#063: Managing Risk With Embedded Payments, SaaS For Laundromats, The Machine Shop Software Opportunity
One vSaaS breakdown. One biz story. One 'how to'. In your inbox once a week.
One ‘How To’:
Managing Risk With Embedded Payments
Embedded payments are growing rapidly.
Bain estimates they will generate $21B in revenues by 2026 🤯
One area no one is thinking about? Managing risk.
Many vSaaS companies offer embedded payments via Stripe Connect Custom or Adyen for Platforms. While Stripe and Adyen take care of key onboarding requirements (AML, KYB, etc.), they don’t manage underwriting risk or monitor for key credit or fraud risks.
Vertical software companies are responsible for owning these risk management responsibilities, often for the first time.
Are you a vSaaS company managing SMB risk for the first time? Here are some quick tips for maximizing growth and managing risk in embedded payments:
#1. Drive attach rate by automatically pre-vetting existing customers: Your existing customers are often great candidates for new products. Use reputational data – such as 3rd party reviews, website analysis, etc. – to pre-qualify your customers for embedded payments, and offer them a one-click sign-up to encourage adoption.
#2. Leverage your contextual data on SMBs during underwriting: For example, salon software providers often collect information on salon booking volumes, which can be a valuable data point when assessing business health. You can use this internal data to offer flexible privileges (e.g. faster payouts) to “good” customers.
#3. Proactively manage credit exposure post-onboarding: Non-fraud, credit-related losses are the biggest loss drivers in embedded payments products. Keep tabs on your credit exposure by monitoring risk signals for individual SMB customers and for your aggregate portfolio. Payment volumes, chargebacks, and authorization rates are all valuable risk metrics to monitor.
There are actually a few companies actually doing this.
Who comes to mind first? My friends at Coris have automated the above risk management strategies in their AI-powered, no-code platform. They also have integrations with Stripe Connect and Adyen for Platforms.
Reach out to learn how they’re automating SMB risk management for companies like Mindbody and Stax Payments.
One Biz Story:
Cents: All-In-One Software for Laundromats
This guy's building a software business for an industry that Silicon Valley forgot about...
LAUNDROMATS.
And he's raised millions from top venture capitalists to do it. This is the story of Cents, the all-in-one SaaS for laundry:
Cents was founded in 2020 by Alex Jekowsy, Gilli Cherrin, and Pramod Dabir. Prior to Cents, Alex earned his stripes as a founder that built and sold an EdTech Marketplace SaaS. Gilli was a key member of Ivy, a vertical SaaS business for Interior Design that sold to Houzz.
Cents product suite handles everything the corner Laundromat needs:
Store Management & Point of Sale
Pickup & Delivery
Machine Payments
Marketing
They even recently added Growth Capital, for laundromat owners to scale their footprint.
The pricing for Cents' products varies depending on the size of the laundromat: But, Cents OS starts at $149 per month, Dispatch at $99/month, and Transact at $149 /month.
In addition, they likely take a piece of each transaction and offer a pay-for-success marketing solution.
Cents acquires customers through targeted marketing, outside sales, conferences, and referrals. Many verticals that are late to digitization often have more difficult customer acquisition motions than others. My guess? Outside sales via conferences is the most effective.
It seems to be working. Cents is making a significant impact on laundromats across the U.S. A Case Study they dropped showed that Laundré doubled their revenue after moving to the Cents Operating System.
But can this be big enough to support a venture-scale business? Bessemer, Newfund Capital, Riverpark Ventures, and 1517 Fund think so.The company raised $4.25M in funding to date from them in an effort to take over the industry.
The Laundry market is much bigger market than I anticipated, but brick-n-mortar is relatively small - only a ~$5B industry. vSaaS companies market penetration can hit as high as 60% in some cases. Cents will have to do this to achieve $100M in ARR or expand into another market.
Cents claims over 1,000 Laundromats run on their software. My research shows there are about 35,000 of them in the U.S. At an estimated $5K / year per location, Cents would in the $5M ARR range. So they have achieved some solid scale, but still just getting started...
If they do achieve massive market share, they could do what MindBody has done for gyms. Bessemer was MindBody's biggest backer, all the way to a ~50% market share and a $1.9B exit. And they've gotten behind Cents. That's a good sign...
I'm cheering for @Ajekowsky and the @trycents team.
Let's see how big this this thing can get.
Thanks for reading!
One vSaaS Breakdown:
Machine Shops Industry Scorecard
Thinking about building a SaaS business?
Perhaps look into doing it for Machine Shops. There are ~18K of them, doing $40B a year in revenue. Highly fragmented space.
Let's go deeper ⬇
First off, WTH is a machine shop?
A machine shop is a business that creates parts. These parts can be made of metal, plastic, wood, ceramic, & more. These parts are typically sold to manufacturing companies - folks who are making aircrafts, cars, ships, etc.
Think of it like this, if Boeing needs 5M tailor made screws for one of their aircrafts, they hire machine shop to construct the particular part for them.
There are also machine shops that work with entrepreneurs or small businesses to bring their physical product ideas to life.
So how big is the market?
It's BIG. There are ~18,000 machine shops in the United States. Collectively, those 17K shops bring in $40+ BILLION of revenue. The average facility does $2M a year in revenue.
How is the market segmented?
At the surface, it seems that the market is highly fragmented. It seems it has a massive amount of Small Businesses, some Mid-Market, and very few enterprise business. A great thing for software and go-to-market!
How is the SaaS competition?
The manufacturing software space is CROWDED. Machine shops, however, are this smaller offshoot of that space and competition doesn't seem that intense. The only real vc-backed competitor is Fulcrum. Other than that most seem pretty legacy.
What are machine shops currently using these SaaS tools for?
Well, a whole lot. These businesses are pretty complex, given the highly physical nature of their operations. Here's an overview of how Fulcrum supports them:
What are potential product opportunities?
I would assume compliance is very important in this space. I think building a Turbo Tax type of tool that plugs in with the ERP's of the world may be a good place to start looking into. Fulcrum product seems too vast to be nailing this
How would one acquire machine shop customers?
Given the demographic, you're likely going to need to close the deals in person. I'd take an outside sales approach, visit shops and events that these folks attend. Cold outreach, Digital ads, or PLG is probably very tough here.
Should I bootstrap or raise money?
The market can definetly support a VC opportunity. I wouldn't start there though. Find a wedge, get in the door, and learn more about the market. Later on, If you see there is an opportunity to build an OS than I'd raise VC and go for it.
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