The US restaurant industry is a pretty massive industry.
By number of employees, it ranks third.
Depending on the numbers you use, the US restaurant industry generates between $650-$900B of revenue.
That’s a lot.
BUT, restaurants are also the lowest paying industry, on average.
What these charts tell potential investors is, “Wow, this is a big market with clearly a lot of TAM, but damn, they don’t seem like they’d be good customers because they won’t pay for what things are worth.”
And this is the inarguable truism of the restaurant industry:
Huge market.
LOTS of problems.
But you’ll never make any money.
(Unless you take advantage of the customer through unscrupulous payments processing or by leveraging customers against the merchant).
Just think about it this way:
If the restaurant industry is $650B of sales, 1% of that would be $6.5B.
You need about $100M of ARR to be a public company.
So there should be about 65 companies large enough to be public that just serve the US restaurant industry.
But there aren’t.
Why?
First, restaurants have a hard time paying for what things are worth. They’re low margin, over worked, and frankly most of them just don’t have the aptitude to objecitvely evaluate value.
A good rule of thumb is 3x: whatever value you provide, you can take a third.
Facebook and Google do this quite well: they purport to generate 4x your investment into their platforms.
Restaurants don’t think that way.
It’s why when companies like Toast come out with an S-1 saying that restaurants will spend more than a few basis points of their revenues on technology we LOLz.
Second, the market is really fractured.
Because acquiring restaurants is so painful (which is a function of their sophistication, proven by Toast’s $10,000 CAC per rooftop) a lot of vendors end up trying to build as much as they can to recover that high CAC, only to soon realize that they’ll never recover that initial investment before the restaurant churns, or that even if you generate 1,000,000% ROI the limit a restaurant will pay is a few hundred dollars per month per store.
Still, we don’t think technology vendors in the restaurant sector are making anywhere near $6.5B in aggregate.
In fact we’d put the number at about 20% of this number, and of that 20% we’d bet 80% of that is payments revenue (think of Toast, who reports revenues in the hundreds of millions but 85% is payments revenue).
If you go bottoms up there are very few public (or were public) restaurant tech vendors:
PAR
Oracle
NCR
Toast
Olo
OpenTable
Micros/Oracle
DoorDash/Uber (ish)
The list is really small, sadly.
Given this, conventional venture capitalists rightly eschew the restaurant market. Said another way, if you like IRR and want any chances of raising another fund, our best advice is to NEVER put a dollar into a company tied exclusively to the restaurant industry.
If the industry acknowledges these facts, the only real chances for new technology comes from restaurant operators investing in the industry.
Chipotle’s Cultivate Next fund would appear to do that… on the surface.
Underneath, we think it’s a self-serving vehicle that will totally screw technology founders.
For starters, the principles of the fund (Chipotle’s CTO) won’t discuss the fund publicly.
Really?
Red flags should be going off immediately.
Here’s a random new fund launching that shared tons of info on an industry rag.
Funds LOVE to talk about themselves.
As they should.
Why?
Deal flow.
The more content you put out, the higher chances of potential investments reading your materials and aligning with your vision.
When an investor refuses to talk openly about what they’re doing, how do you think they’re going to behave as an investor?
Second, who’s on the investment committee? Do they have experience in capital allocation? What’s their returns track record? Total value of transactions? Are they networked enough with other investors to help you syndicate a round or source more capital?
Of course we have no idea about Cultivate Next because, to the first point, they’re refusing to talk about it. All we know is that their CTO, whose name is the only one we’ve seen associated with the fund, has been in restaurant IT since 1992 according to his Linkedin profile.
That doesn’t exactly scream “I know how to improve the success at early stage technology startups by having operated in your shoes,” or at least, “I have seen tons of tech deals in my time and have built great heuristics about what makes technology companies successful.”
Just to make sure we didn’t miss something we looked up Curt, Chipotle’s CTO, on Crunchbase.
Womp, womp: no obvious startup activity to speak of.
Lastly and most importantly, dissecting what little press we could find about the fund had us running in the other direction:
Cultivate Next’s aim is to support seed to Series B stage companies that can accelerate the Company’s [Chipotle’s] strategic priorities…
Stop.
Let’s rephrase this in plainspeak.
We don’t know if Chipotle will lead or follow in rounds.
We don’t know what Chipotle’s exit plans are.
We don’t even know what value they’re going to bring.
All that we know is that Chipotle is singularly focused on sourcing companies to build Chipotle’s prioritized business objectives.
Me, me, me.
It’s all about Chipotle.
And in doing so, we bet Chipotle kills what ever company they invest in.
And most likely, it’s intentional!
Because we are pretty damn sure Chipotle will bend the startup to iterate their product to fit Chipotle’s needs above everything else.
Who cares if the startup can’t service other restaurant brands: that’s not Chipotle’s problem.
Who cares if the startup can’t grow enough to raise more capital: that’s not Chipotle’s problem.
Who cares if the startup founders are toiling 90+ hour weeks and effectively making less than Chipotle’s frontline workers: that’s not Chipotle’s problem either.
And if the startup fails? Fantastic! Chipotle swoops in and buys the remainder of the startup for pennies on the dollar, effectively building their priorities for slave wages.
Unlike corporate venture funds (random one for comparison) that have transparent mandates and have done quite a lot to help startups reach subsequent stages of success, Chipotle has provided nothing to make us believe that Cultivate Next isn’t a glorified, outsourced technology innovation sweatshop for the Chipotle mothership.
Until we see more data, this is our position, and we encourage all restaurant tech founders to stay far, far away.
Add comment