Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Nick Kokonas, Patrick O'Shaughnessy
So we started out with a group of five people literally in a closet. We had like a spare store room in the Alinea offices. That's how it started. It's been fascinating to actually sell this thing to the industry. [00:00:00] S0: Can you talk about what it was like in the earliest days and how you decided which restaurant's customers to focus on and which features to deliver to them first? I always find this to be a huge challenge in building software is you kind of know where you're going in the end state but the sequencing is really critical to success or failure and hard to stay disciplined on. So how did that go in the early days of Tock? Who did you focus on and what did you deliver first and what was your strategy for deciding those two things?
· Nick Kokonas
[00:00:00] S1: I looked at what everyone else was doing and what everyone else was doing ... Our competitors worldwide. I looked at every booking system worldwide. And what they all did was that they copied part or as much as they could of the feature set of OpenTable and then gave the product away for free to gather market share. That is a standard playbook kind of thing to do. Which is, "Hey, we'll make this slightly better iterative mousetrap and then underprice the competition. We tout a new feature or two but really we're not trying to break new ground here because we don't want to scare people." That is exactly what was getting funded at the time and I looked at the products and I was like, this doesn't do anything for me that I couldn't do on OpenTable. And yeah, it might be free. But if you give something away for free the people that you attract are the people who need free. So in a weird way you get the worst customers. If people are that price sensitive they're probably not thriving. So we sat down and for the first six weeks of the company we literally just white boarded out everything. What is the target customer in the first six months? The one thing I could prove beyond a shadow of a doubt was that for a certain kind of prix fixe high end restaurant, this would be a game changing thing. It would make them millions of dollars. There also tended to be the high profile restaurants and the restaurants that could take risks. So we were like, double down on the high end thing. It's kind of like the Tesla approach. Let's build the fancy car first and then work our way down market. Everyone else was trying to build the Volkswagen bug and sell a ton of them by giving them away for free. I remember talking to VCs at the time. They were going like, "What's your TAM?" And I'm like, "My TAM is a giant percentage of GDP in the world." "Yeah, but you're only for high end restaurants." I'm like, "No, no, no, no, no. We're starting with that and we will go down market." I mean, I had very famous VCs tell me that this will never work, you need to have a B2C strategy. These other guys are paying $25 to $50 per download on advertising and promotion whereas we're getting thousands at the time, just a couple thousand, but thousands of new clients every time we add a high end restaurant because people are seeking out that restaurant.
· Nick Kokonas
That goes back to my point that the network of open table wasn't finding the restaurant. It's like if we got The French Laundry and Eleven Madison Park and The Fat Duck and Atelier Crenn and all these Michelin three star restaurants, people are going to go to them no matter what booking system was because they didn't care what the booking system was. So we'll get our first million users for free and then we'll provide a great ROI on the $700 a month we're charging to these restaurants. And by the way, we'll process millions of dollars. We'll pull that from the POS systems and we'll be a payment processing company at the core. That's how we will make our money in the long run. And I'm telling you, nobody believed it in the VC world. Now, not nobody believed it because I had some really great VCs that very quickly believed it once we had 50 to 80 to 100 restaurants on. Origin Ventures, Jason Heltzer. I served as a judge at the new venture challenge at the University of Chicago Booth School of Business. Sat next to him a couple of times on that and I was like oh, this guy gets it. He asked the tough questions here and all that. He always said to me like, "If you're ever going to take money for Tock let me know." While we never intended to, I recognized about a year into it that this was going to be a long-term project, 10 year project. It's going to take hundreds of people to build it, not dozens. I went out to raise money. I called him up, he came in, they talked for an hour, we had a term sheet at a crazy valuation an hour later. And that was because for years he saw how I personally operated and he knew that I was committed to doing it well. But the business model didn't resonate with most people until honestly this year. People now see that creating a network in say New York and Los Angeles and San Francisco is not as resilient as creating a network in Kansas City, Minneapolis and those cities as well. You need everywhere and you need all sorts of different restaurants and you need to figure out how to provide the ROI to all strata of these businesses. As soon as we had all the feature set to provide a great ROI for really high end restaurants, we started going hard down market fast on purpose and building out all of those features and breaking them and then all of our engineers went and worked in restaurants as hosts.
· Nick Kokonas, Patrick O'Shaughnessy
These are people who spent their time staring at a computer screen and they're suddenly checking people in at a restaurant. So they suddenly had empathy for the end user. And we didn't conduct focus groups. We didn't bring the restaurants into our offices. We did the opposite. We took our people and we put them into the restaurant. [00:00:00] S0: Two incredible insights. The one being that last one there. Putting people in there but also the value of spending care and time choosing your first customers. It's so interesting how much of a business gets determined by who it picks at its first customers. I feel like that doesn't get talked about enough.