Months Before CEO Shakeup, Leaf Investor Took Control of Startup

5/9/14Follow @curtwoodward

[Updated 11:30 am, see note below.]
Boston-area startup Leaf gave us another glimpse at how rough the retail payments sector can be with this week’s sudden departure of its founding CEO. 

Such CEO swaps happen pretty frequently in the startup world, where companies are moving at a breakneck pace to either grow their business or die. Still, for a young company like Leaf, seeing a founder depart is a huge shift.

It’s clear, however, that an even more important change came several months ago, when a major investor from the payments industry effectively took control of the young company. The investment, reported at the time as $20 million, came from Heartland Payment Systems, a publicly traded payment processor that handles more than $80 billion a year in retail spending.

The deal was touted as a way for Leaf to expand its employee base and speed up product development, and a chance for Heartland to get a head start on a coming wave of innovation in retail payments. Leaf sells a custom-built tablet computer that businesses can use to ring up orders and swipe card payments, along with software for tracking sales and other data.

What wasn’t mentioned in those initial investment reports was the fact that Princeton, NJ-based Heartland was getting a 67 percent stake in Leaf. The scope of Heartland’s investment was eventually reflected in its own financial reports, which describe the deal as an acquisition and show the actual cash price paid was $14.5 million.

By the end of the year, Leaf’s board and corporate roster reflected the new owners. As this Massachusetts state corporate filing shows, Leaf’s treasurer, secretary, and four of its six board members at the close of 2013 were from Heartland, including CEO Bob Carr and Sarah McCrary, the former Heartland executive who replaced Aron Schwarzkopf as Leaf CEO this week.

It was a huge change from the previous annual report, filed just before the Heartland investment, which showed two names in every key role: co-founders Schwarzkopf and Sebastián Castro Galnares.

Now, Schwarzkopf is out. The news was first reported by BostInno on Monday, and Leaf later issued a formal statement on the change. McCrary, the new CEO, had been announced as the company’s operations chief in March, along with new vice presidents of finance and engineering.

What isn’t known is the reason behind Schwarzkopf’s departure. McCrary declined a request for an interview, and representatives for Heartland did not return messages seeking comment. An e-mail to Schwarzkopf’s company address also wasn’t answered. The press release announcing the change said only that he had departed the company “for new ventures.” BetaBoston reported that co-founder Galnares, who had been chief product officer, would remain at the company “in a lesser role.”

In any case, it’s clear that local retail payments remains a fiercely competitive sector. Tech startups have long coveted the U.S.’s huge array of small businesses as customers, but the difficulty of selling to and maintaining accounts with so many outlets has made it one of the toughest markets to crack.

Leaf itself is often seen as a much smaller competitor to Square, the heavily funded payments company led by Twitter co-founder Jack Dorsey. Heartland and Leaf are facing off against a long list of competitors, from small startups and traditional payments players to big technology names like PayPal and, potentially, Amazon.

With that competition as a backdrop, Heartland saw big potential in Leaf. Before the investment, Heartland had started re-selling Leaf’s product to merchants around the country, and even considered Leaf a possible future replacement for its own point-of-sale hardware.

In the press release announcing her new job, CEO McCrary said she would continue carrying out Leaf’s vision of establishing an open platform for businesses. That’s been a key part of Leaf’s sales pitch—rather than mandating its own payments-processing software, the startup has allowed retailers to choose from several options, including Heartland and Stripe.

“The energy around the mobile payments industry is palpable and the opportunity for Leaf to sustain its foothold as a flexible and valuable solution for business owners is an exciting opportunity,” she said.

It all seems to signal that Heartland is committed to pushing Leaf forward, even though growing the business will cost money. In its most recent quarterly filing, Heartland said that Leaf lost $2.7 million in the first quarter. It’s projecting that Leaf will continue to be a drag on Heartland’s earnings for the year.

[Corrected spelling of Leaf CEO's surname to McCrary throughout.]

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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