As a VC you can’t renege on so many commits. You just can’t do that. I’ve seen them do this over and over again over the years that I’ve known them.
Branded Portfolio Company
This is the first thing a restaurant technology founder said when asked about their experience with Branded Hospitality Ventures.
But the comment doesn’t tell the whole story, and it would be unfair to end things here.
Let’s zoom out.
Retail is a miserable industry.
Long hours, low margins, and merchants who can’t spell their name (this is sadly not even a pejorative) are standard fare.
It’s even worse in restaurants, where you’re dealing with hot environments and perishable inventory.
Restaurants are basically mini manufacturing plants that receive no help from machines and automation. And even if machines or automation could help, restaurants are too proud and dumb to use them.
That’s because, as we’ve routinely pointed out, retailers refuse to invest in anything.
They simply cannot grasp the concept of ROI: inputting something and receiving a multiple of that input back.
It flies right over their heads.
Whoosh!
Which is why the only vendors to have ever made acceptable returns selling to retail either:
- Bleed the merchant through payments, which merchants have to accept and whose costs the merchants cannot calculate (cuz math), or
- Acquire a merchant’s customers and rent them back to the merchant one transaction at a time
If you’ve read this far you now know why investors refuse to back technology that targets retailers: you’re dealing with humanity’s most unsophisticated buyers who refuse to spend money on anything, churn frequently, and are too irrational to serve in any profitable manner.
Branded Strategic aims to fill this void.
For all the companies out there chasing restaurants (may God have mercy on your soul), Branded provides a stepping stone.
Branded’s founders come from the restaurant industry and have an undisputed track record of creating value for their investments.
“Branded had just Invested in Chowly when I met them,” says one restaurant technology founder. “I was pitching them my company and met them at the bar they operated. I hadn’t raised any money yet and only had a few customers, but Branded was interested.”
A few short calls later, Branded offered to invest $100K. “I had basically nothing and was looking for a few more months of runway. Branded stepped up.”
This founder put their system in Branded’s bar and Branded let the founder demo the system to other potential customers.
Branded’s partners are great people. They provided enormous value in reaching other hospitality technology companies, which is where I needed help getting integrations. After an intro from Branded we would get the API docs and get an integration done; they probably saved us a year of time, which is critical when you’re a startup.
Branded Portco
Another founder Branded invested in similarly offered glowing remarks.
“Branded are outstanding people and they try really hard. They’ve been super value-add, made more introductions than I can count, and were there when we needed them most.”
This founder went on to share how they had overdrafted their bank account by six figures and were effectively insolvent. “Branded stepped in and provided us $300K so we could get back in the black and have extra cash to figure things out.”
But it’s not only rainbows and sunshine with Branded. In fact, there’s a pretty consistent – but explainable – pattern with Branded when it comes to money.
“Branded committed to investing over $1M and then only wired like 10 percent on closing day,” says a founder. When we asked why, the founder explained a bit more how Branded operates.
Branded hasn’t been able to raise a formal venture fund. They commit capital they don’t have so financing is always this just-in-time, rolling deal. They often want to lead but don’t have the money to effectively do it, so they go to their network to try and raise the funds.
Branded Portco
A founder went on to tell a rather humorous story.
Branded had just committed to my round. After signing the term sheet, I got an email from an investment bank looking to raise the funds that Branded had just committed to my company. Naturally I called Branded and asked if the bank was working on their behalf to find the capital Branded had just committed, and Branded told me that was exactly what was happening.
Branded Portco
Another founder’s advice was to acknowledge that founders need to actively manage Branded as an investor, and that they can’t rely on the money Branded commits in-full. At least not yet. “Founders will need to talk with Dean, Branded’s money guy, to make sure that Branded has the money, or at least when to expect to get the funds.”
Branded’s lumpy funding created real challenges for another company where Branded committed capital.
Branded invested in my company’s first round but it took them nearly six months to deliver the capital. Sometimes money would come in tens of thousands of dollars at a time when they had committed over a million dollars. So when I was raising my next round I was leery about involving Branded.
Branded Portco
But in an industry where VC’s are nowhere to be found, Branded is often the only lifeline.
“Branded ended up committing nearly half the subsequent round and the lead investors were willing to commit the rest of the round so long as Branded’s money came in.”
Investors know that if a startup raises less than it needs, it’s a massive operational risk, and in these instances the investors don’t actually want to invest.
Think of it like this: someone is pitching you the idea to make a football. Everyone knows it takes a yard of leather to make the ball. If the founder has accumulated only half a yard of leather, there’s no way they’ll be able to make a complete ball. So investors typically say something like, “Well, when you are 100% sure you will have the full yard of leather, I’m in, because otherwise you can’t deliver on what you’re pitching me.”
Branded ended up signing this founder’s funding documents in July.
And all the investors wired money at closing except for Branded.
Six months after Branded signed the funding documents they had only sent 13% of the money they committed. The other investors were furious and lawsuits were threatened.
Branded Portco
Over the next few months, this founder held 140 investor meetings to backfill the money Branded committed, which eventually closed.
“While Branded didn’t wire the total amount, in between signing our funding documents and us closing the round, they did invest in a competitor. ”
But the founder wasn’t all sour grapes either.
I genuinely believe that Branded is trying to help, and they are. They are fantastic at making connections and have done so many times and I genuinely appreciate the partnership. I guess I’d say that they just need to stop overcommitting.
Branded Portco
In many ways Branded is still a startup and they’re trying to figure it out, just like any founder. They didn’t come from venture capital, though their lack of financial discipline will eventually earn them a demand letter from co-investors if they are not outright blackballed on future deals.
I love Branded but they’re a bit unorthodox. But they have learned and they have gotten a lot better. When they first gave me a deal we had a few question marks on terms but nothing wild. If you were working with a tier 3 VC you would see the same things. After they did our round they wanted to see the term sheet from a higher caliber VC. Then they started using the better VC template going forward.
Branded Portco
Conventional VC hates restaurant and retail tech, so Branded isn’t really investing alongside funds that will put them at reputational risk. At least not top tier funds, who know better than to invest in this industry.
Even founders who supposedly “love retail” never come back: once they’re gone, they never think about retail again.
Why?
Use your brain.
Point solutions are supposed command a premium because they’re specifically tailored to the vertical they’re in.
That doesn’t happen in restaurants.
Companies like Podium charge $500/store/mo while analogous, specialized tools for restaurants make 10-20% of that if they’re lucky.
All of this should underscore that Branded is doing what they can in an industry that is intentionally abandoned by institutional investors.
Hard to believe that rational capital allocators don’t want their dollars chasing terrible customers that refuse to pay for anything, eh? And yet retailers lack any vestige of self-awareness.
So restaurant technology founders shouldn’t get upset about Branded’s seemingly questionable antics because the questionable antics don’t seem intentional. Yes, Branded shouldn’t commit capital they don’t have, and that needs to change (or it could be outright fraud – Branded’s LPs really should be asking questions), but our guess is that Branded’s LP investors often don’t come through with the money once they realize how terrible the returns are in restaurants.
If you can accept this as mostly out of Branded’s hands, then Branded really seems to be creating value for their investments.
The long and short of it is this: restaurant technology founders have few options.
Unless they want to make money on payments or take the restaurant’s customers hostage.
Because restaurants are terrible, horrible, no good, very bad customers. Even if they think they’re awesome and refute all the data to the contrary.
In any other industry Branded is a gift horse that you shouldn’t look in the mouth.
But we’re not talking about any other industry: we’re talking about the most irrational industry in existence.
Given that set of circumstances, Branded is a prize horse.
Giddyup.
Note: we offered Branded a chance to review and engage in crafting this article and they refused to provide any clarifications or corrections.
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