What Startup Founders Could Learn from Restaurateurs
I’ve always felt a kinship with restaurant owners. It’s hard not to respect people who pour their blood, sweat and tears into starting and running a restaurant. The hours of work before opening to prep the food. The hours of work and stress during service. The hours of work to clean everything up so they are ready to do it all again the next day. The time they will never get back that could have been spent with their families and friends. All of this in the face of the frighteningly unfavorable odds that they will most likely fail. I could never pinpoint why I connected so well with restaurateurs until I realized how much we had in common. It was this mutual respect that drew me to befriend and eventually cofound my current company Pared with Will Pacio, founder of Spice Kit restaurants.
Since starting Pared, I’ve only grown to appreciate the similarities of starting a tech company and starting a restaurant even more. This is my second startup and the fear of failure and stress from uncertainty isn’t any less than the first. Turning an idea into a real business that employs people and has paying customers is hard. Convincing people to believe in your ability to do that and give you their money to try is hard. Managing and growing the business to profitability is really hard. Both startup founders and restaurateurs struggle with these very same challenges every day.
Starting from Scratch
Ideas for startups are a dime a dozen. People come up with new startup ideas thousands of times a day in conversations all over Silicon Valley. And as everyone knows, ideas are worthless if you can’t execute. Uber for kids. Netflix for sports. Facebook for pets. I’ve complained about how mediocre the Korean food in San Francisco is since I moved here in the late 90s. Saying “I’d be rich if I opened a decent Korean BBQ joint in this city!” is about as worthless as the lettuce used to wrap that mediocre kalbi with. It’s one thing to come up with an idea, it’s another to pull it off.
Asking friends for money is awkward. Asking them for money to start a business that has a 90% probability of failure is downright painful. Most startup founders and restaurateurs have to raise money to start their business unless they are independently wealthy (through their own means or from a rich uncle). Whether you are asking for money for a tech startup or a restaurant, it can be a painful pride-swallowing process. Admitting you don’t yet have all the answers and knowing that your friendships (or family ties) are on the line can be nerve-wracking. It’s enough to make most sane people give up before they even get started.
Restaurateurs have to come up with a concept and then execute by creating food and a menu that people want to eat (product development). But they also have to choose the right location where there will be demand (product-market fit). Opening up a taco joint next to three other really good taco joints probably isn’t the best strategy. They have to design and build the ambiance and environment to have an enjoyable meal (user experience). They have to create a logo and branding to represent their business and what they want to stand for (marketing). They also need to choose the right purveyors and vendors from who to get the chicken from to what software they use for their point-of-sale. All the while, restaurateurs need to be recruiting and hiring the right people on their team to make it all work. Dealing with landlords for the lease, architects and contractors for the buildout, designers for the branding, selecting and negotiating with vendors and interviewing candidates feel all too familiar to startup founders. Instead of contractors building out a restaurant we have engineers coding our website and instead of deciding on Golden Gate Meat Company for their meat, we choose Heroku to host our app. Every day is another day of making decision after decision on your product or service. Every day is also another day of capital burned and hair pulled out.
In any business, whether it’s a tech startup or restaurant, metrics are critical to the success of a business. CAC, LTV, Churn, ARPU, MAU, GMV are all part of the shared vernacular of tech entrepreneurs. Restaurateurs talk about average tickets, table turns, covers, food cost, yield, and COGS. These are all important metrics to measure the health of startups and restaurants. Restaurants have to manage menus and pricing with labor costs, food costs and overhead very closely to squeeze out profits over a year. You do what you can to maximize that profit by optimizing on yield of your ingredients, increasing average tickets, managing table turns and more. Startups optimize their CAC by improving targeting and messaging, decreasing churn and increasing MAU with better engagement tactics and increasing ARPU and GMV by playing with dynamic pricing. There are levers to pull to make a business hum and it’s critical to both a restaurant and startup to have a deep understanding of that data to know the right levers.
The Ups and Downs
Opening the doors to a new restaurant or launching in the app store are nerve-wracking moments of anticipation. You have no idea if anyone is going to walk through the door or download your app, but your hopes and dreams depend on it. Everything you worked for from building up the courage to pursue your dream to raising money from friends and family to investing the time and effort to get the product ready for showtime has come down to this moment. Waiting for those first customers or users can seem like an eternity. When they finally come, there’s a brief moment of joy, but anxiety kicks in as they evaluate your offering. Will they like the food? Will they write a good review? Will they tell their friends? It’s the peak of the roller coaster of being an entrepreneur before the real fun (or nightmare) begins.
Over time, if you are fortunate enough to continue getting more customers, you will get feedback and iterate on your product to improve it. You tweak your menu and mix to streamline operations and costs. You redesign onboarding in your app to improve conversions. Every day is an opportunity to optimize your business. Unfortunately, every day is also highly unpredictable. The twists and turns are not for the weak of stomach or faint of heart. Your head chef walks out on you in the middle of service. Your VP of Engineering gets an offer he can’t refuse from Google. Michael Bauer from The San Francisco Chronicle gives you a glowing review. Sequoia decides to invest $10M in your startup. There’s never a dull moment when you start a new business whether it’s a tech startup or a restaurant.
Evan Rich, Rich Table
I’ve been fortunate enough to become friends with Evan Rich, the insanely talented chef who with his wife Sara, are the team behind one of the hardest reservations to get in San Francisco at Rich Table. Evan cooked with David Bouley and Daniel Paterson prior to opening his own restaurant. He was constantly innovating his food and menu, coming up with signature dishes like the porcini donuts (which were so good they were sold at AT&T Park) and sardine chips. He and Sara built a culture of trust, learning and loyalty. They hired a team whom they could trust to execute, even when they weren’t there. Evan’s long-time friend and partner Jonny Gilbert is their GM and makes sure that every service runs flawlessly with his years of experience at per se and Bouley. The chef de cuisine Brandon Rice has done a tremendous job of continuing the high caliber of food that Evan has served for years. Having Jonny and Brandon by his side has allowed Evan to focus on his next project RT Rotisserie down the street. Someday I hope he opens a ramen shop, because he makes a mean chicken ramen!
In the startup world, recruiting and nurturing strong leaders are the key to growing the business. Founders need to trust their team to manage and lead as they expand their startup or they risk stagnation. It’s impossible for a head chef to start another restaurant if he can’t find someone to lead his or her first one. Just as it is futile for startup founders to launch new markets or focus on growing the business if they can’t entrust others to manage for them. It all stems from building the right culture that inspires and empowers your team. That culture of mutual respect leads to better hires and less turnover. When good people see a strong culture, they want to be a part of it. Only with a strong culture and team can a startup grow to the next level.
Charles Bililies, Souvla
Charles Bililies has worked for two of the most famous chefs in America: Thomas Keller and Michael Mina. In 2014, he took that experience and opened his own restaurant, Souvla in the Hayes Valley neighborhood of San Francisco (around the corner from Rich Table). Souvla serves Greek cuisine in a simple format of wraps or salads, but with high quality ingredients and prompt service. You can get an American Homestead Pork Shoulder wrap with minted greek yogurt, cherry tomato, pickled red onion, cucumber, feta cheese. Or my personal favorite, the Mary’s Free-Range Chicken with “granch” dressing, fennel, navel orange, pickled red onion, pea shoots, mizithra cheese. Top it off with a Greek frozen yogurt with baklava crumbles and syrup. It’s a fast casual concept that doesn’t cut corners on the food.
In restaurant circles, most are aware that Souvla is to put it mildly: crushing it. There are lines out the door daily and nightly. Charles has met this demand by opening a second and third location which also have lines out the door. His fast casual Greek concept clearly has product market fit that resonates with many. It’s only a matter of time until there are Souvlas all around the Bay Area and beyond. Charles has created a brand and product that has attracted loyal repeat users. He built something that people want and are willing to pay for. That’s the holy grail of success for any startup. He figured out the right playbook and optimized his first location before expanding to his second and third. He nailed down the menu, the operations and the brand before he grew the business. A startup needs to have the right playbook in its first market before expanding, because growing the business prematurely by market or adding new product offerings will only stretch the team thin and increase the burn and stress. If you don’t know what’s wrong in the first place, it’s unlikely that throwing fuel on the fire is going to help.
Peter Yen, Sushiritto
People love sushi. People love burritos. Of course it makes sense that people would love a hybrid of the two. Thus the concept of Sushirrito was born and trademarked by Peter Yen to make burrito-sized sushi rolls. Unlike Evan and Charles, Peter was not a chef and had no culinary experience in his career. Peter was an outsider with an investment banking background and MBA from Kellogg. In 2010, Peter worked with the former exec chef of Roy’s Hawaiian Fusion in San Francisco to develop the concept. Peter raised a friends and family round and they opened their first location downtown San Francisco a year later to lines wrapped around the block. As Sushiritto opened the next two locations, Peter had proven enough to raise a significant amount of institutional capital to grow the business. Since then they have expanded to four locations in San Francisco, one in Palo Alto, one in San Jose and two locations in New York City.
Peter turned an idea into a product into a food phenomenon. And if imitation is the sincerest form of flattery, then Peter should be flattered because copycats have popped up from Washington, D.C. to Miami to Los Angeles. Just like any startup founder, Peter had to raise money based on an idea and a “prototype”. After building the operations and generating demand, he had the traction to convince institutional investors to fund a growth round. Peter had to prove to investors that the unit economics would yield attractive returns. Many startups often run before they can walk, choosing growth over capital efficiency. This only exacerbates and magnifies flaws in the business model. Startups need to understand their business before they can invest capital thoughtfully. They need to figure out the keys to acquisition, activation, engagement and resurrection of their customers. If they can’t solve how to make more money off of a customer over their lifetime than they spent to acquire that user, it’s not a good business. No one would invest in a restaurant that made $1M a year selling $10 foie gras truffle burgers that cost $20 to make. Restaurateurs like Peter are forced to make the numbers work before they can raise more capital, the same isn’t always necessary for many startups looking for funding. It takes discipline and focus to get unit economics right, but restaurateurs have no choice if they want to stay open or raise money. Startup founders should have that same discipline and sense of urgency and not rely on a bailout to buy them more time (at the cost of more dilution) only to figure it out too late.
Startup founders could learn a lot from restaurateurs. Danny Meyer’s book Setting the Table is just as insightful to starting a successful business as any. There are few profiles of successful restaurant operators like Evan, Charles and Peter because you won’t find their stories in TechCrunch or VentureBeat. Yet they have achieved more than most tech founders, because they have actually built profitable businesses that aren’t propped up by venture capital. Their restaurants generate multi-million dollars of revenue annually and return money to their investors. Some people might dismiss restaurants as not being scaleable and having small market caps. Tell that to Shake Shack, Chipotle and Panda Express (all multi-billion dollar concepts). The next time you’re at your favorite restaurant, introduce yourself to the chef or owner because you might learn a thing or two about how to run your startup.