Success can appear inevitable in retrospect as much as it can look unlikely at the outset. Leapset, a firm founded by a Sri Lankan that’s built an online platform for the restaurant business, appears to have crossed the threshold from the unlikely to the inevitable.
For the restaurant business, it has built a platform that links through the cloud customers, suppliers, staff and payments with the restaurant seamlessly. The firm pulls this off by connecting an advanced Point of Sale (POS) terminal at the restaurant that integrates with stakeholders though the Leapset app on their smart mobile devices. In the US, where Leapset’s system is being rapidly rolled out, smart phones are ubiquitous.
Leapset’s revenue model is three-pronged. The hardware, which is a Point of Sale system, is supplied on a contract costing the restaurant a few dollars daily, its first revenue source. Leapset’s negotiating power with banks has allowed the firm to share in the benefits of lower commissions on credit card payment processing with the restaurateur, which is the second revenue source. Thirdly, it receives a share of any new revenue it helps bring to the business.
Mould-breaking innovation is different from the incremental kind that’s more common at firms looking to improve products and processes. Japan has shown how incremental improvement can produce world-beating technical achievements over time. The innovation culture in the US and particularly in the Silicon Valley in California, where Leapset is headquartered, is however completely different. In the US the emphasis is on disruptive innovation: sweeping new things that transform markets and society.
Disruptive innovation is successful when it creates an ecosystem in its path that brings together the innovators, other firms and users across many domains. A successful ecosystem would add value to all its users and allows the innovator to learn from its followers. Leapset is fulfilling a need, at the intersection of a number of related domains.
Leapset has created phenomenal value over the last couple of years. Months ago Sysco, a $40 billion firm that is the largest food distributor to restaurants in the US, invested in a 25% stake in the firm valuing it at $22 million. “You can’t create that kind of value in a services organization no matter how big the services organization is,” contends Leapset cofounder and Chief Executive Mani Kulasooriya. In comparison Virtusa, a NASDAQ-listed software services firm, is valued at around $132 million, while MillenniumIT, a developer of capital market trading software, was acquired by the London Stock Exchange Group for $30 million. One of Sri Lanka’s largest listed firms, JKH’s market cap is $1.4 billion after more than a century in operation. In comparison Virtusa and MillenniumIT are firms that have operated for around 15 years.
Disruptive companies grow significantly in value year on year. Kulasooriya and Leapset’s founding team including Shanil Fernando and three others have single-mindedly focused creating a disruptive firm that’s valuation hit $22 million in little after a year in operation. Sysco’s being a shareholder has completely transformed Leapset by the level of access and credibility it now has with potential new restaurant signups.
Leapset founder Shanil Fernando says before Sysco their sales staff had a tough time convincing independent restaurant operators that the Leapset system can save them money, increase revenue and improve restaurant management. “These restaurants have people trying to sell them crap all the time,” he says. In fact a Leapset promoter was once physically assaulted by a riled restaurant owner annoyed more about the intrusion than about the product. “That was a hard journey and a painful way to build scale,” recollects Fernando who was a founding member of Virtusa, and at the time of his leaving was managing a 4,000 person team and heading a key product division.
Sysco, on the other hand serves 400,000 outlets across the US every week and its sales teams are well known by restaurant owners they serve. They are now introducing Leapset to potential customers all across California and Florida, the two US states where the firm has chosen to launch their services. Sysco’s Series A funding, or the first venture capital funding for the firm, has altered Leapset in two ways. Firstly, signing on new customers is now a breeze with the Sysco backing. Secondly, Leapset has narrowed its focus to just service restaurants from its earlier wider emphasis on small merchants in different business verticals.
Venture capital interest was high, when one year after launching Leapset was seeking its first round of financing. Founders and other angel investors who contributed the first equity of $4.5 million were in less than two years seeing a near five times return on their investment.
Online POS systems, the type offered by Leapset, are not a unique offering. Across the US and elsewhere dozens of firms offer such solutions. They range from Square, which converts an iPhone or iPad in to a credit card processing device, to numerous high-end online POS solution providers. However, Leapset’s focus on independent restaurants and having Sysco as a partner makes it a clear leader in that space. “Scaling the operation is the biggest challenge,” confides Shanil Fernando, Leapset’s Vice President of Global Delivery. Currently a customer ordering the product has to wait 45 days due to the supply constraint. Before a customer POS system is put online Leapset staff have to create their menus on the system, refine it to operate seamlessly on various mobile devices and train the customer’s staff. However, they realize to roll the product across the US without losing momentum Leapset has to cut lead times.
Leapset is filling the void in restaurant technology which has fallen behind the smart device era. An internet connected Leapset POS system connects directly with the restaurant’s customers through their mobile devices. Customers with the Leapset app are able to order online and be part of rewards programmes from each restaurant. Restaurant owners know which customers are in their premises, their names and details like what they ate last time or how they like their coffee. They are also able to push special offers to customers in the restaurant or its vicinity though the Leapset app. The app also integrates seamlessly with social media, so restaurants are able to benefit from their customer’s social media networks.
Restaurant owners also are able to track employees and inventory and are able to remotely access the system. Leapset customises individual restaurant menus and promotional material for each client and promotes their partner’s outlets online. Since the system is provided on a contract there aren’t upfront costs for restaurants joining Leapset; only a daily rental fee.
Mani Kulasooriya, a Sri Lankan who has been living overseas for two decades, and Shanil Fernando are rare because they choose to make a quantum leap with Leapset in contrast the incremental growth model of most firms. Leapset’s quantum leaps didn’t come from taking a POS system and trying to tweak its performance. Nor did they bother to listen to restaurateurs who may have pointed to the need to improve the size of the cash register key pad to achieve greater productivity. Instead they re-imagined the POS system from scratch, taking a cue from customers who were adopting and spending more time with their mobile devices. Sheer bloody-mindedness is an audacious trait that few have the guts to let thrive within them.
Mani, Shanil and other founders demonstrated their intrepid approach when in the pursuit of the opportunity Leapset offered they shut down a successful and profitable IT services firm, Latitude 365, which they had cofounded together first. Latitude 365, also called Monvia in the US, had good enough margins to incubate a number of new products. Latitude’s revenues were topping $5 million a year when it also became apparent that the online POS idea, that was later incorporated as Leapset, could be a runaway success. “We made a decision in hindsight,” says Kulasooriya about their first choice to split the team and continue operating Latitude, which was cash flow positive, and Leapset as a separate venture. None of them wanted to walk away from a business that had $5 million or more in revenue to only focus on an idea that currently had no revenue. “We did that for eight months and then made decision to shut down Monvia (Latitude).
“We burned the bridge so that there is no return. And that’s where the company really changed into something,” Kulasooriya explains using an analogy he often sites. One of the original partners quit, primarily because he was uncomfortable with that decision. “You have to be comfortable with risk. If you aren’t, what are you going to do every single time you are faced with a task that is insurmountable?” he asks referring to challenges faced by disruptive start-ups. Monvia and Leapset operating models are polar opposites. “The leadership structure is different and the motivation and everything else is also different,” says Kulasooriya, comparing Leapset to Monvia. He reckons a bean counter mentality which was encouraging them to cling to Monvia would have wrecked the breakthrough attitude that was required at Leapset.
Now cash-rich Leapset is hiring the best engineers for its engineering unit in Sri Lanka which works closely with their peers in the US to build robust software that integrates seamlessly with the hardware. Leapset’s offices now also have the trappings usually associated with organisations fostering innovation and collaboration like hang out areas and fussball.
Kulasooriya a decade ago had abandoned a job at Citi Bank to howls of protest from family in Sri Lanka for his first start-up, a firm that did funds transfers at a much lower cost than did Western Union, using the interconnected ATM and banking infrastructure. However, regulators soon intervened telling Kulasooriya that he needed a banking licence to continue the funds transfer business.
Kulasooriya’s unique circumstances at Citi Bank had exposed him to opportunity in the payments space and he knew the banks were unwilling then to innovate around reducing the $30 or so that was charged for a funds transfer.
Since he didn’t have a banking licence Kulasooriya sold the business for what he refers to as a ‘decent exit’, which he defines as one that returns enough to buy a house in 2002. He then joined Yahoo! Finance to head business development and was introduced to Shanil Fernando years later when on holiday here he sought out an IT professional for a chat.
Leapset founders however can possibly look forward to more than a ‘decent exit’ considering the lightning pace of growth so far. It aims to go public in three to four years when it expects to have up to 20,000 restaurants connected to the system. Now that its ideas have found traction it’s a case of waiting for serendipity if peers that have built similar scale are an example to go by. One of them OpenTable, a NASDAQ-listed firm through which tables can be reserved at 20,000 restaurant across the US, is valued at over $1.5 billion, a market cap that pips that of even the biggest listed company in Sri Lanka. “The way the street evaluates companies is not on what your opportunity is today but your opportunity in the future, so it’s our goal in three to five years to get to 20,000 locations, multiple products for the restaurant industry not just POS, and maybe start dabbling a little bit in a couple of international markets. That’s the story we will take to the market,” declares Kulasooriya who was in Colombo recently.
At 20,000 locations Leapset will only be covering 5% of Sysco-serviced clients. “So it positions us really well as a company that can go public because we have the unit economics similar to a $2 billion company when we tap just 5% of the available potential,” he points out. “That’s not the whole market; that’s just the captive exclusive audience that we have.”