Leaf CEO: For POS Startups, It’s a ‘Race Against Time’

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The-Cash-Register1The merchant’s counter isn’t what it used to be. Hundreds of startups have poured into the enterprise services business, chipping away at long-established industries like payments and loyalty. But it’s the point-of-sale (POS) — the touchpoint for each of these services — that presents both the largest opportunity, and the most difficulty, for hyperlocal firms.

Over the past few months, the POS space has gone from busy to bustling. Large companies like Square and Groupon have rolled out their own products, investing heavily in building out their own POS systems as a way to link proprietary services like payments and marketing. Meanwhile, a host of smaller players have emerged, staying lower in the stack, partnering with payment, and other service providers, to scale iPad-based solutions.

One of those smaller players is Leaf, a Boston-based startup that sells a modified tablet to help small businesses manage their day-to-day operations. The company, which raised $1 million in seed funding, positions itself as an open platform, providing a centralized system through which third-parties can build out services on top of a merchant’s data. It’s preparing to bring its app store out of beta in the fall, and the company, which is closing in on another round of financing, is set to process a half of a billion dollars in transactions by year’s end.

Street Fight caught up with Aron Schwarzkopf, Leaf’s founder and CEO, to discuss the problem of software distribution in local, how to solve it, and the coming crunch in the POS space.

After the daily deals boom, the local loyalty space took about 12-18 months to shake out. What’s the timeframe for the ePOS world to separate the chaff from the wheat?
Industry-wise, I think it’s going to take 36 months to actually see a clear shakeout. Right now you have over 500 companies that are coding an iPad app and putting a dongle on it. You need to wait 24-36 months to know who the players are going to be. But here’s what we think: we don’t believe there will be POS providers in the traditional sense, but platforms that aggregate things [like loyalty, payment] and, POS. That’s our strategy and it’s pretty dissimilar to that of Square and Groupon.

The closed approach offers companies like Square, which build loyalty, inventory, and payment into one system, deep control over the soup-to-nuts experience. What’s stopping well-endowed players like Square, and even Groupon, from running over the competition?
If you have a lot of funding, as Square does, it might be interesting to do a closed system. But it all comes down to marketing. Distributing software to SMBs is not only capital-intensive, but time-intensive as well. It requires a lot of time to get to every single store, and speak with each merchant. The reality for Square however, is that the small businesses are not wholly ready. They’re pushing a lot of their distribution through retail, which is great for them and some early-adopting merchants, but not for all. It will be interesting how it plays out, but the industry itself is not there yet.

We believe that the key to reaching the entire market is to build a network of service providers and figure out a way to make them money. Every merchant has a best friend or consultant who sold him his fridge or his credit card processing that influences the decision. You need to reach that person.

Since its launch five years ago, Apple’s AppStore has transformed the way consumer software is bought and distributed. Will that transformation ever come to small enterprise?
We’re going to see a change, but it’s not going to be a drastic as people think (or hope). All of these independent sales organizations are changing rapidly, and we need to figure out where they’re headed before they disappear entirely. Anyone selling software to SMBs would love it if distribution was through ecommerce or retail. The problem with the industry however, is that SMBs have never reacted well to that. Remote distribution never worked. Service providers have always had to knock on doors to make a sale.

But I do believe that five years from now the POS could be the gateway to the SMB. And that the way you will get to the small business may be through applications that work through the POS. But you first need to build a layer of distribution to make that happen.

In terms of adoption by merchants, what catalysts — technology improvements, adoption cycles, industry developments — might accelerate adoption of ePOS systems?
I know lots of folks are cool on mobile wallets, but I really believe they will help ePOS adoption quite a bit. The reason being that companies like eBay and Google, which have wallet programs, spend a lot of money to acquire merchants and consumers. That will help lift adoption of ePOS because it’s dramatically easier to use mobile wallet in a ePOS system than with a legacy technology. You’re starting to see it. For instance, PayPal is paying cash to merchants who replace legacy registers with new systems to push out their mobile wallets. You have Isis and others trying to get in the market as well, and they will allow other ePOS players to grow faster by taking a big chunk out of the acquisition costs.

Leaf has raised $1 million, and another round is in the works — but you’re almost certainly not going to be able match Square’s war chest. How does the smaller guy win?
For everyone who doesn’t have 100’s of millions of dollars, it’s a race against time to get to some sort of critical mass. It’s not technology, it’s not features, it’s not pricing, which limits us; it’s 100% the time to acquire merchants.

I’m also a first-time entrepreneur, which makes it hard to raise money. There are competitors who are second- and third-time founders, which makes it much easier to raise capital. We all are raising these small — $10 to $20 million — rounds, and then we’re competing against these anomalies like Groupon or Square, which have hundreds of millions of dollars under their belts. I think it’s possible to compete, but you have to be very careful with your strategy in how you leverage incumbents.

The POS space looks like a sea of small players fighting over a shrinking pie. How do you make sure Leaf doesn’t get swept away?
It’s all about distribution. We have a two-pronged strategy to grow larger than anyone in the next 36 months. The first part is to be completely open. Our app store is still in beta, but we plan to roll it out soon. It allows any developer to build on top of the Leaf tablet, use our merchants’ data, and essentially bundle their service with our hardware. For instance, in addition to apps from PayPal, we also have a third-party building a POS application on top of our platform.

The second part is that we’re completely agnostic to payments. We’re one of the few companies that makes no money on payments. It allows us to get companies who sell different types of services — payment processing, loyalty, ordering et cetera — to bundle with our POS, and to integrate their service with us. We give an extra incentive to people in the financial world, both in gift and card processing, to actually adopt mobile and bundle Leaf with their core service. We’ve got a lot of merchant acquirers who already sell our product. They can bundle mobile tech, and they bundle point-of-sale with their core service.

As far as technology is concerned, POS is one of the most expensive and substantial investments a small business makes. Is it really something that can be upsold?
It’s absolutely a challenge. But the times are changing. The payment industry is exactly the same as any other industry. Today, the sales guy who before only sold credit card rates, needs to (and can) start selling other products like POS.. If you’re a credit card processor — say, a First Data independent sales organization (ISO) — who has a regional portfolio of 2,000 merchants, but you don’t have the tech DNA to compete, you can still service your clients by bundling other services like POS with your key product. When you move to the cloud, and you’re dealing with mobile tech that has nearly zero-cost installation, it’s a fairly simple sale.

Steven Jacobs is Street Fight’s deputy editor. This interview has been edited for length and clarity.