Toast is raising a Crowd SAFE at a $20 million valuation. This price is too high for Toast’s current level of traction. The company generated $1.3 million in revenue last year. A 15x revenue-to-valuation multiple is far too high for a consumer products brand, particularly one that hasn’t built out a strong direct-to-consumer channel and is still blocked by legal restrictions in more than half of the United States. While Toast boasts that investors can get in at this low valuation before an upcoming Series B raise, this price is misaligned with the company’s true value. Additionally, raising a Series B at an even higher price might be difficult, particularly in the event of an economic downturn.

The United States market for legal cannabis is relatively small. It was estimated at just $10.8 billion in 2021. However, the market is expected to grow at a 14.9% compound annual growth rate until 2030. The market’s growth rate is above average, and increased legalization and mainstream adoption of marijuana are growth drivers. 

That being said, the cannabis market is still undergoing seismic changes as legal restrictions ebb and flow. There are many reports that legal cannabis brands are struggling to compete with the underground market, which is worth significantly more (an estimated $70 billion in the US in 2019). For instance, legal cannabis sellers in California are struggling due to the legislative bureaucracy that disadvantages them against underground dealers. 

Given all of this uncertainty and complexity, Toast is playing in a risky market. Potential revenue in legal cannabis is still relatively low compared to the underground market, and companies are put through the wringer to sell weed in multiple product formats or in multiple states. While cannabis companies several years from now might be able to carve out market dominance, the industry is still developing. It’s unclear whether Toast has the staying power or dominant strategy to weather this unstable market.

Toast is led by a seasoned pair of operating executives. Punit Seth, Toast’s co-founder and CEO, holds a Master of Business Administration from New York University’s Stern School of Business. Before and after business school, he worked in consulting at Accenture. He also served as the senior chief of staff at renowned investment firm Bridgewater Associates before briefly leading a marketing firm called Viceroy Creative as COO. 

Toast co-founder and COO Shovahn Rincon has a Bachelor of Science in computer science from Northwestern University. Like Seth, Rincon is also a former consultant, with 12 years of experience as a senior manager at Accenture. 

In addition to Seth and Rincon’s well-credentialed backgrounds, Toast has another ace in its pocket: co-founder and Executive Chairman Chris Burggraeve. He has a master’s degree in both international economics and business (from the Catholic University of Leuven) and European economics (from the European University Center). Burggraeve – who has personally invested more than $1 million in Toast – was formerly the global CMO of Anheuser-Busch. He has a number of other projects and involvements, including a board role related to Richard Branson’s Virgin Group, so Toast is not his full-time gig. However, Burggraeve’s extensive marketing expertise honed over a more than 30-year career is undoubtedly an advantage for Toast. 

It’s worth noting that neither of Toast’s C-suite executives have startup experience. While consulting at a big-name firm like Accenture is a masterclass in business fundamentals, learning from major corporations doesn’t always translate to building successful early-stage startups. Otherwise, Toast’s leaders have strong resumes packed with name-brand universities and companies. The company has a very strong team in both its day-to-day operators and its executive chairman. 

Toast’s pitch is compelling. The marijuana industry is still fractured and localized, and many consumers have no idea who to trust when purchasing cannabis. Toast’s product branding is excellent and certainly stands apart from the vast majority of products found at many dispensaries. In theory, Toast’s approach of adding a touch of luxury to cannabis products and giving consumers a name brand to trust seems like a strong differentiator in this industry. 

However, Toast doesn’t seem to be accomplishing this goal yet. Part of the issue is Toast’s operating model. The company relies heavily on brand licensing (75% of its revenue), which harms its ability to build a direct, branded relationship with consumers. In addition, Toast’s direct-to-consumer hemp and cannabis websites are poorly branded. They don’t properly communicate the consistency and luxury of Toast’s fundraising materials. It doesn’t help that the company is named Toast. That’s a difficult word to build organic traffic for, particularly given the presence of the very large restaurant software-as-a-service company called Toast. 

It will be critical for Toast to iron out these strategic and branding kinks in order to build a household name in the cannabis industry. For now, Toast is a relatively small company operating primarily via licensing, which isn’t a strong competitive differentiator. 

Toast was founded in 2015, and the company is just beginning to show strong growth. In 2020, Toast generated just $709,731 in revenue but posted a net loss of almost $1.6 million. Those aren’t good results, but the company turned it around in 2021. That year, Toast achieved $1.3 million in revenue and cut expenses to post a net loss of $603,143. The company still has a long way to go toward stronger revenue and profitability, but nearly doubling revenue and more than halving net loss is a solid achievement in one year. 

Beyond financials, Toast has achieved other key milestones. The brand has forged a number of partnerships and distribution deals. Toast is co-branding beauty, bakery, and restaurant products with brands like Georgia Louise. The company also sells products in six states online and through major stores like Columbia Care and Erewhon. Plus, Toast has a strong fundraising history. It has raised $10 million from venture capital funds, family offices, and angel investors (including Toast co-founder and board chairman Chris Burggraeve, former global CMO of Anheuser-Busch). 

While Toast is still not generating incredible revenue and still has not achieved profitability, recent financial performance shows improving operations and capital efficiency. Particularly at the company’s $20 million valuation, better financial performance would be preferable. In sum, though, Toast has achieved many of the milestones that investors would hope to see from an emerging consumer brand.

Any investment opportunity in the cannabis industry is a somewhat risky one. While all signs clearly point to increased legalization over time, it’s not clear how long it will take for hurdles to be lifted for companies in this market. Plus, there’s evidence to suggest that legalization alone isn’t enough. Even after a state legalizes marijuana, legal cannabis companies struggle with arduous reporting requirements and other red tape. These risk factors impact Toast – particularly in its goals to become a nationwide brand. The company also faces some financial risk. Revenue must increase rapidly to justify the company’s valuation, and Toast must continue managing expenses to inch closer toward profitability.

Toast has a strong thesis that the cannabis market needs a nationwide brand that consumers can rally behind, like Coca Cola or Anheuser-Busch for the weed industry. However, Toast is struggling to achieve this goal for two reasons: persistent legislative challenges and poor execution.

Though marijuana has steadily become legalized in more states since 2012, companies looking to develop a nationwide cannabis brand still face massive hurdles. Selling weed requires different licenses and reporting obligations in each state, obstacles that make it difficult for legal distributors to compete against the ever-present underground market. Toast has attempted to skirt some of this state-by-state complexity by operating primarily through licensing agreements. However, this licensing model muddles Toast’s brand among other brand partners and distributors and takes away from the company’s core goal of building its own recognizable brand. 

In addition, Toast isn’t doing itself any favors on execution. While the company’s brand and products look excellent on its fundraising page, visits to Toast’s hemp and cannabis websites paint a less compelling picture. For a company so highly focused on building a consumer brand name, the sites (and Toast’s overall marketing presence) are in drastic need of a well-branded overhaul. This inconsistent execution calls into question whether Toast can actually succeed at its lofty goal of becoming a household name in cannabis.

While Toast faces many obstacles to actually achieve brand-name status, the company’s overall thesis and point of view on the cannabis industry is a good one. The industry is still localized and fractured, and many consumers are still unfamiliar with their options for buying weed. Marijuana has a long way to go before it achieves the mainstream status of alcohol, but Toast’s approach of offering well-branded, carefully formulated products that are accessible to the mainstream buyer could play an important role in moving the industry in that direction. 

In addition, Toast benefits from a strong team of executives, advisors, and investors. Both of Toast’s C-suite leaders are well-credentialed. Toast’s third co-founder, Chris Burggraeve (who serves part-time as executive chairman), used to be the global CMO of Anheuser-Busch. He offers invaluable perspective on how to build a name brand as well as a huge network of contacts that could help Toast succeed. Due in part to this strong team, Toast has raised $10 million in funding so far. With all of these positive tailwinds, Toast may indeed achieve its goal to become one of the first national cannabis brands.

Toast is a cannabis company looking to bring a strong brand and a touch of luxury to the nationwide marijuana market. Toast offers a wide spectrum of hemp and cannabis products, from pre-rolled marijuana cigarettes to skincare products, chocolate, and more (many produced alongside brand partners). With distribution in six states so far and rapidly increasing revenue, Toast hopes to become a household name in the cannabis industry. The company also benefits from a well-credentialed team, with part-time co-founder and Executive Chairman Chris Burggraeve offering a huge network of contacts.

However, Toast will likely struggle alongside all other cannabis companies to deal with the ever-changing nature of cannabis regulations in the United States. For now, companies are stuck navigating per-state regulations and red tape. The difficulty of establishing a company with widespread distribution is one reason why the legal cannabis market is still significantly smaller than the underground market in the US (worth $70 billion in 2019). Due to the unsolved complexity of this market and Toast’s meager efforts thus far to develop a strong consumer brand, Toast has been rated a Neutral Deal. 

For questions regarding the KingsCrowd analyst report or ratings for this company, please reach out to support@kingscrowd.com. 

Analyst report written on June 29, 2022.