Based on my interactions with about half a dozen partners in VC firms, here are some broad guidelines. Professional/Institutional investors evaluate opportunities using the following 4 criteria:
1) Growth potential of the opportunity area - will this space allow a few businesses to the tune of 100 Cr each to be set up in 5 to 7 years. In general investors invest in not more than 1 or 2 businesses in a specific area to de-risk their investments. Currently the appetite for early stage investments in the restaurant space is low (especially given that VC investments in Yo China, Kaati Zone, Booster Juice etc. do not seem to have generated returns for the investors yet - even after about 5-6 years. Typical VC investors seem to look for an exit in 5-7 years). So if a VC has invested in a restaurant business already, chances are they will not make additional investments. Other VCs will also be cautious. This will change in the future once a few businesses succeed and generate significant returns for the investors.
2) Quality of the Management team - Self explanatory
3) Scalability of the specific business model with some validation - This, in my opinion, is the most critical yard-stick. The broad consensus is that you need to have about 10 operational and profitable units, with atleast 1 unit in another city. At this number, the team has proven that they can manage scale to some extent, the business model is validated to a large extent and if funds are available, the same model can be replicated quickly without too much further experimentation. Having a unit in another city is some validation that the model will work in multiple cities and the management team has the ability to manage remote operations. At this stage of your business, a VC will put in money to help you scale to about 100 units in 5-7 years and exit through a IPO or by selling to a large private equity player.
4) Price at which the investment opportunity is available - Equity % in return for the investment. This is again self-explanatory. A VC will be expecting a 10x return at a minimum on the investment. So expect to give up reasonable equity for the money.
In summary, the right and the earliest time for you to approach VCs would be when you have atleast 10 profitable and operational units with atleast 1 unit in another city. By bootstrapping, this will realistically take you anywhere between 3-10 years depending on how capital intensive your business is and how much money you personally have access to. In this business, it is unlikely that you will get money based on a 1/2 units, a concept and business model on paper.
I am the founder and CEO of Kaati Zone.Let me state at the beginning that Kati Zone is not a failed investment, as some of the readers of your blog may interpret. We are building a highly scalable QSR business in Indian foods. We are among pioneering players in this space. A QSR business is a long-haul one where you need to first establish the scalability of your business model before you actually start expansion. During the last six years, we have established this scalability through central manufacturing and an efficient supply chain that supplies long shelf-life ingredients to our entire network of stores. We have established a retail format of store that requires low investment, has simple operations and low overheads leading to attractive economics for our franchisees. Finally, we have established a large user base for our product, demonstrating acceptability of our product in several retail environments (airports, malls, tech parks and high streets). We focused on just one city, Bangalore, during this phase of establishment of scalability. We have now started expansion and presently have 26 stores in six cities. Our growth is modular and our groundwork will enable us to reach store strength of over 100 in 12-18 months.
ReplyDeleteClearly, the long-term nature of a QSR business suggests the industry is not an ideal sector for investment by VCs/PEs, particularly in early stages of the business. Based on my experience, I am not even sure a majority of them will look at a business with 10 stores and two-city operation.
I have been an early-stage VC myself for 20 years and believe this sector has huge potential for financial returns for those investors who have patient capital and have ability to evaluate businesses in early stages.
My apologies for the misunderstanding Mr. Kiran Nadkarni. I don't think I meant that Kaatizone, Yo China and Booster juice are failures - they have just not been widely successful yet and have not given investors confidence to put in money in more early stage ventures in the restaurant space. I have modified the language in the post to better reflect what I really meant. Given that these early stage investments have not borne fruit for the investors yet, the appetite is probably lower amongst the investors, unlike a field (say Hi-tech) where some investments have generated significant returns and builds up investor confidence. I heartily wish you all the best with your business and hope that you are able to accomplish your vision. If you succeed and generate returns for the investors, I think a few more entrepreneurs will get funded. So in some ways, your success is critical for all budding restaurant industry entrepreneurs. All the best.
ReplyDeleteMr. Nadkarni - Given your past experience as a early stage VC and having spent 6 years with your restaurant start-up business "Kaati Zone", I would invite you to write a guest column on this subject: "When should a Restaurant Entrepreneur approach VCs/Institutional Investors?". You are clearly better equipped to help other entrepreneurs on this topic than me. Would request you to send your column to me by email - jayanth@jlnventures.in and I will be happy to post it "verbatim" on the blog for the benefit of the readers.
ReplyDeleteHi , My name is Subramanian and the director of Planets9 mgmt & Hospitality have two branded South Indian restaurants in Bangalore and one in Guragaon. I agree with both your views and it was a tremendous task to come to this level . Being the family business for generations and worked as senior management and board in many MNC's at india and abroad ,the food industry is challenging nowadays. In olden days challenging in the sense was with the kitchen staff and nowadays its other way around . The challenging comes from the customer and their expectation are too high for the amount they spend. They want quality food/ambiance with lower price what has been offered at the food path specially on the south indian segment side. Regarding investors if they understand the industry or from the industry it will be excellent opportunity to get them inside,whether early stage or later stage it wont make any difference . Traditional way we look for success of any food business when we ask the person how much time it took for him to do the break even. If he says ,he has done within 3-4 months then we say there is a problem in the business and it wont sustain for long. For any good setup minimum 6 - 8 months time required to get minimum break even and two years to get see some good profit. If the VC from different industry it will be very difficult to sell the proposal on reality at the early stage venture to convince him that from third years on-wards there will be good return.Anyway nice topic and we have passed the difficult 2 years stage.
DeleteRestaurant business is well known and most profitable business, with this we can getting more money and good brand recognition etc. To start that franchise are gives you best support.
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Hi Jayanth.....owning a restaurant like yours must have undergone all the pains and falls, so if you calculate all long the route you have invested into it, how much it had costed you initially to set up this famous "Mani's Briyani" and what was the break even? How would you like to promote or scale this up further. As far as the post I have seen so far, you have expanded to 4 places presently. What's the plan forward? Why not pure vegetarian? Study of Bangalore done on food habits like VEG and NON-VEG? Class of people, say those earning within Rs 15000 & max not more than Rs 50000 per month. Others, we do not consider taking upper middle class or the niche class of customers. What is your gut feeling on this proportion of VEG and NON-VEG?
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ReplyDeleteSuperb blog. When I saw Jon’s email, I know the post will be good and I am surprised that you wrote it man!
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Very thoughtful bllog
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