're ready to go to bars and make out with each other for quite a bit of time."
Toast told CNBC that "off-premise dining" now accounts for about 70% of restaurant revenue, and the company has seen a tripling in volume through digital ordering.
Pay it forward with gift cards
On its homepage, ESR says that all of its dining rooms are closed and encourages customers to buy gift cards at a discount. A similar message appears on the websites of many other Toast clients.
The owners of Side Street Cafe in Bar Harbor, Maine, said in a post dated March 15, that they made the "tough decision to close our in-person dining and switch to take-out only service starting tomorrow morning." Tios Mexican Cafe in Ann Arbor, Michigan, expanded its delivery service, telling customers, "You can't come to see us, but we can come to you." Protein Bar & Kitchen, which has locations in Colorado, Illinois and Washington, D.C., shows a popup on its website suggesting people buy gift cards or order pickup or delivery.
In Austin, Texas, Kome Sushi Kitchen says online ordering is available from 12 p.m. to 8 p.m. daily, adding that 100% of tips "go directly to our furloughed staff until we can put them back to work."
Kayo Asazu, who along with her husband owns Kome and five other restaurants in Austin, said that she had never personally learned how to use Toast's software until the last couple weeks after letting go of about 90% of her 150 employees. Two of her restaurants are closed, the ramen shop has lost about 80% of its revenue and sales at Kome, her biggest restaurant, are off by about half, she estimates.
Asazu said that it took her half a day to get up to speed on Toast and that she was easily able to get all the menus online even though "I'm not computer savvy." Toast proactively reached out to her offering free software for online orders and gift cards, Asazu said, and is available when she needs help.
"It was really generous compared to other vendors," Asazu said. She said she's been trying to get deferred payments, "not just with software providers but local vendors too."
Even with Toast's best efforts to help prop up its customers, the company is largely at the mercy of the coronavirus pandemic and the depths and intensity of the economic fallout. The Trump administration is now targeting the end of April as the time to start reopening the economy, and the San Francisco Bay Area has extended its shelter-in-place requirements until at least May 1.
In the meantime, Toast is publishing blog posts to advise restaurants and workers on places they can turn for financial help (such as forgivable loans through the CARES Act), as well as suggestions on what kind of foods work best for takeout and ways that consumers can assist the local businesses they love. On March 17, Toast launched Rally for Restaurants to encourage people to buy gift cards, share their purchases on social media and get their friends and family members to do the same.
Toast's philanthropic arm is donating $1 per social media post, up to a total of $250,000, when people use the hashtag #RallyforRestaurants. Consumers have spent over $4 million on gift cards through the site, the company said. On March 31, Toast began promoting #TakeoutTuesday to get more people involved.
"Your favorite restaurants are suffering as a result of the COVID-19 health crisis," the website says. "Sales are down across the country, and jobs are at risk. You can help. Support your local restaurant and order takeout, buy a gift card, or rally your government officials to take action so local restaurants have a chance to survive."
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