Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy, Nick Kokonas
[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. [00:00:00] S1: And who you don't pick too. There are restaurants and restaurant groups that wanted to use us three years ago. When I saw what they needed and what they wanted to do I just went, "We're not quite ready for you yet." And they were like ready to sign on. And I was like, "No, we'll fail if we do this right now because we don't have this particular wait list feature or a walk in feature." There's so many different aspects. Like a restaurant actually sells 10 different things and at the time we could only service two of the 10. And meanwhile, they had five other systems that were servicing all 10 and I was like, "You know what, when we're ready for you I will call you and then I want you to take me seriously." And we did that over and over and over again. We didn't even have a sales team at all until three years in which is crazy. We grew the company very, very capital efficiently. And one of the ways we did that is can we onboard more a hundred restaurants this month? No. Okay, well let's just concentrate on doing 50 then and do it perfectly. [00:00:00] S0: That discipline is rare. I see it over and over again.
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: That discipline is rare. I see it over and over again. [00:00:00] S1: I think it's a Chicago thing too or maybe it's just that I've always ran profitable businesses. The concept of the phrase burn in a startup is just the worst word in the world because I'm not burning money, I'm investing it. The time horizon on investing money in a startup, tech startup especially, is a lot longer than people think. For every Instagram out there where you get a ton of users and all of a sudden it's like this ballooning unicorn and their first raise is $100 million at a billion dollar valuation or they sell it for a billion dollars or whatever. The vast majority of SaaS based companies have to work capital efficiently early on. Any time I saw a negative month which was going to be for a long time, I was like just viscerally upset. Intellectually I knew that in order to grow something that scalable you're going to have to have a long time horizon of investment. That said, my restaurants are making money in the second month that they were open. Now they were paying back a giant upfront investment but I can kind of go like, well yeah, in 18 months or 24 months, we'll have all that paid off and for as long as it runs after that it's profitable. The trading firm, was the same way. It's profitable. It was very strange to me working for a business that wouldn't be profitable for years. And I think because of that we attracted people who understood and welcomed that mindset. But that also was a mindset that turned off a lot of investors prior to COVID.
· Patrick O'Shaughnessy
[00:00:00] S0: I want to talk about what Tock did during COVID but I feel obligated to do some set up first around just the restaurant business generally speaking. You talked about the 10 ways it makes money. It makes me think of the old adage, a third, a third, a third of the margin goes to the manufacture, the wholesaler and the retailer in a lot of businesses. And I would just love to hear ... You always hear that restaurants make their money on booze. I would love you just to describe sort of the canonical restaurant business model. From the food in the ground through to the retail price at the restaurants. Generally speaking, how does a simple restaurant business work so that we can lay that groundwork before talking about how COVID changed things?
· Nick Kokonas
[00:00:00] S1: I'm not going to use a simple one. I'm going to use a complicated one and then go backwards. Gramercy Tavern is one of, I think, the best restaurants in America. It's a great place. It's iconic. Let's use Gramercy Tavern. When you arrive at the front door of Gramercy Tavern they have no idea what you're going to do. And when I say that, I mean that very literally. They have no idea what you're going to buy. They have a bar area there that's casual. That serves more casual fare. They have a walk up bar that you can be at. So now we have two different things that they're selling. Your casual restaurant and your bar. Then in the main dining room you sit down and they have an a la carte menu which is amazing. Michael Anthony's a great chef, great place. Then you have a tasting menu. They tell all the people sitting down, "If you want to do the tasting menu you all need to do the tasting menu. And then we have two kinds of tasting menus. We have the regular omnivore one and we have a vegetarian tasting menu." And if you do the tasting menu you can add on wine parings or you can buy the wine list. And then they have private dining. So they have two private dining rooms there that are sold for special occasions, corporate events, all that sort of stuff. Plus they have a cookbook. So eight things that they are selling. The bar, the casual, the a la carte, two prix fixe menus, private dining and merchandise. When you go to book that the only thing you say is I'm showing up. It's incredibly, incredibly inefficient. And what they'll say is they'll say, "Well yeah, but only 4% of the people buy the tasting menu." But that's because you're relying on the server to surprise them with this as an option and then everyone at the table needs to agree to it at that moment. If one person doesn't agree with it, it gets vetoed and everyone orders a la carte. If you put that up on a Saturday night when your demand is three times your supply ... There's 700 people that want to go there but you only have 250 seats. I'm making that number up. If you say, "Well, I'm going to put 100 of these up for sale as tasting menus only," you will sell all 100 and you will know before people come in what they're going to get. For those people, not the a la carte people. The people who want to do it at the bar, you have a separate button that says, I want the casual aspect.