🧑🍳 Lightspeed - Restructuring a Publicly Listed Vertical SaaS
🧑🍳 Lightspeed - Restructuring a Publicly Listed Vertical SaaS
Overlooked #183
Hi, it’s Alex from 20VC. I’m investing in seed & series A European vertical solutions (vSol) which are industry specific solutions aiming to become industry OS and combining dynamics from SaaS, marketplaces and fintechs. Overlooked is a weekly newsletter about venture capital and vSol. Today, I’m sharing the a deep-dive on Lightspeed to complete my trifecta on vertical SaaS for the restaurant industry after having covered both Olo and Toast in the newsletter.
Today, I’m breaking down Lightspeed, a Canadian-based vertical SaaS company building an all-in-one platform for restaurants and retailers. Lightspeed was founded in 2005 and went public in 2019. Its market capitalization peaked at $17.5bn in Sep. 2021 before being hit hard by the public market when interest rates began impacting tech companies and the market started to challenge Lightspeed’s aggressive roll-up strategy to increase its location count. Over the past three years, Lightspeed has been restructuring its business by integrating acquired companies, nudging existing and new customers to bundle payments with SaaS, and making several layoffs. I have divided this post into four sections: (i) company history, (ii) platform overview, (iii) metrics & valuation overview, and (iv) key insights from studying the business.
Section 1 - Company History
Chapter 1 - Inception & Early Growth (2005-2013)
Lightspeed was founded in 2005 in Canada by Dax Dasilva. It started as a retail management solution for Mac before becoming one of the first Point of Sale (POS) systems for the iPad.
Before founding Lightspeed, Dax Dasilva was a programmer. He developed an interest in computer programming at the age of twelve when his father gave him an Apple Macintosh. He later studied computer science, art history, and religion at the University of British Columbia.
After having bootstrapped for several years, Lightspeed raised a $30m series A in Jun. 2012 led by Accel with the participation from Inovia Capital. At the time, it was used by 10k retailers and had grown its revenues by 2,000% in 5 years.
Chapter 2 - Expansion & Diversification (2014-2018)
Starting in 2014, Lightspeed began expanding in other geographies, in restaurant as second vertical after retail and in adjacent product bricks to its POS. Lightspeed funded this expansion with multiple funding rounds.
In Oct. 2014, Lightspeed expanded into the restaurant vertical and opened the European market after acquiring POSIOS in Belgium which was a restaurant-focused POS. In Jun. 2014, it added Advanced Analytics to Lightspeed Retail's features.
In Sep. 2014, Lightspeed raised a $35m series B led by Inovia Capital. At the time, it was working with 20k retailers and was processing $7.5bn in annual transactions. It also launched a Lightspeed Payments which was an in-house payment platform. It seems that it did not work out as Lightspeed had to relaunch a payments processing product in 2019.
In May 2015, Lightspeed expanded to London as its HQ for its European operations. In Sep. 2015, it raised a $61m series C co-led by CDPQ and Investissement Quebec. At the time, it was working with 25k retailers in 100 countries, was processing $10bn in annual transactions and was growing 123% YoY.
In Nov. 2015, Lightspeed acquired SEOshop and launched Lightspeed eCom to support online merchants but also to help its brick and mortar retailers to start selling online with an omni-channel offering. With this acquisition Lightspeed aimed to compete more directly with Shopify with a proprietary e-commerce offering.
In Oct. 2017, Lightspeed raised $166m series D led by CDPQ to prepare its IPO by expanding into payments and opening new geographies. Inovia Capital and Silicon Valley Bank also participated into the round. At this point, Lightspeed had 50k merchants and was processing $15bn in annualised transactions.
In Dec. 2018, Lightspeed announced Lightspeed Loyalty platform to enable restaurants and retailers to engage with their customers in a personalised way via marketing programs and rewards systems.
Chapter 3 - Going Public & Expanding into Financial Services & Major Acquisitions (2019-2021)
In 2019, Lightspeed pursued a strategy to go public based on two key pillars. First, adding financial services starting with payments and lending. Second, acquiring many companies to expand the scope of its platform and to add more locations to its business.
In Jan, 2019, Lightspeed launched Lightspeed Payments. In Mar. 2019, it went public on the Toronto Stock Exchange. In May 2020, Lightspeed launched Lightspeed Capital in the US in partnership with Stripe. In Sep. 2020, Lightspeed listed on the New York Stock Exchange.
Between 2019 and 2021, Lightspeed acquired 10 businesses, spending over $2.4bn on external growth. We will revisit this M&A strategy in a later section of the article.
Chapter 4 - Facing Challenges & Leadership Changes (2022-Today)
In Sep. 2021, Spruce Point Capital Management published a short-selling report on Lightspeed accusing the company to inflate its number of merchants and ARPU as well as to conduct a poor roll-up strategy. Alongside with the broader tech market crash in Q4-21/Q1-22, it created a situation in which Lightspeed had to restructure its business.
In hindsight, the business faced several issues. First, its acquisitions were too expensive, harder to integrate than expected, and not always of high quality. Second, it suffered from the hyper competitive nature of the POS market - especially in the US, where Square and Toast hold strong market shares.
In Feb. 2022, Dax Dasilva stepped down as CEO and became Executive Chair. In Jan. 2023, Lightspeed announced a first RIF reducing its headcount by 10% laying off 300 employees. In Apr. 2023, it launched its Unified Payments strategy which makes mandatory for new and existing customers to adopt payments with their software offering. In Feb. 2024, Dax Dasilva rejoined as a CEO to double down on Lightspeed’s restructuring. In Apr. 2024, Lightspeed reduced its headcount by 10% laying off 280 employees.
Section 2 - Platform Overview
Lightspeed is a cloud-based commerce platform. It goes after SMBs serving two main verticals which are restaurant and retail. At it core, it bundles a point of sales system with payments. Overtime, Lightspeed has added multiple modules to become an all-in-one platform for its customers including omni-channel capabilities, product and menu management, employee management, inventory management, analytics and reporting, multi-location, CRM and loyalty as marketing solutions as well as lending.
Historically, Lightspeed has acquired multiple companies to expand its product offering and to enter new geographies but today its product is streamlined around two main platforms which are Lightspeed Restaurant and Lightspeed Retail. Both have common features (e.g. POS, payments, capital) on top of which are added industry specific features (e.g. order anywhere and kitchen display system for Lightspeed Restaurant or B2B catalog for Lightspeed Retail).
The Core Modules Common to Lightspeed Restaurant and Lightspeed Retail
Lightspeed’s core modules include:
Point of sale (POS): point of sale platform accessible via mobile, desktop or a dedicated hardware for merchants to collect and process orders. Lightspeed has also a customer facing display to improve the checkout experience. Customers can see the breakdown of their orders, can add a tip and can pay directly using this display.
Payments: in-house payment processing to enable merchants to accept payments from multiple channels (in-store, curbside, online). Payment processing is integrated within the POS to reconcile financial transactions with the business logic. Starting in 2024, Lightspeed is automatically bundling payments processing and POS. Previously, it allowed merchants to choose third-party payment systems, knowing that Lightspeed received a kickback on transactions to monetize the gross transaction volume processed by its customers.
Marketing with CRM, gift cards and loyalty management: customer relationship module to keep track of consumer information and sales history, to offer discounts and gift cards as well as to set up loyalty programs.
Product and menu management: manage the description, categories, prices and images of the goods sold wether you are selling dishes as a restaurant or products as a retailer.
Inventory management: allows retailers and restaurateurs to have a real time visibility on their inventory, to access vendor product catalogues and to create/receive orders from suppliers. Lightspeed has also smart features to prevent businesses from running out of inventory and to control their margins based on the price evolution of their cost of goods sold.
Employee management: workforce planning leveraging third party applications connected to the Lightspeed’s platform.
Accounting: pre-accounting module to synchronise business data with major accounting software and to draft certain accounting operations (e.g. multiple locations reconciliation).
Reporting and analytics: real-time visibility on sales and other key business metrics as well as smart business intelligence to make recommendations to customers on how to improve their business.
Capital: merchant cash advance program designed to support eligible merchants with their business growth and cash management needs. This program provides cash advances that merchants can use to manage their cash flows effectively, purchase inventory and invest in marketing initiatives. 6 month is the average duration and 30% the average APR.
Industry Specific Modules for Lightspeed Restaurant
Lightspeed Restaurant has industry specific modules including:
Anywhere delivery: enables restaurants to process multiple type of orders from curbside to delivery thanks to integrations with leading delivery platforms consolidating all orders into a single screen.
Floor and table management: creates floor plans reflecting the actual layout of the restaurant and if necessary gathering tables into groups.
Kitchen display system: connected to the POS, it enables the kitchen to digitise food production by allocation orders to cooks and by tracking turnaround time.
Industry Specific Modules for Lightspeed Retail
Lightspeed Retail has industry specific modules including:
Supplier network: connects retailers with brands to access and purchase their products in wholesale. It also streamlines the addition of product data from brands purchased into the retailer’s POS and online store.
Omni-channel: enables retailers to easily create an online personalised store as an extension of the products they offer in-store. Customers can leverage this store to advertise and sell on social media.
Section 3 - Metrics & Valuation Overview
In 2024 (fiscal year ending in March), Lightspeed generated $909m in sales (growing 24% YoY). It makes 35% of its revenues from SaaS, 60% from financial services and 5% from hardware.
It also generated $385m in gross profit (growing 16% YoY) implying a 42% gross margin with a 76% SaaS gross margin, a 28% financial services gross margin and a negative 34% hardware gross margin (meaning that Lightspeed subsidise the hardware sold when it acquires new customers or renew existing customers).
Lightspeed makes 60% of its revenues from financial services but only 40% of its gross margin comes from financial services as it has a 28% gross margin on financial services. This gross margin on financial services significantly deteriorated in the past four years as Lightspeed internalised its payment processing and started to force the bundle between payments and SaaS on its customer base. It traded a lower gross margin on financial services for a higher overall gross margin in absolute terms.
Lightspeed has 165k locations. Its number of locations declined by 2% in 2024 as Lightspeed is cleaning its customer base to focused on merchants generating $500k+ in GMV because they are higher quality customers with a lower churn rate, a higher ability to monetise via financial services and a higher expansion potential for other SaaS modules. As a result of this transition, Lightspeed has now a 110% net retention rate which is good for the SMB segment and has increased its ARPU from $2.5k in 2023 to $2.9k in 2024.
Lightspeed is cutting its operating expenses to move towards profitability. Removing the impact of M&A on its business, Lightspeed has reduced its Opex base from $497m in 2023 to $467m in 2024.
Discussing Key Insights from Studying Lightspeed
Insight 1 - What Does it Take to Serve SMBs as a vSaaS ERP?
Vertical SaaS companies face challenges in scaling by targeting small businesses for several reasons: higher failure rates, lower willingness to pay, and greater difficulty in upselling.
Lightspeed managed to build a vertical SaaS serving small businesses with a $2.9k ARPU that is on path to generate $1bn in sales this year. Studying Lightspeed’s history, there are several learnings from other vertical SaaS going after small businesses:
All SMBs are not equal. Overtime, Lightspeed has narrowed its ideal customer profile to target only retailers and restaurants generating more than $500k in revenues because they are higher quality customers.
“Our efforts will remain focused on finding and catering to higher-GTV customers that tend to adopt more software, generate more payments revenue and have lower churn.” said Dax Dasilva during Lightspeed’s Q2-2024 Earnings Call
SMBs want all-in-one platforms. You cannot go after the SMB segment with a point solution. You should quickly become the ERP of the industry you target.
“It is our belief that SMBs don’t have the time, resources, or in many cases, the capabilities to stitch together multiple point solutions to accomplish their goals.” - Lightspeed’s IPO Prospectus.
If you don’t build an all-in-one platform for SMBs, your go-to market unit economics won’t work. Your ARPU will be too low to acquire customers with a good payback period and with a good LTV/CAC ratio.
“If you can get $3-5k per account (or more), if you can find a product valuable enough for people to spend that kind of money, then you can actually be able hire people, build a team. You will be able to bootstrap and build your company to a point where investors will come to you.” said Dax Dasilva in a 2016 interview.
You should monetise your customer base indirectly with financial services and marketplace revenue streams. SMBs have a mental ceiling on what they are willing to pay for software. To increase your ARPU beyond this ceiling, you should monetise them indirectly. Lightspeed is doing this with financial services (payment processing and lending) as well as with a marketplace take-rate from brands selling to its retailers on its procurement module for retailers.
Insight 2 - Being a vSol Actually Combining Business Model Dynamics from SaaS, Financial Services and Marketplace
Lightspeed is a prime example of a vertical SaaS that has become what I called a vertical solution which is an industry specific solution combining business model dynamics from SaaS, financial services and marketplace.
Lightspeed started as a POS monetised via a subscription fee. Overtime, it has evolved into an all-in-one platform to serve all the needs from its customers (e.g. inventory management, online store, etc.). Most new modules were also monetised via a subscription.
More recently, Lightspeed expanded into financial services and added a marketplace dynamic to its platform.
In 2019, Lightspeed launched its own payment processing product tied to its POS to start generate revenues from financial services. In 2020, it added another financial service with Lightspeed Capital which is a lending offering.
In 2021, Lightspeed acquired NuOrder which was a B2B marketplace to help retailers source products directly from brands in a model similar to Faire in the US or Ankorstore in Europe. NuOrder makes money both from a subscription from brands selling to retailers as well as from transaction fees.
Looking ahead, Lightspeed is likely to expand by adding financial services like insurance and payroll, as well as a marketplace for restaurants to source products.
Insight 3 - Bundling Payment and SaaS
Lightspeed has a complex history with payments. In 2014, it launched a first payment processing offering bundled into its software enabling retailers to process payments directly into Lightspeed without having to contract with a third party payment processor. It seems that this offering failed and Lightspeed grew mostly as a SaaS business.
In 2019, Lightspeed relaunched a first payment processing offering in partnership with more modern payment partners like Stripe and Adyen providing a Payfac as a service product to Lightspeed. Prior to this, Lightspeed had deals in place with several third party payment processors that would pay a transaction fee as a kickback when Lightspeed was selling them to its new customers alongside its POS.
“Historically, we have referred customers to various payment processing partners, from whom we would generally receive a small percentage-based referral fee of approximately 0.25% of electronic transaction volume processed. With Lightspeed Payments, we intend to price our solution at approximately 2.60% of the electronic transaction volume processed on a gross basis, and we are targeting to net approximately 0.65% after accounting for network and interchange fees and other direct processing costs.” - Lightspeed’s 2019 IPO Prospectus
With this first party model, the idea was to increase increase by 2.6x the net revenues take-rate that Lightspeed could generate from payments as well as to increase the processed payment penetration rate. In 2024, Lightspeed went one step further forcing existing and new customers to bundle payment and SaaS when they buy the Lightspeed for both retailers and restaurants.
I believe that bundling payment and software has multiple benefits for vertical SaaS companies including increasing the ARPU, increasing retention (because you provide a superior customer experience when both are integrated) and giving more leeway to be more agressive customer acquisition costs which is key especially in the SMB market.
Insight 4 - An Agressive M&A Strategy to Add Locations and Create Value by Embedding Payments
Lightspeed is a serial acquirer. It has acquired 14 businesses since its inception. It acquired companies for 4 main reasons:
Expand the scope of its platform with complementary products. Lightspeed aims to enhance its product suite by acquiring companies that offer complementary technologies and services. This helps them provide a more comprehensive and integrated platform to their customers. For instance, it acquired SEOShop to launch an eCommerce offering and it acquired ReUp to launch a Loyalty offering within Lightspeed.
Add additional revenue streams beyond SaaS to its platform. As we discussed, Lightspeed started as a pure SaaS business. It has added overtime financial services and a procurement marketplace to multiply its revenue streams using external acquisitions to reach this goal. For instance, it acquired NuOrder which is a B2B marketplace to help its retailers to source products from the best brands.
Enter new geographies. By acquiring companies in different geographical regions, Lightspeed can quickly establish a presence in new markets without having to build from scratch. For instance, Lightspeed expanded in Europe mostly via external growth opening Belgium with POSIOS in 2014, Switzerland with iKentoo in 2019 and Germany with Gastrofix in 2020.
Consolidate an existing market by removing a competitor and buying market share. Lightspeed uses acquisitions to consolidate the market by buying out competitors or companies that offer similar services. This reduces competition and allows them to capture a larger market share. For instance, it the US it strengthened its market positioning in the restaurant vertical by acquiring Shopkeep (20k locations) and Upserve (7k locations).
More specifically, between 2019 and 2021, Lightspeed accelerated its external growth strategy by acquiring 10 businesses in 3 years. In this period, it had an explicit growth strategy to acquire existing POS or e-commerce companies that could be augmented by embedding Lightspeed payments into their value proposition.
Insight 5 - A Side by Side with Toast
I previously covered Toast in the newsletter. I could not resist to the tentation to compare both businesses. It was tricky to make an apple to apple comparison but I did my best. You should keep in mind that Lightspeed is serving both restaurants and retail when Toast is almost entirely focused on restaurants.
Moreover, Lightspeed is in the middle of a restructuring trying to stitch all its acquisitions into coherent platforms, to move closer to profitability and to bundle aggressively SaaS and payments. On the contrary, Toast had a relatively smooth ride on the public market since the tech market crash in Q1-2022. The company is growing at a strong pace (above 30% YoY) adding locations mostly organically and reaching recently EBITDA profitability.
On the public market, as of Jul. 25th, Lightspeed had a $2.0bn market cap. and a $1.3bn EV compared to Toast’s $13.7bn market cap. and $12.7bn EV. In terms of multiples, Toast trades at a 2.5x EV/NTM Sales multiple while Lightspeed trades at a 1.2x EV/NTM Sales multiple. The difference is even bigger when you look at the EV/Gross Profit multiple where Toast trades at a 14.1x EV/GP multiple compared with 3.4x for Lightspeed.
When you compare the main KPIs, the difference can be easily justified by the delta in ARR growth and locations growth between both businesses. In the LTM, Toast grew its ARR by 35% compared with 12% for Lightspeed. Toast also added 27k locations when Lightspeed lost 3k locations. Moreover, Toast has an ARPU which is 3.9x bigger than Lightspeed because it focuses on more complex restaurants than Lightspeed and it does not address retailers which tend to have lower ACV.
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋
Nice post