For the past two decades, the technology industry has been obsessed with the consumer. Startups have revolutionized the way we find and consume information, and they have rethought how we interact and communicate with one another.
However, a growing demand for technologies like Uber, which help us not only explore and communicate, but also buy goods and services locally, is pushing the technology industry to address a much less sexy audience: the small business. Carefully and quietly, a handful of software businesses are working to build software that brings the back-office of small businesses online, and, in doing so, wrench open the supply side of a local marketplace, which accounts for over $4 trillion in U.S. consumer spending annually.
Last year, Bain Capital placed its bet in this realm. Through its venture wing, the private equity and consulting firm poured $27 million into Booker, a company that builds scheduling and business management software for small and medium-sized salons. Today, the New York-based startup is working to push deeper into the front office, building a new suite of tools that use a business’s operational data — booking data, payment information and the like — to engage with existing customers, and in some cases, find new ones.
In a conversation last week, Josh McCarter, chief executive at Booker, and the company’s VP of business development, Matthew Mahoney, talked with Street Fight about the what clicked in the fundraising process, what Groupon taught other local startups about expansion, and the opportunity for booking in the local marketplace.
Last year, you raised a large round of funding from Bain Capital. Talk a bit about the fundraising process and what clicked for the investors when you pitched the company.
McCarter: A lot of our success in fundraising came from crafting our vision around where we thought the market opportunity was going. We saw that there were obviously a lot of players that were going in the vertical path — whether it was Millennium [Software] going down the salon path or PracticeFusion going down the medical path. We felt that there was a broader opportunity to bring booking and service management to a much wider audience.
Much of our positioning in the early days was talking about online-to-offline commerce, addressing the underlying reasons why service businesses haven’t migrated to the web. As we started going out for our series B, we started to highlight the traction that we were getting, clearly articulating the underlying sales metrics and the growth that we saw and marrying that with the market opportunity and our broader strategy.
We looked hard at our product and said, “Okay, we’ve invested a lot in the run capacity of our products. So let’s start talking about how we can help these businesses grow as our next big source of revenue.”
For many growing local startups, Groupon’s international surge in 2010-2011 is a case study in what not to do. The company scaled too quickly, and in doing so lost sight of key product development needs. Given the suite nature of Booker’s product strategy, how do you think about balancing product development and market growth?
McCarter: To an extent, we were in a similar predicament last year. We spent a lot of time in our annual planning this year working through those items, getting alignment with the executive team on what the priorities were, making sure that we communicated that to our board and investors, and really this year there is a heightened focus on product. In the last four months, we’ve added north of 20 people to our product team, up from six a year ago.
In a sense, one of our core product initiatives is in business development. We really want to make sure that our users can use the Booker platform to help grow, and not only run, their business, whether or not its through us or a partner. Because we’re effectively the system of record for these businesses, we have keen insights into their occupancy levels and usability rates and pricing dynamics and so forth, and we can help inform the way they grow their business.
More and more, partnerships are becoming a critical strategic tool for companies in the local space. Talk a bit about how you use partnerships to expand capabilities without sacrificing revenue opportunities down the road.
Mahoney: From the standpoint of partnerships, when you think about the grow side of the story, one of the key things we’re looking for is customer traffic. At this stage, we don’t plan to develop a customer front-end, or going down the path of OpenTable, where you have kind of the back-end process and then a customer-facing site. We’ll be fighting with the Yelps and the Groupons and the LivingSocials and everybody else out there who’s going after the customer traffic.
So from that standpoint, the view is that we want to partner with the people that have the customer eyeballs. We want to make our merchants present there, make them bookable where the customers are, and have that as widespread across the web as we possibly can. That’s probably the number one driver from the partnership there.
One area where Booker has made a big push recently is in using data about a business’s operations to inform, and in some cases measure, a business’s advertising and marketing efforts. If we can assume that in a few years the majority of small businesses will have systems to manage their “source code,” so to speak, and that everything will be able to be measured against that, what is the outlook for businesses like Yelp, which sell advertising on a subscription basis?
McCarter: There’s a big shift underway to performance-based marketing, and measurability as a whole in local. When you talk about attribution on the web, one of the big issues is that you can say how many people clicked or how many people maybe did a click-to-call. But if there’s not real tight tracking of that online-to-offline commerce transaction, then there’s no clear metric to allow performance marketing.
With respect to a Yelp, I think they’re going to have to develop a more transactional model. And they’re already moving in that direction through partnerships with [Booker] and others. I do think it’s changing. The question is will it ever change to the point where their business is 100 percent transaction-based and I think the answer’s no. But there may be a shift in terms of how much they’re driving out of that merchant.
Often, when people talk about the size of the local opportunity they speak in terms of the legacy local advertising industry. But more and more, the back-office software and marketing businesses are colliding. How do you see that pie dividing over the next few years, and do you see SaaS companies taking a part of that “advertising” spending?
Mahoney: I do think that the majority of the spending will come from offline advertising. But you also get into a discussion about marginal cost and utilization type as well. Right now you’ve got this pie. However it’s divided, it is driving a certain amount of business and now you’re going to try to shift some of that from offline to online, to retention, CRM and everything else.
But if that then starts to generate more business and drives more profit for a business, then they will start thinking, “Well I can spend more on that or maybe I can make the people that I have more efficient, have higher utilization rates” and so forth. So if the flywheel works right, then it’s a shift from offline to online and then there’s generation of more profits that can be reinvested in the tools that are working correctly.
If you take a look at Grubhub’s prospectus, the company’s take rate (the amount they charge per transaction) has decreased over the past two years — albeit, only slightly. What impact will the availability of merchant-facing systems like Booker, which provide the basic ordering software to small restaurants as part of suite of services, have on the rates which a consumer facing commerce brand like Grubhub can charge?
McCarter: If you’re providing somebody a software tool and charging them for the same business that they would otherwise already have on top of that, I don’t think that model is sustainable. If you have a software tool that brings the net new customers, then I think that you can certainly charge for that.
Steven Jacobs is Street Fight’s deputy editor.