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Chris Comparato, CEO, the Toast, Inc. IPO at the New York Stock Exchange, on September 22, 2021.
Source: NYSE

Not long after selling software company Endeca to Oracle in 2011 for over $1 billion, Steve Papa called Bessemer Venture Partners with a hot tip. He said three of his best engineers were working on something new that Bessemer, which had previously backed Endeca, would be crazy not to fund.

Kent Bennett, who’d been a junior associate on the Endeca deal, fielded the call. He told Papa there was some empty space at the firm’s office in Boston that his people could use. But Bennett knew he couldn’t get his firm, one of the biggest and most successful in the venture industry, to write a check to three engineers with an unspecified project.

“I said, ‘Well just send them over here and they can hang out here until they figure it out,'” Bennett told CNBC, recalling his conversation with Papa.

The three guys and some office space eventually became Toast, a provider of software and hardware to restaurants that held its New York Stock Exchange debut on Wednesday, closing the day with a market cap of over $31 billion. (It’s since slipped to $28 billion.) The three co-founders — Steve Fredette, Aman Narang and Jonathan Grimm — are billionaires, and remain top executives at the company.

Fredette, Narang and Grimm now have about 2,200 co-workers. They call them Toasters.

Bessemer eventually ended up investing in Toast in 2015, and Bennett joined the board. But even though it’s one of the largest holders, with over a 12% stake, the returns would’ve been much larger had Bessemer jumped in earlier.

Bennett told one of his partners he’d made a “massive mistake” by passing. It wasn’t just Bessemer. Venture capitalists wanted nothing to do with the restaurant industry, where margins are low and budgets notoriously tight.

So in early 2013, Papa filled the initial void by investing $500,000 of his own money into his buddies’ start-up.

“I said, ‘guys it’s not my space, but you helped me be successful, and I owe it to you,'” Papa, who was on the Toast board until recently, said in an interview after the IPO. “I was going to help them no matter what. In this case it meant capital to get them going. Did we understand the shape of it at that time? No.”

Papa’s investment today can be measured in billions. As of Friday’s close, his 12% stake in Toast is worth $3.1 billion, amassed from the initial investment and follow-on funding. He controls slightly less than Bessemer, which owns $3.3 billion in Toast shares after investing just over $100 million between 2015 and early 2020.

No ‘West Coast offense’

Start-up origin stories are part of the fabric of the tech industry. Apple and Google famously started in Silicon Valley garages, Facebook was built by a boy-wonder Harvard dropout, and PayPal came together through an awkward collaboration between Elon Musk and Peter Thiel and included an exhaustive list of engineers who would go on to build other billion-dollar companies.

Increasingly, Silicon Valley stories have become more formulaic, thanks to programs such as Y Combinator, which has turned into a Unicorn factory over the past decade. The start-up incubator has helped spawn Dropbox, Airbnb, Stripe, DoorDash, Coinbase and Instacart, and serves as a direct path to meetings with the top venture capitalist firms.

Toast was born on the other side of the country and a world away. The founders lived in the Boston area and had no plans to leave. Boston had been a venture hub in an earlier era, but the momentum had shifted to Silicon Valley, where all the big exits were taking place. Bessemer has offices in both locations.

Papa said one Bay Area VC indicated interest in the pitch for Toast, but said he didn’t want to get on a plane.

Fredette, Toast’s president, said the company’s East Coast roots ultimately became an advantage because it could be “a little unconstrained by the traditional wisdom of grow, grow, grow.”

“We used to talk about West Coast offense, which was hype over substance,” Fredette said in an interview from the NYSE on Wednesday. “East Coast would be substance first and not enough hype.”

The founders sprinkled in a healthy dose of naivete. Fredette said they were so inexperienced with fundraising and business in general that he and Narang, the chief operating officer, would often debate each other during investor meetings.

The original idea for Toast came from all the hours Fredette, Narang and Grimm spent hanging out in Boston bars, cafes and restaurants trying to figure out what to build. After experiencing a particularly long wait time for the check one day, they thought they’d found a problem that could be fixed by paying the check from their smartphone — if only the technology existed.

They developed an app and launched it in 2012 with Firebrand Saints, a bar they frequented in Cambridge. The app gave customers a way to start a tab at the restaurant and link a credit card.

“We used to go there a lot after work to get a burger and a beer,” Fredette said.

As they slowly expanded in the region, they signed up Dwelltime, a cafe in Cambridge.

That’s where Bennett got to demo the product. The transaction went through. Still, Bennett was terrified of putting money into a company that was trying to take on incumbent point-of-sale (POS) vendors like Micros, which Oracle bought in 2014 for $5.3 billion, and NCR.

“To me it sounded like a suicide mission,” said Bennett, recalling that he told the founders it would take them five years to build something viable. “These legacy systems were old and painful but they were 50,000 features into a really complex roadmap.”

Meanwhile, Papa would soon start flying around the country trying to help land new business deals and recruit talent.

One place he wasn’t going: The Bay Area.

“We intentionally chose not to put reps in Silicon Valley,” Papa said. As long as potential competitors didn’t see the product in action, they could continue “arrogantly dismissing it,” he said.

Instead, Papa was traveling to places like Grand Rapids, Michigan, home to a 124-year old company called Gordon Food Service. Gordon distributed food to restaurants across the country and became a critical distribution partner for Toast.

“We focused on the middle of the country, which was mostly overlooked,” Papa said.

Toast quickly evolved from a relatively simple mobile app at Firebrand Saints and a few other spots to a more complete back-end restaurant system that used Android tablets as terminals. At the time, iPads were the far superior product, and were being used by buzzy start-ups like Revel Systems.

Toast opted for Google’s open source Android technology, which allowed the company to design its own hardware and customize software rather than being restricted to Apple’s closed system.

Toast point of sale system
Toast

By late 2015, Toast was up to 170 employees, had millions of dollars in revenue and was used in thousands of restaurants, including Costa Vida, a Mexican-themed chain with 75 locations, and Beach Hut Deli, which had 40 locations on the West Coast. Chris Comparato, another Endeca alum, had just joined as CEO.

That’s when Bessemer finally took the plunge, leading a $30 million round along with Google’s venture arm at a valuation of about $100 million. Bennett said the big move that changed his thinking was Toast’s push into payments. As a full POS vendor that was getting a cut of every transaction on the system, Toast at last had a volume business with a consistent and profitable revenue stream.

They used margin from payment processing to support software development, Bennett said, and the business model clearly worked. In a memo to the firm in December 2015, Bennett wrote that “we’ve stood by anxiously as the team hit obvious product-market fit but punted on raising more equity.” 

To get onto the cap table, Bennett was having monthly dinners with the founders trying to convince them to take Bessemer’s money. He also recalled telling Felda Hardymon, his mentor at the firm, “I think this will be the biggest business Boston has ever seen.'”

Papa was making similar pronouncements as he tried luring investors. In a June 2015 presentation, he wrote in one slide that Toast had “the potential to be the next Uber or Airbnb valued in the many billions” and that it had “potential to build $10b+ exit.”

“In fairness to VCs, a lot of people put stuff like that on slides,” Papa said. “We have survivorship bias.”

Toast in 2015
Steve Papa

Bessemer was very bullish, but it never predicted Toast would be worth this much. In Bennett’s memo, he laid out potential outcomes and how much the firm would receive in each case. The off-the-charts “just goes nuts” scenario would produce an $8.3 billion company and a $700 million return for Bessemer.

‘Oh my god, we’re going to lose it’

Toast’s growth trajectory over the next four-plus years was so dramatic that in February 2020, the company raised $400 million at a $5 billion valuation. Annual revenue had swelled to $665 million, mostly from payment transaction fees. Toast was helped by a 10-year bull market in the tech industry, featuring astronomical valuations for companies across the board.

A month after that mega-financing round, it almost all came crashing down.

The Covid-19 pandemic immediately exposed Toast’s glaring risk: Reliance on a single industry. As infections spread rapidly, restaurants across the country saw revenue plunge 80% in March, squashing Toast’s business.

Cash quickly dwindled and Toast was force to slash about 50% of its workforce in April, eliminating roughly 1,300 jobs.

“With limited visibility into how quickly the industry may recover, and facing slower than anticipated growth, we now find ourselves in the unenviable position of reducing our headcount,” Comparato wrote in a blog post announcing the job cuts.

At the board level, panic set in.

“Immediately we said we’re burning a ton of capital and are going to go out of business if we don’t do something now,” Bennett said. “I remember everyday going by thinking, ‘oh my god, we’re going to lose it.'”

Even more shocking was the speed of the rebound.

Restaurants reopened their doors to takeout and outdoor dining, and brought in a bunch of new technology to enable contactless ordering and mobile payments.

Toast’s POS system had expanded to include inventory management, payroll, and multi-location menu controls, which were all useful in simplifying a manager’s job. But what restaurants really needed was a takeout app that synced with their existing system and a way for diners and wait staff to limit contact.

So they turned to Toast for newer products like curbside notifications for takeout, flat-fee deliveries, and mobile software that enabled ordering and payments from their devices.

By the third quarter, revenue was increasing again from the prior year. And for all of 2020, sales jumped more than 20% to $823.1 million. Headcount is back near pre-Covid levels.

Bennett said that during the pandemic Toast became a consumer brand. He knows because his friends started telling him about their experience at restaurants using mobile payments with the Toast logo.

Toast mobile payments
Toast

“I probably got three-dozen texts this year from friends who were like, ‘this is the piece of bread from your t-shirts,'” Bennett said.

It’s the exact idea that inspired the founders eight years earlier, long before the technology existed to make it work. Narang said on Wednesday that, “we were just too early” and the company has come “full circle.”

Even Bennett has been surprised by how many restaurants now use it.

After a recent meal at Pammy’s in Cambridge, Bennett was waiting a while for the check to arrive. After eventually paying by card, he noticed the QR code on the receipt. Had he scanned it, the Toast payment option would have popped up on his phone.

“It would’ve gotten me out of there a lot sooner,” he said.

Papa is also hearing from friends, including those who could never have imagined that the restaurant-tech start-up he seeded almost a decade ago would be worth close to $30 billion.

“I remember you telling me exactly how this would all play out over lunch one day in Kendall Square,” a friend emailed him on Thursday. “But I don’t remember you mentioning the part about the pandemic. Anyways, quite the success story.” 

WATCH: Toast and AKA Brands make their NYSE debut

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Nintendo profit plunges 69% as it cuts forecast for sales of ageing Switch console

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Nintendo profit plunges 69% as it cuts forecast for sales of ageing Switch console

Mario poses at the “SUPER NINTENDO WORLD” welcome celebration at Universal Studios Hollywood on February 16, 2023 in Universal City, California.

Rodin Eckenroth | Getty Images Entertainment | Getty Images

Nintendo on Tuesday cut forecast for Switch sales for its fiscal year ending March 2025 as demand wanes for its ageing console.

The Japanese gaming giant said it now expects to sell 12.5 million units of the Switch over the course of the period. That’s down from a previous forecast of 13.5 million units.

Nintendo has been contending with fading demand for its flagship Switch console, which is now more than seven years old.

Investors are waiting for news surrounding a successor to the Switch, which they hope will re-energize Nintendo’s gaming business. In the past, the company said that the Switch successor will be announced in its current fiscal year, which ends in March 2025.

Nintendo also cut full fiscal year forecasts for sales and operating profit. The company said it now expects sales of 1.28 trillion yen versus a previous forecast of 1.35 trillion yen. The operating profit outlook for the period was slashed from 400 billion yen to 360 billion yen.

Here’s how Nintendo did in its fiscal second quarter ended Sept. 30 versus LSEG estimates:

  • Revenue: 276.7 billion Japanese yen ($1.8 billion), compared with 273.34 billion yen expected.
  • Net profit: 27.7 billion yen, versus 48.06 billion yen expected.

Revenue fell 17% year-on-year. Net profit plunged just over 69% versus the same period last year.

Super Mario, Zelda boost fading

The Switch is Nintendo’s second best-selling console in history, behind the Nintendo DS. Despite the recent fall in sales, Nintendo has prolonged the console’s appeal for an extended period of time since its launch in 2017 by relying on its recognizable characters.

In its last fiscal year, Nintendo managed to reinvigorate sales of the Switch thanks to the the success of the “Super Mario Bros. Movie” and the highly anticipated release of the “The Legend of Zelda: Tears of the Kingdom” game, which underscored the appeal of its iconic characters.

But that effect is fading.

On Tuesday, Nintendo noted the boost that the company received in the first half of its last fiscal year, but said “there were no such special factors in the first half of this fiscal year, and with Nintendo Switch now in its eighth year since launch, unit sales of both hardware and software decreased significantly year-on-year.”

Sales of the Switch totaled 4.72 units in the six months ended Sept. 30, compared with 6.84 million units in the same period of last year.

In the face of falling sales, Nintendo has tried to license out its intellectual property for use everywhere, from movies to theme parks. A new Super Mario movie is slated for release in 2026.

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Meta extends ban on new political ads past Election Day

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Meta extends ban on new political ads past Election Day

Meta’s Mark Zuckerberg plans to visit South Korea, scheduling key meetings during the trip, according to a statement by Meta on Wednesday, which did not provide further details. Reportedly, Zuckerberg is anticipated to meet with Samsung Electronics chairman Jay Y. Lee later this month to discuss AI chip supply and other generative AI issues, as per the South Korean newspaper Seoul Economic Daily, citing unnamed sources familiar with the matter.

Alex Wong | Getty Images News | Getty Images

Meta extended its ban on new political ads on Facebook and Instagram past Election Day in the U.S.

The social media giant announced the political ads policy update on Monday, extending its ban on new political ads past Tuesday, the original end date for the restriction period.

Meta did not specify the day it will lift the restriction, saying only that the ad blocking will continue “until later this week.” The company did not say why it extended the political advertising restriction period.

The company announced in August that any political ads that ran at least once before Oct. 29 would still be allowed to run on Meta’s services in the final week before Election Day. Other political ads will not be allowed to run.

Organization with eligible ads will have “limited editing capabilities” while the restriction is still in place, Meta said. Those advertisers will be allowed to make scheduling, budgeting and bidding-related changes to their political ads, Meta said.

Meta enacted the same policy in 2020. The company said the policy is in place because “we recognize there may not be enough time to contest new claims made in ads.”

Google-parent Alphabet announced a similar ad policy update last month, saying it would pause ads relating to U.S. elections from running in the U.S. after the last polls close on Tuesday. Alphabet said it would notify advertisers when it lifts the pause.

Nearly $1 billion has been spent on political ads over the last week, with the bulk of the money spent on down-ballot races throughout the U.S., according to data from advertising analytics firm AdImpact.

Watch: Tech still investing big in AI development despite few breakout products.

Tech still investing big in AI development despite few breakout products

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Jeff Bezos and OpenAI invest in robot startup Physical Intelligence at $2.4 billion valuation

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Jeff Bezos and OpenAI invest in robot startup Physical Intelligence at .4 billion valuation

Sam Altman, CEO of OpenAI, attends the 54th annual meeting of the World Economic Forum, in Davos, Switzerland, January 18, 2024 (L), and Amazon CEO Jeff Bezos speaks during the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 2, 2021.

Reuters

Physical Intelligence, a robot startup based in San Francisco, has raised $400 million at a $2.4 billion post-money valuation, the company confirmed Monday to CNBC.

Investors included Amazon founder Jeff Bezos, OpenAI, Thrive Capital and Lux Capital, a Physical Intelligence spokesperson said. Khosla Ventures and Sequoia Capital are also listed as investors on the company’s website.

Physical Intelligence’s new valuation is about six times that of its March seed round, which reportedly came in at $70 million with a $400 million valuation. Its current roster of employees includes alumni of Tesla, Google DeepMind and X.

The startup focuses on “bringing general-purpose AI into the physical world,” per its website, and it aims to do this by developing large-scale artificial intelligence models and algorithms to power robots. The startup spent the past eight months developing a “general-purpose” AI model for robots, the company wrote in a blog post. Physical Intelligence hopes that model will be the first step toward its ultimate goal of developing artificial general intelligence. AGI is a term used to describe AI technology that equals or surpasses human intellect on a wide range of tasks.

The news comes days after OpenAI launched a search feature within ChatGPT, its viral chatbot, that positions the AI startup to better compete with search engines like GoogleMicrosoft‘s Bing and Perplexity. Last month, OpenAI also closed its latest funding round at a valuation of $157 billion.

Physical Intelligence’s vision is that one day users can “simply ask robots to perform any task they want, just like they can ask large language models (LLMs) and chatbot assistants,” the startup wrote in the blog post. In case studies, Physical Intelligence details how its tech could allow a robot to do laundry, bus tables or assemble a box.

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