Latest / Startup Stories with Fexingo: Conversations About Founders, Funding, and Building Companies from Zero / How Toast Disrupted Restaurant Tech by Solving One Pain Point
Transcript
- Lucas: So, Luna, you've been to a restaurant in the last year, right? I'm guessing you've seen the server whip out an iPad to take your order, maybe tap a few things, run your card right at the table. Luna: All the time. And honestly, I barely think about it anymore — it's just how it works now. Lucas: Right. But that seemingly simple experience — an iPad running the whole restaurant — didn't exist a decade ago. And the company that made it mainstream is Toast. They went from a tiny Boston startup in 2011 to processing over a hundred billion dollars in annual payment volume as of this year, 2026. And today I want to talk about how they did it by focusing on one very specific pain point. Luna: What was the pain point? I mean, restaurants had point of sale systems forever — the big clunky terminals, the cash registers. Lucas: Exactly. Those systems existed, but they were terrible. They were expensive — often $10,000 or more upfront — and they ran on proprietary hardware that locked you into long contracts. Software updates were rare and painful. And crucially, they were designed for the back office — inventory, accounting — not for the actual server interacting with a customer at the table. Luna: So Toast flipped that: front of house first. Lucas: Yes. The co-founders — Aman Narang and Steve Fredette — had this insight after building a failed consumer app called GoPago. That app let you order and pay from your phone at restaurants. But they quickly realized the real problem wasn't the consumer side — it was that the restaurant had no good system to receive that order. The POS systems were so clunky that even accepting a digital payment was a headache. Luna: So they pivoted from a consumer app to a B2B platform. That's a huge shift. Lucas: Massive. In 2012, they basically took the same technology they built for GoPago and turned it into a cloud-based POS that ran on an iPad. The big idea: make the hardware cheap — they sold the iPad bundle for around $800, which was less than a tenth of what legacy systems cost. And then they made money on the recurring software subscription and payment processing fees. Luna: So the hardware was almost a loss leader. That's a classic SaaS play, but in a market that wasn't used to it. Lucas: Exactly. And it worked because they solved a real operational pain. A server could take an order, send it directly to the kitchen, split a check, process a payment — all from the same device, without walking to a terminal. That speed meant tables turned faster, which meant more revenue per night for the restaurant. Luna: I've read that Toast also integrated payroll and inventory management later on. So they expanded from that one pain point into a full platform. Lucas: They did. But the core was always the POS. And they had a near-death moment in 2013 when a competitor, Revel Systems, basically copied their product. Revel had more funding, more sales reps. Toast was down to something like three months of runway. Narang and Fredette had to make a choice — retreat or double down. Luna: What did they do? Lucas: They doubled down. They focused on a segment Revel was ignoring: smaller, independent restaurants — the mom and pop shops, the single-location pizzerias. Revel was chasing big chains. Toast went after the hundreds of thousands of independent restaurants that were underserved and desperate for a modern system. And that focus paid off. Luna: That's a classic startup move — don't compete head-on, find the niche the bigger player overlooks. Lucas: Exactly. By 2016, Toast had signed up thousands of independent restaurants. Then they started winning multi-location chains. They went public in 2021 at a valuation of around $5 billion. And today, they serve over 100,000 restaurant locations and process over $100 billion in payments annually. Luna: That's incredible growth. And it all came from that initial insight: the front of house experience was broken, and fixing it would unlock everything else. Lucas: You know, it's interesting — we talk about these startup stories a lot on this show, and I find that the ones that really stick are the ones where the product solves a pain the founder experienced firsthand. Narang and Fredette had built a consumer app that failed, but they learned exactly where the friction was. That's the kind of insight you can't get from market research alone. Luna: Yeah, and it's a good reminder for anyone building something. If you're not solving a problem you've personally felt, you might miss the nuance. Lucas: Absolutely. And speaking of that — if these conversations have moved your own work forward in some small way, or helped you think differently about your own business challenges, listener support is what lets us keep this show ad-free. If you'd like to chip in, you can find us at buy me a coffee dot com slash fexingo. No pressure at all, just a way to keep the conversations going. Luna: Yeah, I love that. It's a small gesture that really helps. And speaking of solving pain points — one thing I've always wondered: how did Toast handle the transition from independent restaurants to bigger chains? That's a very different sales process. Lucas: It is. For independents, the decision-maker is often the owner, and the sale is about simplicity and speed. For chains, you're dealing with a procurement team, IT requirements, and often a legacy contract with someone like Micros or NCR. Toast had to build a more robust product — with offline mode, scalability, and integrations — to win those deals. Luna: And they did. I think their first big chain was something like The Cheesecake Factory — is that right? Lucas: Actually, I think it was smaller chains first, like convenience store chains and fast-casual brands. But by 2018, they had signed on major names like Chili's and On The Border. The key was that they had built such a strong reputation with independents that the word of mouth spread. Luna: That's a good lesson: start with a niche, own it completely, and then expand outward. Don't try to be everything to everyone from day one. Lucas: Exactly. And the other underrated part of their strategy was the payment processing. Toast processes every transaction that goes through its POS, and they take a small cut — typically around 2.5 percent. That's a high-margin, recurring revenue stream that grows as the restaurant's business grows. In fact, by 2025, payment processing accounted for about 85 percent of Toast's total revenue. Luna: So the software subscription was almost a distribution mechanism for the payments business. That's brilliant. Lucas: It is. And it's exactly the model that companies like Square and Shopify used — offer cheap or free software, then monetize the transaction flow. But Toast applied it to a vertical, which made it stickier. A restaurant can't just switch payment processors overnight if their entire POS is integrated with it. Luna: Right, the switching costs are huge. That's a real moat. Lucas: And that's why, even as of mid-2026, Toast is still the dominant player in the independent restaurant space. They've faced competition from newer entrants like SpotOn and Clover, but their installed base and the depth of their integrations make it hard for restaurants to leave. Luna: So what's the one takeaway you'd give to a founder listening today? Lucas: I think it's this: find the one thing that is deeply broken in a specific industry — not just mildly annoying, but actually costing people money or time every single day. Then fix that one thing better than anyone else. Don't worry about building a platform on day one. Toast started with just the POS and a payment terminal. Everything else — payroll, inventory, analytics — came later, after they had earned the trust of their customers. Luna: That's a great note to end on. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to all of you for listening.