Shopkeep Raises $25M to Build a Better Cash Register for Indie Retail

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ShopKeepShopkeep, a New York-based startup that builds point-of-sale software for mobile devices, has raised $25 million in its third round of funding. The new capital thrusts the company to the forefront of a busy pack of upstarts looking to rethink the point-of-sale. It also sets the stage for a drawn-out fight between a handful of well-funded startups, the legacy point-of-sale providers who control much of the market, and a number of other tech giants looking in.

With the rapid growth of Shopkeep and competitors like Boston-based Leaf, which raised $20 million earlier this year, it’s clear that cloud computing is really making an impact on the business technology industry. By building software which runs remotely, rather than on a servers located in a store, these startups can dramatically reduce costs, opening up new markets and erasing much of the maintenance and service fees that drive a large portion of legacy firms’ revenue.

ShopKeep was founded in 2008 by Jason Richelson, who owned a independent grocery store and an accompanying wine shop in Brooklyn, serving the borough’s growing professional class. The store was a success, but the back office was a mess, he says, and he wanted to create a better way to manage the store’s inventory. So, in 2009, he left the grocery businesses, hired a developer and began to build his own POS system.

Fast forward three years, and the company’s software is now used by over 10,000 businesses across the U.S.. In January, the company rolled out a iPhone and iPod touch version of its application to help it serve food truck vendors and other more-mobile service providers, with whom Square has become synonymous.

To date, the company has focused on small, independent retailers with under $1 million in annual revenue — a market, which Richelsen says remains overlooked by some of the larger institutional players and underserved by existing resellers who peddle often outdated PC-based software.

“Shopkeep has built a big brand around customer service for smaller merchants, and that’s why we’ve been able to acquire these smaller business that (Micros and NCR) don’t want,” said Richelson.“[The small business market] has always been attacked by value-added resellers, but that’s really a broken model.”

The company plans to use the funding to expand its existing footprint internationally, and build out additional features unique to a cloud service. For instance, Richelsen says some of the capital will go toward building out an analytics products for merchants, which could algorithmically identify potential theft or missing inventory.

However, the company faces an increasingly crowded and complex competitive landscape, anchored by legacy point-of-sale companies such as Micros and NCR, which remain flush with cash and which are increasingly aware of the opportunity in these new markets, and the potential threat of the startups opening them. Both firms have invested heavily in cloud-based point-of-sale technology in an attempt to stem the tide of startups like Shopkeep and Square, and expand their products a previously unserved segment of very-small and mobile businesses.

“The difficulty cloud-based POS startups will have moving forward is that Micros and NCR have not been asleep at the wheel,” said Alan Hayman, a former Micros executive who now runs Hayman Consulting Group, about the shakeup in the industry. “Moving up market will be much harder for POS startups because operators are much more savvy, the competitors are extremely capable, and their solutions are very comprehensive”

What’s still unclear is whether these companies can fully themselves off of a business model, which traditionally relied on large upfront sales and large service and maintenance revenues. Cloud-based software reduces a lot of the hands-on service costs, removing potential complications with the hardware in-store and allowing the provider to maintain software remotely.

Meanwhile, another competitor, Square, faces challenges of its own. The mobile payments company, which has pressed its own software into more established retail environments, appears to be hemorrhaging cash and has shopped around for a potential buyer, according to a recent report by the Wall Street Journal. The article, which the company has denied, says the company recorded a loss of roughly $100 million dollars in 2013.

Square’s struggles appear to validate the decision by Shopkeep, and other tablet POS startups like Leaf, not to build a payment-processing business. The company works with a number of payment processors, and in doing so, has been able to not only avoid, but profit, on the price wars, which appear to be draining the capital of many in the industry.

Adding to the chaos, reports surfaced in January that Amazon planned to offer retailers a check-out system that uses the company’s Kindle tablets. The project remains in its early stages, but a potential entry of Amazon and Apple into mobile payments complicates what already is a confusing and fluid industry.

Steven Jacobs is Street Fight’s deputy editor.