Invest Like the Best with Patrick O'Shaughnessy
· Nick Kokonas
When we were building Next, I just decided this is like a theater like restaurant. It changes three times a year to an entirely new menu. I'm going to sell tickets to this. And again, everyone in my own company thought I was an idiot. So I had to hire an outside programmer, had to not get a phone on purpose. We barely built it in time and it broke right away because it was a home brew software. But then the first day we sold $562,000 in tickets to a restaurant for the first time ever. And I remember that as one of the happiest days of my life. Because I turned on this thing and people did it five or six or seven years of me kind of looking at this going like, I'm pretty sure this'll work. I'm pretty sure this'll work. And everybody in the industry telling me no and all of my employees rolling their eyes at me. I remember I called Grant up and we were opening night for Next. And I said, "You've got to come to my house." And he was like, "Dude, we're opening a restaurant tonight. I can't. Things are falling apart here." And I was like, "Just come. Just for 10 minutes." And he showed up literally in his chef whites and clogs. And I must have looked like hell because I had spent like 10 straight days like a bad movie eating pizza and drinking wine and trying to get this thing set up. So I hadn't shaved, I hadn't showered. I looked like a The Big Lebowski. And I took him up to my little third floor office and I showed him. I'm like, "Click on that button, that table will become available and then it will instantly sell." And he did it and he was like, "What happened?" And I was like, "We just got $625 in our bank account and that person's not going to dine for two months. And any one that you open will instantaneously sell." And he was like, "That's amazing." And I was like, "Yeah, it's fucking amazing." And then he just laughed and was like, "Okay I'm going to go cook." And that was like one of those moments where you go like, I have a time machine. When I was a trader, there was, exchange traded funds were just starting and the natural hedge for them was the futures at the mercantile exchange. I was the guy who said we need to connect these two exchanges via closed in cellular network so that people can talk to each other instead of using all these hand signals and phone calls.
· Nick Kokonas
The moment that I got that turned on after over a year of work getting the regulatory approvals for it and everything, I had a five second time machine on the market. Now people are down to like picoseconds now with high frequency trading. But at the time literally five second time machine. I could see what was going on in New York five seconds before it arrived in Chicago. This felt like the same thing. I can run my restaurant in a way that no one else in the world can and it worked. I mean we sold every single seat for a year. We made over 30% margins in the first year. We blew out all of our goals while providing people with an incredible value. That opening menu was $85 for a 12 course menu. It was incredibly satisfying and then incredibly frustrating as well because even after I did it people would say, "Oh, well that works for that one." In any business you're kind of constantly having to prove that it works outside of your own niche. Even if you look back at the articles they would say, "Oh yeah, this is a really unique restaurant. This one's different than all the others so it works for them but it won't work for pick your casual pizza place." And I was kind of going like no, no. That's why the variable word is in there. You could charge $5 and still affect people's behavior. It took four years but four years later I just couldn't take it anymore and so I started Tock.
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: Do you think, before we get into some of the Tock origin stories and spend a bunch of time there, do you think that this concept of ticketing, pre-payment and even dynamic pricing can and should be extended to all sorts of other business verticals? I'm thinking about like salons or spas, anything like that. [00:00:00] S1: My original thought, and if you look back at the old blog post and you google ticketing for restaurants Alinea, it's still somewhere out there. I called it dynamic and variable pricing for time slotted businesses. Any business that's time slotted should be dynamically and variably priced right down to your lawyer frankly. Your dentist. If everyone wants a 10 a.m. Saturday appointment because of work hours, why doesn't it cost more to go to the dentist or a salon or anything else for that matter? Personal trainers at 10 a.m. on a Tuesday do not have as many clients at 6 a.m. on a Tuesday. To me, all of those things should be and will be dynamically priced. The tools to do so are not yet widely available. But you look at something like Amazon and Shopify for hard goods, they're doing that already. It's accepted for hard goods. It's less accepted for services. Inevitably it's going to happen. If I was going to open a dry cleaner or something like that, I would immediately have dynamic pricing.
· Nick Kokonas, Patrick O'Shaughnessy
[00:00:00] S1: My original thought, and if you look back at the old blog post and you google ticketing for restaurants Alinea, it's still somewhere out there. I called it dynamic and variable pricing for time slotted businesses. Any business that's time slotted should be dynamically and variably priced right down to your lawyer frankly. Your dentist. If everyone wants a 10 a.m. Saturday appointment because of work hours, why doesn't it cost more to go to the dentist or a salon or anything else for that matter? Personal trainers at 10 a.m. on a Tuesday do not have as many clients at 6 a.m. on a Tuesday. To me, all of those things should be and will be dynamically priced. The tools to do so are not yet widely available. But you look at something like Amazon and Shopify for hard goods, they're doing that already. It's accepted for hard goods. It's less accepted for services. Inevitably it's going to happen. If I was going to open a dry cleaner or something like that, I would immediately have dynamic pricing. [00:00:00] S0: Can you discuss the origin or Tock itself? I think now we can talk about software business that potentially is rolling out the innovative thinking that you have and making it a service for a whole bunch of restaurants to begin all over the country. Why did Tock begin? And we'll kind of talk through each stage including an incredible story through COVID.
· Nick Kokonas
[00:00:00] S1: I came to the restaurant business as an outsider with this weird background. I was a philosophy major in college. Studied logic and philosophy of language and applied it to derivatives and then ended up in the restaurant business. Inevitably you start going like well, I need to know my customers, I need to start looking at some data here. All of the software available to restaurants at the time ... And this is still true. Their business model intermediates the relationship between the business and the consumer. OpenTable wants to own that relationship because that's how they monetize it. They get paid a dollar for every diner that books at a restaurant up until $7 if you enter their promotional plans as the restaurant. So they claim to the restaurant, we deliver the diners, not you. Not your great ideas. Not the table plate we were talking about and all that. And I was like, they're not delivering any diners for us. We're doing that. We're making a great experience and yet I don't know which Patrick O’Shaughnessy's coming in tonight. So I don't know that your wife is left handed and likes tea. I don't know that you've been to my other five restaurants 22 times because each restaurant is siloed as its own server. And the more I dug into the why of all of that ... How are these companies monetizing it? What do their pricing plans look like? Who owns the data? Who owns the customer relationship? I started more and more going this is rife for innovation and it's just frustrating as hell as a business owner. I didn't build the predecessor to Tock to commercialize it. I just built it for my own restaurants because I was dissatisfied with the existing system. And it ended up being a much bigger problem than I thought in terms of solving it, programming it, building out the system because there's just so many components to it. And that's why no one had started it before. There are whole companies built around a wait list for a restaurant and that's a feature, not an application. But they turned it into an app and they just built a little better wait list thing and they sold it to Yelp for like $40 million bucks. So I would look at this and go, how is that a thing? That's a weekend project and it's not even executed well. More power to them mind you. But I would just get incredibly frustrated that there were these little peaks and pokes at it.
· Nick Kokonas
So finally I woke up literally one day and read this article in the Wall Street Journal about Reserve and Resy and OpenTable and just went, no one gets it. No one gets what the real problem is here. I would listen to some leaders in the industry, wow, they don't get it either. Meanwhile, I knew what the finances of my own restaurants looked like. This doesn't seem as hard of a problem as they were saying. When I would go into conferences and talk to them it was incredibly dismissed. I wrote this blog post literally on a Saturday morning. Woke up, read the article and said, "I should probably dump all my thoughts into a blog post." 5,000 words in like four hours and posted it up. It was read a couple of million times in the first couple of months because economists loved it because they were like, "Oh, this is behavioral economics in action." Restaurant owners were like, "Yes, this is what I've been thinking." Now, if 200 restaurant owners email you, you fall into the trap like every startup going like, well everybody thinks this way. Look, people love this idea. But of course the 200 restaurants that emailed you are the ones that are the minority. I didn't know that at the time. The crossing the chasm thing is kind of real. So the early adapters are all going to call you up and say that you're brilliant and we want the software and that. Well, I fell for that and called Brian Fitzpatrick and said, "Look, I need to make this into a company." And he was the head of Google in Chicago at the time. I was like, "I need to hire two engineers and build this thing out." I was seriously under imagining what it would take. That naivety is great to have when you're starting a company. I'd invested in other software companies. I grew up programming as a kid, not that I can program at all now. But I knew what was sort of required and he quit Google. I didn't expect him to but he just said, "I want to quit and start this with you." And we hired a few really great engineers, one of whom heard me give a talk at Google actually about dynamic and variable pricing for time slotted businesses. And it was a talk about derivatives and how derivatives can apply to things other than financial products. These folks are super geeky engineers and understood the math and statistics of these things and whatnot and were enamored of trying to apply that to an industry that's 5% of GDP.