At a coffee shop around the corner from Forbes, reluctant ownership started accepting credit cards a few months ago. Now a tablet on a stand from payments company Square sits on the counter for the cash-averse. And every time I use it, I think of how Square is actually losing money on my swipe.
Payments is a low-margin business and a crowded one, with card issuers, PayPal and younger entrants like Square all fighting for business . Even Square, with major venture backing and the tech fame of founder Jack Dorsey, has struggled to make major partnerships that will really move the bottom line–like an integration with the juice bars in a Whole Foods, not the Whole Foods register itself.
The big brother of payments at a coffee shop or retailer is the point of sale system. It’s supposed to help handle payments, but also the other minutiae you don’t see unless you’re working there, like the time clock and inventory. It’s also a legacy business, with over 80 offerings built out on Microsoft XP machines and sold locally across the country and a couple huge players like MICROS Systems and NCR, each multi-billion dollar companies in thousands of retail locations, restaurants or hotels.
Some of Square’s products have flirted with point-of-sale, but there’s a whole separate group of startups who’ve seen the legacy technology that keeps shops running and has wanted to turn it around. But the going is slow with large deals slow to sign and small vendors either tied down to an existing contract or unfamiliar with the use of software to handling employee wages or store inventory.
Square’s card reader at the Forbes watering hole is easy to use, but if someone else offered me the same functionality and the cafe got other benefits like managing its coffee bean flow through that software, I wouldn’t notice what brand is on the tablet I’m signing. And some investors agree, looking to point of sales systems that can handle both functions and still put that tablet in front of me.
Point of sale systems do make money–MICROS charged $330 million in services last year in just the U.S. and Canada alone–but the margins are, like payments, fairly small.
Silicon Valley has one contender, Revel Systems, which boasts 250% growth in customer base and takes in an estimated $20 million in revenue a year. Revel’s growing, but not necessarily as fast as its backers might have hoped when it launched four years ago. The company works with quick-serve chains like Pizza Patron and even added Bitcoin functionality to try to make a splash back in February.
Then there’s New York’s contender, ShopKeep, which just announced $25 million in new funding Thursday from local growth equity firm Thayer Street Partners in a Series C round that also included existing backers Canaan partners, Tribeca Venture Partners, Contour Venture Partners and TTV Capital. ShopKeep says it’s tripled sales every year for several years, though it won’t disclose revenue. But founder and CEO Jason Richelson insists that he can build a billion-dollar company just on selling software not to chains, but small businesses.
Richelson says he’s actively turning down deals for retailers or coffee shops with more than three locations, and that’s where ShopKeep’s landgrab is happening, avoiding the chains that are entrenched with legacy vendors or the smaller ones that competitors like Revel are signing up. The company’s in 10,000 stores today.
“It’s hard to go for small businesses, because you have to do everything from helping them set up to managing how they use it and dealing with every little problem,” Richelson says. “This is a service business at its core, and it’s hard.”
Margins aren’t going to be big on each sale then–plenty of potential customers would themselves be scraping by–but the former wine shop owner says ShopKeep makes money on each installation, even though it allows customers to only commit month by month.
According to Richelson, point of sale systems aren’t sticking in place as long as they used to, from around 5-7 years per upgrade cycle before cloud management software became common to a shorter turnaround today. The company expects to see a boost as retailers move away from Microsoft-based XP systems they can no longer support or patch if something goes wrong.
Like Revel, Richelson says there’s low churn in his business. But it’s a plausible claim for the legacy vendors, too. Even if Intuit's QuickBooks alternative would cost $5,000 or more upfront compared to ShopKeep’s $1200 or so and then tacks on extra software and service fees, a customer who is used to the solution has other things to worry about. Actively taking market share is a tough sell.
“You don’t switch out unless you are really unhappy,” Richelson admits. “It’s good for us and it’s bad for us.”
Several investors who’ve looked at the space told Forbes that the margins and ability to scale up such a business to a meaningful size, let alone a billion-dollar valuation, will be very difficult for ShopKeep. Richelson says part of why he picked Thayer is their “really long term focus,” and that the company would sooner look to go public in a couple years than seek an exit. The company’s looked to Belfast in Northern Island as the base for its growing engineering team.
But regardless of ShopKeep’s upper ceiling as a company, its growth is another sign of how difficult it is to win with payments alone. ShopKeep’s already partnered with PayPal to do mobile payments in some of its stores, and sees an annualized $1.8 billion in run rate crossing its system each week. That’s many times the amount of money that’s actually going to ShopKeep’s coffers–which is why when ShopKeep talks about getting to a one billion dollar milestone someday, it’s got to do that by bringing on hundreds more small businesses–not simply swiping credit cards.