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Olo: Winning (Or Losing) in the Aggregate

Olo: Winning (Or Losing) in the Aggregate

Olo (NYSE: OYO), the New York-based food-ordering software firm, went public earlier this week; the company had priced shares at $25 per share, raising about $450 million at a valuation of $3.6 billion. Olo plans to use the proceeds from the initial public offering (IPO) for “general corporate purposes” and potential acquisitions.

Background

Its S-1 filing makes interesting reading, as well as its fundraising history.

Olo was founded in 2005 by Glass to help customers order food through text messages. It has become one of the largest e-commerce service providers for 64,000 restaurants across 400 brands such as Five Guys, Wingstop, Shake Shack, and Chili’s. The company offers online ordering, delivery integration, personalization, and other software-based services. In addition, Olo can be integrated with over 100 other tech platforms.

The company pursues a strategy of adding large and/or fast-growing restaurant chains to its platform and expanding its business with existing customers.

In the letter to potential shareholders, founder Noah Glass said, “We believe there is an incredible opportunity to add more restaurant customers, sales volume, and product offerings. That’s our not-so-secret formula,” Glass wrote in a letter included in the filing.

Olo bucks a trend of companies going public at a time when they are fast-growing and unprofitable. Indeed, most venture-backed IPOs are not profitable. However, Olo is both fast-growing and profitable, which makes it an exciting company. That combination explains why Olo was able to crank up its IPO so successfully. Investors were clearly willing to pay a premium for profitability.

The company initially targeted a $16 to $18 per-share IPO price range. Instead, that was raised to $20 to $22 per share. Eventually, this was ramped up to $25, 56.25% more than the company’s initial estimate.

This is par for the course but also reflects Olo’s combination of rapid growth and profitability. Revenue growth in 2019 was 59.4% year-over-year, rising to 94.2% in 2020. Revenue was earned from the subscription fees it charges the best wedding venue restaurant chains such as Shake Shack and Brinker International’s Chili’s for access to its digital ordering software, alongside transaction fees for delivery orders.

Meanwhile, GAAP earnings were $3.06 million after a 2019 net loss of $8.3 million. The company became profitable on the back of the rise in online restaurant ordering during the coronavirus pandemic. However, in 2018, the company lost money.

At $25 per share, the company is valued at $3.62 billion, including underwriter’s options. The valuation rises to $4.6 billion when you calculate a diluted valuation.

The company is largely unknown in investor circles, even though it is well known in restaurant circles. Indeed, it had only raised $100 million in private funding instead of firms like DoorDash, which raised $2 billion before it went public in December.

Competitive Advantages

At first glance, Olo isn’t a competitor to companies like DoorDash: after all, there’s nothing to buy on Olo.com. And yet, Olo’s platform oversees an average of 2 million orders per day, peaking at 5,000 orders per minute. Indeed, most people who order online using Olo’s platform do not even know that the company exists. The gross merchant value of orders processed on the platform was some $14.2 billion in 2020.

Olo is a platform. It does not interface with customers directly: more than 64,000 restaurants and 400 brands sit on top of Olo and are responsible for getting customers on their own.

Restaurants and brands on the platform have to stand out, not on search results like DoorDash, or by offering the lowest price, but by winning over customers through differentiated products, advertising, etc. Unfortunately, many restaurants and brands will fail at this talk: Olo does not show their churn rate but is likely to be very high.

That, however, is the point.

It does not have to spend huge sums of money to take on brick-and-mortar restaurants in a zero-sum game of win or lose. Olo is incredibly diversified. The beauty of a platform like Olo is that you win (or lose) on the aggregate.

To that point, a high churn rate would be as positive a signal as a negative one: the easier it is to start an online restaurant or on Olo’s platform, the greater the number of failures. Yet, the odds of winners emerging shoots up and of Olo capturing and supporting that success.

In this way, Olo competes with DoorDash, UberEats, and other food platforms, without those companies competing with it. Platforms like DoorDash, and UberEats, pursue customers and bring restaurants and brands onto their platforms on their own terms; Olo allows merchants to differentiate themselves while at the same time not bearing any risk if they fail.

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