New Silk Route Buys Into Fast Food Chain Adiga's

Adigas (www.adigas.com), a homegrown Quick Service Restaurant brand in Bangalore with 11 units and a catering business (estimated revenues of 80-100 Crores totally) has managed to attract a Private Equity investor to cough up (according to Rumour mills) about 100-150 Crores for a majority stake (51%+). That means the company has been valued at 200-300 Crores. Fantastic stuff for a small home-grown business and potential hope to a number of budding QSR entrepreneurs. This investment and the valuation of the business underlines how difficult it is to build a sustainable restaurant business and the premium investors are willing to pay once you get your act together. 

For those unaware, Adigas started out as a neighborhood joint "Brahmin's Coffee Bar" in Chamrajpet in the 1960s - still operational. The second generation of the family scaled up Adiga's. 

Article Credit: VCCircle.com; April 24, 2012

BY MADHAV A. CHANCHANI


NSR is looking to invest $100 million or Rs 500 crore in a portfolio of food & beverages (F&B) formats

Private equity firm New Silk Route has completed its fourth control transaction by picking up a significant stake in Bangalore-basedVasudev Adiga’s Fast Food Ltd, which runs a chain of South Indian restaurants. The deal came following the private equity firm’s plans to create a platform in the food & beverages (F&B) sector. New Silk Route is looking to invest $100 million or Rs 500 crore in a portfolio of F&B formats.

“Certain factors like liberalisation of the economy, growing income of the middle-class population and macro-economic conditions have had a positive impact on consumer spending and consumption in both rural and urban areas, thus boosting the growth of this sector,” a statement from NSR said.

The deal with Adiga’s marks NSR’s second investment in the F&B space after backing the holding company Cafe Coffee Day, India’s largest coffee chain, along with Kohlberg Kravis Roberts & Co (KKR) and Standard Chartered Private Equity.

Cipher Capital was the sole advisor to the transaction.

Vasudev Adiga’s currently has 11 restaurants in Bangalore and one on the Bangalore-Mysore highway. Adiga’s is an offshoot of the famous Brahmin’s Coffee Bar at Basavangudi (Bangalore), which was started in 1965 by late KV Nageshwar Adiga. The company is now run by second-generation entrepreneur KN Vasudev Adiga who is also an engineering graduate.

Besides restaurants, Adiga’s also has presence in event catering business. Its corporate clients include marquee names like SAP, NDS, Ingersoll Rand and Honeywell.

“We see tremendous potential in Adiga’s as it has combined the strengths of two different and popular formats – restaurants and event catering. Our aim is to help Adiga’s expand, initially in Bangalore and eventually across India, so that it can become India’s first homegrown national chain of restaurants. Since there is an unmet demand for good quality south Indian food even in other parts of the country, achieving our goal should not be a challenge,” said Jacob Kurian, partner at NSR Advisors.

NSR Eyeing Significant Stakes

The deal is the third investment announced this year by New Silk Route, an Asia-focused private equity and growth capital firm with $1.4 billion assets under management. It recently invested Rs 175 crore in VRL Logistics Ltd and also picked up a significant minority stake in Hyderabad-based education support services provider Varsity Education Management Pvt Ltd.

It had earlier picked up controlling stakes in companies like Ascend Telecom Infrastructure (telecom tower), 9X Media Pvt Ltd (which runs the Hindi music channel 9XM) and Destimoney Enterprises (financial services).

NSR also acquired minority stakes in companies like Nectar Lifesciences, Reliance Infratel and Rolex Rings.

PremjiInvest, Carlyle in talks for stake in JSM Corp

JSM Corp (www.jsmcorp.in) run by Jay Singh and Sanjay Mahtani, owns and operates Shiro (UB City, Bangalore, Delhi & Mumbai), all Hard Rock Cafes (www.hardrock.com) in India, all California Pizza Kitchen's (www.cpk.com) in India. In the industry, Sanjay and Jay are considered to be the folks who have really figured out the restaurant business in India and are known for their uncompromising execution skills. 

Article Credit: Times of India, Bangalore Edition (Thursday, April 12, 2012)

PremjiInvest, Carlyle in talks for stake in JSM Corp
Private-equity funds including Carlyle Group and Sequoia Capital are in separate talks to invest about $40 million to $50 million in JSM Corp, which operates the Indian franchises of Hard Rock Cafe and California Pizza Kitchen, two sources with knowledge of the matter said. 
JSM Corp, which runs 12 outlets across different brands, is looking to raise capital to expand its networks and operations, said the sources, who declined to be named as the discussions are not yet public. Premji Invest, the venture capital arm of Indian software services exporter Wipro, and New Silk Route, an Asia-focused private-equity firm, are also in talks to buy a "significant minority holding" in the company, said the Sources. 
JSM Corp, PremjiInvest and Carlyle did not respond to emails seeking comment. Sequoia and New Silk Route declined to comment. 
The company plans to set up 60-80 outlets of California Pizza Kitchen in the next three-four years, and is also looking to expand the other brands, the sources said. REUTERS

Outsourced Kitchen Start-up ItsMyMeal Gets $10-m Funding

One more positive development for wannabe food entrepreneurs. Investors seem to be betting big on businesses built on a hub and spoke model - centralized processing with a distribution mechanism. All the best to the folks at itsmymeal.in. 

Article published in the Economic Times, Friday, April 5, 2012

Outsourced Kitchen Start-up ItsMyMeal Gets $10-m Funding

PEERZADA ABRAR & BISWARUP GOOPTU, BANGALORE 

A handful of angeI investors have pumped in $10 million in ItsMyMeal, an online outsourced kitchen start-up that seeks to profit by delivering homemade ethnic food to the doorstep of the customers. 
Started by IIT and IIM graduates Nikhil Gupta, Anoop Agarwal and Neeraj Kumar, the firm provides customised basic daily home cooked meals to a growing number of Indians who have no time to cook. 
The premise has been strong enough for investors to make one of the highest first round investments in a new start-up, which typically attracts funding of about $1 million to $4 million even in the high-profile e-commerce segment. “Cooking food is an art, but we do it with technology which is helping us sustain the business,” said Nikhil Gupta, chief executive, ItsMyMeal. He declined to name the investors. Venture capital for very young start-ups has picked up pace this week. Accel Partners has invested $1.2 million in Delhibased Hotelogix which provides a cloud-based platform for hotels. Inventus Capital Partners invested $1 million in Bangalore-based Savaari Car Rentals. Founded by Gaurav Aggarwal, Savaari has grown to a network of over 100 operators across 60 cities. It derives more than half of its revenues from small towns and cities. 
“Car rental services are estimated at . 14,000 crore,” said Aggarwal, who will use the funding to grow its sales network and build technology to run back-end services. Shekhar Kirani, partner at Accel, said the ability to sell online is giving rise to a new generation of Indian companies. 
ItsMy Meal offers a custom built online platform and a mobile application for meal planning, budgeting and ordering. The firm, which has a central kitchen in Bangalore, will use the money raised to build kitchens in technology parks and company campuses. Each kitchen will cater 1,000 packs of lunch, evening snacks and dinner per day. It uses artificial intelligence technology and software to determine the exact amount of ingredients required to make the meals which helps to reduce food wastage. 
The firm also uses an innovative packaging technology that it plans to file a patent for. 
Gupta calls his business a combination of food and online commerce. A former merchant navy sailor, Gupta put in a stint at the BPO arm of Infosys where he once got into a discussion about homemade meals at the cafeteria. 
“We were fed up with the oily canteen food which lacked taste. We made the business plan on the same day,” he said. The company has created a panel of top chefs and nutritionists who have built a database with 250 dishes from all over India. It adds 10 new dishes every week and even offers comfort meals such as curd rice for customers who are unwell. 
On the Platter • ItsMyMeal offers a custombuilt online platform and a mobile application for meal planning 
• The firm, which has a central kitchen in Bangalore, will use the money raised to build kitchens in technology parks and company campuses

New Silk Route Seeks Gastro Delights

Please note that this article is simply a reproduction of the original article published in the Economic Times on April 5, 2012, Bangalore Edition. If you come across any other interesting articles that I miss out, do email the link/article to me and I will review and post them for the benefit of all readers. 

Article Credit: Economic Times, Apr 5, 2012, Bangalore

New Silk Route Seeks Gastro Delights
Fund has set aside . 500 cr to invest in a portfolio of four food and beverage firms by crafting a unique model

ARCHANA RAI BANGALORE

 

New Silk Route has set aside $100 million (. 500 crore) to invest in a portfolio of four food and beverage firms by crafting a model that has never before been implemented in India. 
The investments will be channelled through a holding company that will take a controlling stake of 51 % in mid-size promoter–led firms in an initiative that has been informally termed ‘Project Gastronomy’. 
Promoters will be asked to cede control of accounting, human resource management and project management in return for fresh capital and handholding to expand their firms both in India and overseas. 
“Promoters have to buy into the fact that the whole is more valuable than the sum of the parts for this model to work”, said Jacob Kurien, a partner at the fund which invests out of a corpus of $1.4 billion in emerging markets in Asia. The fund is in advanced talks with ethnic fast food chain Adiga’s, run by the Bangalorebased K N Vasudev Adiga, and another person who runs a network of fresh fruit juice kiosks. The two other companies under this umbrella will include a chain specialising in Indo-Chinese cuisine and a network of fine dining restaurants. Kurien declined to identify the companies it is looking to invest in. 
“Once we sew up the first deal, it will offer a proof of concept to other promoters,” he observed. The innovative model is a response to the challenges faced by risk capital investors in India, who have reduced the amount of money they have committed over the past few quarters in the food & beverages business. While last year they pumped in $256 million across sixteen deals, there has been just one deal in the first quarter of 2012, according to research firm Venture Intelligence. 
“Funds such as New Silk Route will never find one single company in the food sector to back with a $100-million deal. But food & beverages is a great investment opportunity and they are figuring out new innovations to get a slice of the action,” said Mayank Rastogi, a partner at consulting firm Ernst & Young. 
High valuations demanded by promoters and very low scale of operations were the reasons why New Silk Route, which is an investor in Café Coffee Day, devised this model, according to Kurien. “If market leaders are trading at 40 times over earnings before tax then smaller promoters feel they should be paid at least twenty times. That is too high a valuation,” he said. 
Adiga’s which owns twelve vegetarian fast food joints across Bangalore and in the town of Maddur, has ambitions of taking the brand global. It hopes to add 15 outlets in India and overseas in three years, a person aware of the plan said. “The primary motivation for a promoter to consider such a model is the need to expand.”
The New Silk Route model will also offer a central pool for real estate and project management as well as a health & hygiene division to standardise processes that will be necessary to build a global brand. “A platform allows the opportunity of partnering different companies with diverse cultures. Funds that resort to such investments will have the confidence to back themselves in a sector”, said Jaspal Sabharwal, partner, Everstone Private Equity which also invests heavily in the food & beverages sector.

VC/PE Appetite begins to build for ethnic Indian Restaurants

A reader suggested that I compile and post interesting/useful articles written about the Indian restaurant industry that are published in the media. I am starting to do this with a recent article published in the Times of India on Monday, April 2012. Please note that these are simply reproductions of the original articles published. If you come across any interesting articles that I miss out, do email the link/article to me and I will review and post them. 

Article Credit: Times of India, Monday, April 2, 2012. Bangalore Edition

VC/PE appetite begins to build for ethnic Indian restaurants

Pranav Nambiar & Shilpa Phadnis TNN 

Bangalore: Indian quick service restaurant (QSR) chains have caught the attention of both the early stage venture capital (VC) as well as growth and late stage private equity (PE) investors. A host of traditional Indian joints like Adiga's as well as the next-gen chains like Mast Kalandar are in the radar of private investors.
Kanwaljit Singh, co-founder of VC firm Helion Venture Partners, said that macro factors like the growing quality of life and the scalable nature of the business make it an attractive bet. Helion invested in Mast Kalandar in late 2010 and over the last one year the chain has scaled from 10 to 35 stores across 4 cities – Bangalore, Chennai, Hyderabad and Mumbai. 
Prashanth Prakash, partner at VC firm Accel Partners, said that globally QSRs are not a venture play. Typically it receives later stage investments by PE or strategic investors. However, in India some VCs are experimenting with investments in new generation QSRs. VCs enter when the QSRs have at least 10or so units established. These formats rely on differentiators around the menu, formats, locations etc. 
Accel Partners has invested in Bangalore based Kaati Zone, which serves kaati rolls. Another VC firm Sequoia Capital recently invested in Mumbai based Kebab and wraps chain Faaso's. “The trend of people eating out more often and growing urbanization are helping these restaurants. Also, our street food is now served in a cleaner yet affordable format,” Prakash added. 
The more traditional restaurants that are of reasonable scale have received interest from later stage PE and strategic investors. In 2011, PE firm India Equity Partners invested $35 million in Sagar Ratna, a Delhi-based South Indian restaurant chain. Late last year Everstone Capital bought a 45% stake in north Indian food chain Pind Balluchi. There is also global investor action in traditional QSRs. The New Silk Route Partners is holding talks to buy a big stake in Vasudev Adiga’s. 
Investors are betting on ethnic Indian cuisine as it has a much larger target audience as compared to other organized quick service formats that serve Italian or American cuisine. Gaurav Jain, promoter of Mast Kalandar, said that the Jubilant Foodworks IPO has attracted PE players into the QSR space, providing profitableexits. Jubilant operates Domino's Pizza in India and has the rights for Dunkin' Donuts. 
Despite the promise, investors in QSRs face several challenges. Jain feels profitability at the store level is a key challenge. Food inflation has been in double-digits in the last three years, affecting the margins. 
Investors say that the business is operationally complex and finding the right talent is a huge challenge. Scaling into newer cities and standardizing of the backend is a major point of concern. 
So investors have to be prepared for a longer investment timeline. It typically takes about 8-10 years for a VC investor to reap decent returns. 
Kiran Nadkarni, CEO of Kaati Zone, said that competition from international QSRs is forcing home grown companies to keep the pricing competitive. "International players like McDonald's have expanded the snacking market by making the entry-level pricing attractive. We are exploring a kaati at price points starting at Rs 25-30," he said. QSRs also compete against darshinis and street food vendors for wallet-share. 


INVESTMENT ON THE TABLE 
• Accel Partners has invested in Bangalore based Kaati Zone, which serves kaati rolls 
• Sequoia Capital recently invested in Mumbai based Kebab and wraps chain Faaso's 
• India Equity Partners invested $35 million in Sagar Ratna, a Delhi-based South Indian restaurant chain 
• Everstone Capital bought a 45% stake in north Indian food chain Pind Balluchi 
• New Silk Route Partners is holding talks to buy a big stake in Vasudev Adiga’s

When should you approach VCs/Institutional Investors?

While the restaurant business is not exactly a very VC (Venture Capital) friendly business (see my earlier post on this - http://restobizindia.blogspot.in/2011/03/restaurant-business-angel-investment.html), there have been a few transactions in this space recently (Mast Kalandar - Investment by Helion Ventures, Fasoos - Investment by Seqouia Capital). Given the expected growth in the Restaurant industry in the next few years, I expect investment transactions to increase in this space. So if you are a start-up in the restaurant space, what do you need to do to attract VCs and when is a good time for you to approach them?

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. 

"Restaurant for Sale"

I spent a large part of the last weekend checking out 5 restaurants that were up for sale in Bangalore - a friend of mine wanted to see if he could get a bargain and jumpstart his business quickly. Kindly see my previous post on this topic to understand my perspective on buying a restaurant that is for sale - http://restobizindia.blogspot.in/2011/03/buying-existing-restaurant-business.html.

Here is my assessment of the ones I checked out this weekend.

1) "iT***e" Restaurant in Belandur (Green Glen Layout): This small restaurant located amidst a thriving residential area was interesting. Started just about 2 months ago, the owner had shut it down primarily due to operational difficulties with staff. This restaurant would work well as an all day Darshini or Sagar (interior changes required especially in the customer seating area to suit a Sagar) or as a low cost multi-cuisine restaurant (the restaurant can pretty much be used as is) with a strong delivery and take-away model. If you get the place at a bargain, it may be worth considering.
Pros: Low Rental, Reasonable Kitchen space and equipment, Ground Floor.
Cons: Sale Price (owner looking to recover entire investment made), Location is poor for a typical restaurant (will only work for select models).
2) "P*****i" Restaurant in JP Nagar: This is a large multi-cuisine restaurant (2800 sft) that has been running for over a year now. Though the restaurant is in on the 2nd floor, visibility is excellent, is located at a major intersection and a lift facility is available. This place can work as a reasonably priced restaurant with a bar (like a Bhagini) - liqour license will need to be obtained. Alternately, the space can be split into 2 parts and 2 restaurants can be created in the space while using the same kitchen to dish out the 2 different cuisines - e.g. Indian and Chinese.
Pros: Reasonable rental for such a large place, Large space for kitchen, Location has potential
Cons: Second Floor, Interiors have a worn-out look (so investment needs to be made in renovation), Kitchen plan needs work (which means more investment).
3) Taste of Punjab in Whitefield: This place was Spice'n'wok for a few months, and Saffron Patch for about a year prior to that. Located on the 3rd floor of a building that has clearly been built for offices poses a huge disadvantage for this space, though there are some positives - great frontage on the main road, ample parking (in front of the building and in the basement), generator back-up for the entire building and very low rentals for such a space in Whitefield. This place will work for a fine dining concept restaurant (especially one that is already established and has brand recall) - significant investment will need to be made for the interiors (including possibly installing a capsule lift).
Pros: Very low rentals, Parking
Cons: Access to the floor poor (narrow alleyway, small lift), 3rd floor, Significant interior investment required.
4) P***i Restaurant in Banasankari 2nd stage: This is a very old run-down restaurant in not such a great location, but on the Ground Floor. This space will work for a Sagar or a Darshini - but the entire place has to be worked upon (including the kitchen space). So you will need to consider this as leasing a building and doing everything from scratch.
Pros: Low rentals
Cons: Nothing in the restaurant can really be used (old & worn-out), location not great for non-Darshini/Sagar type concepts.
5) S****K Restaurant in Koramangala: This was an interesting one. The restaurant is on the First floor of a corner building in a decent street (high footfalls). The restaurant interiors are not bad (can suit multiple reasonable price concepts). There is a very large kitchen and cooking area on the 2nd floor. The BIG negative is the customer access to the restaurant - very narrow staircase and alleyway. Just this access issue makes this space unsuitable for a restaurant. The only model I see working here is a low priced "Mess" style restaurant with a very strong delivery focus.
Pros: Reasonable Rentals & Sale Price expected, Highly usable space, Separate pantry near the restaurant area.
Cons: Customer Access, Operational issues with cooking food in the 2nd floor and bringing it to the first floor.

At the end of this trip, I am even more convinced that buying a restaurant that is up for sale is not such a good idea, unless you get the place at a bargain/throwaway price AND the rentals are ridiculously low AND you are convinced that your concept will surely (200%) work there.

I will try and track what happens to these places in the next several months and post an update. 

Lessons from the Poster Boy of the Indian Restaurant Business - Dominos Pizza India

Jubilant Foodworks (the company which operates Dominos Pizza in India, Sri Lanka & Bangladesh through a master franchisee agreement with Dominos Pizza International) is, without contention, THE success story everyone in India in the restaurant business wants to emulate, especially after their blockbuster IPO in 2010. At one point of time the value (market capitalization) of Dominos India was larger than the value of Dominos worldwide.

If we were to evaluate Dominos India (Jubilant Food Works) as a business, what would their key metrics look like?

Note: All the data below is based on analysis of publicly available information about Jubilant Foodworks, including their annual report. Data is based on Mar 2011 operations. The numbers may vary slightly from the figures in their annual report due to certain assumption I have made to make the analysis and the presentation of the data easier to understand.

* - Employee Costs include Salaries, Bonuses, Benefits (Allowances, PF, ESIC, Gratuity, Superannuation) & Staff Welfare related expenses

What is the break-up of their Operating Expenses?

Important Data to Note in the table above:
1) Dominos India pays Dominos International a franchise fee of 3.31% of Net Sales (it was 3.30% the previous financial year). In addition, there seems to be a small charge paid to Dominos International for every store that is opened.
2) They have been able to get great properties at attractive rentals (7.87% of net sales). Actual store rentals will be slightly lower than this, as the rent shown above includes rentals of non revenue generating space such as the corporate office and commissaries.
3) For all the advertising they do (TV, Flyers in Newspapers etc.) they spend only about 4% of their sales on advertising. This is where their scale of operations is really helping them.

If Dominos were a single store, how would their numbers look like?

Note 1: In true financial terms ROI (Return on Investment) is calculated on Profit After Tax (PAT) and not on EBITDA. But as you can see from the numbers above, Dominos has got their unit level economics really right.
Note 2: The numbers above are based on a number of assumptions I have made to make the analysis and presentation of the data easier.
Note 3: I have assumed that it will cost about 60 lakhs to set-up a standalone store like Dominos. The actual cost may be higher depending on the location and back-end support requirements. 

The Fresh Fruit Juice Business

I recently received an email question - am posting the question and my response as it may benefit a large section of readers:

Email Question: 

Myself and my wife are planning to start a fresh fruit juice centers in and around Bangalore & Mysore..Since you are into restaurant business, can you please throw some light on this area? Need some ideas on locations and general people buying behaviour for fruit juices etc. Also if you can help me in sharing few ideas regarding the finance part too, so that first time entrepreneurs like us would be grateful.

Response:

Do check my post on Juice Junction - http://restobizindia.blogspot.com/2011/03/featured-business-juice-junction.html. I do believe they have got their basics right.

You need a high footfall location - ideally a small unit in a busy pedestrian road, better still - a corner building in that area. You can check the kind of areas Juice Junctions are located. That will give you a great sense of the kind of places that this business will work in. 

This is also a very price sensitive business - again check the Juice Junction pricing. There are folks who have tried more expensive variants in fancy locations / malls - e.g. Booster Juice, Acidic in Bangalore. My assessment is that they are not doing well as a business. In Bangalore, Juice Junction is the benchmark. Ganesha Juice Center is a lower cost variant of Juice Junction. 

For first time entrepreneurs, getting financing / loans is difficult, unless you have some collateral - e.g. property. So you will have to arrange for your own financing

Interview with the Founder of Kaati Zone

The post below is from http://bangalore.citizenmatters.in/blogs/show_entry/141-interview-kiran.

This was an interview conducted by Anjana Vivek, that was published in Citizen Matters on Apr 28. 2008. There are some useful insights - so I am sharing this through my blog. All credits and copyrights related to this interview belongs to Citizen Matters.

Interview: Kiran Nadkarni, Founder Kaati Zone

It gives me great pleasure to start the interviews on this blog with Kiran Nadkarni. Kiran is Founder & Director at Kaati Zone, a chain of quick service restaurants specializing in Indian foods.

Kiran was among the early VCs in the country. Prior to starting Kaati Zone, he has held positions such as President, ICICI Ventures, and Managing Director, Jumpstartup Ventures. He has been an entrepreneur for over three years now and has raised funds for this venture.

Read on to know more about why he turned to entrepreneurship and his experiences in running his venture started in Namma Bengaluru with global aspirations...

Question: You have been one of the early VCs in India, what triggered you to move from someone who invests in entrepreneurs to an entrepreneur who is invested in by someone? We have heard of many entrepreneurs who become investors, you are following the reverse route!

Answer: I had spent 18 years in early-stage venture investing, and wanted to rediscover myself in a way. I was living in the US during 2002-2005, when I first thought of doing the Kaati Zone venture. I felt there was an opportunity to take a brand in Indian foods to the mainstream US markets. Initially, I had planned my involvement in the venture to be much like that of a venture investor, providing strategic inputs to an operating team. However, when I returned to India, I realized my full-time involvement with the venture was very important for it to succeed. You can say, I got sucked into full-time entrepreneurship gradually.

Question: Why this industry, how did you zoom in on this?

Answer: I was living in the US from 2002 to 2005. I noticed that, while Indians were a significant minority in the US and Indian food is popular among locals, most Indians who entered this industry were targeting the ethnic Indian community and did not address themselves to the larger local population. I felt there may be an interesting opportunity to take an Indian food brand to mainstream American market. We chose the quick service format, as it is a scalable business and one can build a significant company with this format. We studied the characteristics of and the current trends in the quick service foods industry in the west and planned our venture accordingly. We had planned to build out the concept on a pilot scale in Bangalore before moving to markets overseas, but things changed as we moved forward.

Question: Did being an investor in companies help you when you started your own venture?

Answer: My involvement as an early-stage venture investor in young companies did help in conceptualization, planning and defining strategies. However, I must admit day-to-day execution was something new to me.

Question: In your mind, what is it in your business that has helped you raise venture capital funding for your company? Any lessons you learnt that you would like to share with entrepreneurs re the fund raising process?

Answer: An early-stage investor assesses three important parameters in a business. He invests in the management team, a business idea that is scalable and can be built into a large enterprise, and a product offering that stands differentiated in the marketplace. My prior experience in venture industry clearly helped me define the initial goals to be achieved before tapping external capital. We invested in a central kitchen that serviced all outlets and demonstrated the hub-and-spokes model that can be scaled. We established a unique identity for Kaati Zone through our products and packaging that signified quality, health and elegance. We built a strong customer base not only for dine-in but for take-away and deliveries (including bulk deliveries to over 80 corporates in Bangalore, many of whom are multinational corporations). We have also ensured that we have retained most of our talent (from restaurant manager level upwards) during the difficult phase of our company. We have achieved it through regular interactions and communication about our vision, growth plans and innovativeness. Our team members have seen opportunities in Kaati Zone and have benefited from our growth.

Question: What is the best thing about being an entrepreneur?

Answer: The idea of introducing innovation in marketplace and making it a success drives the entrepreneurs most. I have also enjoyed charging up my colleagues with entrepreneurial zeal and passion. Young companies are usually unable to hire the best and most experienced talent. The entrepreneurial passion among team members can, to some extent, make up for this handicap.

Question: Is there anything you dislike about being an entrepreneur?

Answer: There is nothing about entrepreneurship that I dislike. I have always respected entrepreneurs and the spirit of entrepreneurship. However, I am extremely disappointed with the system within which we expect our entrepreneurs to deliver success.

• There is not much early-stage venture capital in India. Most investors focus on late-stage private equity deals of multi-million dollar size. I can count only a handful of silicon-valley style venture firms who are willing to back start-ups. Even the silicon-valley based venture firms which have entered India are shying away from start-up deals. I would have liked the Indian national financial institutions, banks and insurance companies to create a pool of capital that could support private initiatives in venture capital to support start-ups and young companies. The Small Business Administration (SBA) in the US contributed significantly to the growth of venture capital industry there. We require similar initiative to create an ecosystem of risk capital.
• The large-scale corruption in different agencies of Central and State Governments takes a heavy toll on young companies.
• Entrepreneurship is a high-risk game, and failure is part and parcel of it. Unfortunately, failure carries a stigma in our society and among investors.

Question: Are there any other insights / learnings / experiences you would like to share with an early stage entrepreneur in Bangalore or someone who is thinking of becoming an entrepreneur?

Answer: Here are a few suggestions for potential entrepreneurs:

• Entrepreneurship is a tough business. It requires staying power and perseverance on the part of entrepreneurs. Do not get into it because it appears glamorous. Attempt it only if you are passionate and are willing to hang in there for a long-term.
• Plan a business that can be built into a large enterprise. Very rarely do venture capital firms invest in small niche businesses.
• Innovate and stand differentiated in the marketplace. Build entry barriers for competition.
• Work actively to hire and retain quality talent. With most industrial sectors booming, employment opportunities are aplenty and retention of staff a very difficult task. This is a test of leadership skills of the entrepreneur.
• Leverage your contacts and networks to grow the business quickly. Also, focus on growth of topline even if it means sacrificing profits in short-term. Profits will grow with scaling up of the business. Venture capital investors like a growing business. They may not necessarily like a business that is profitable but growing moderately.

Will a first floor not really work out?

Will a first floor location for my restaurant business not really work out? I keep getting asked this question often.

The answer is simple & straight-forward: "No, It won't work out - Don't do it". The sooner you accept this the easier your decision making process will become. It is not worth the Risk, especially for a first generation entrepreneur with a new business concept. Wait till you find a place that meets your needs and your budget. Be prepared to make some compromises such as taking a smaller space in a ground floor prominent location.

There is a huge-huge difference between a ground floor and the first floor. It is a case of minimizing your chances of failure and maximizing your chances of success.

Check out for yourself how many successful restaurants are in the first floor - pick 100 and I will bet that over 95 will be on the ground floor. There is obviously a very specific business reason for this - every business would love the lower rentals of a first floor, but they still don't do it - How many McDonald's, Dominos or Coffee Days have you seen on a first floor?

Am I saying that there is no way you can be successful by opening a restaurant on the first floor? I am sure you can invest in a penny stock and become a billionaire - it is just a question of the probability of success and failure.

Breakfast is good for health, bad for business

A number of restaurants try offering breakfast as a unique offering.

The rationale is typically this - "No restaurants in my city offer breakfast for customers - you either have the low cost local joints (like the Sagars/Darshinis) or the hotel buffets (priced at around 400-500 bucks). I think there is potential to offer good breakfast at around 100-200 bucks and make money. No one else in doing it. So my restaurant will be unique and I will make some money".

The restaurant launches breakfast as an offering and withdraws it within a few days. I have seen this movie play out so many times that it I feel bad and frustrated at the same time.

I don't believe that there is a market in India for restaurants to offer breakfast, outside of very selected pockets/areas. Why?

1) Eating out is still an event in India - unlike in the developed world where eating out is typically the norm. So when customers want to spend money, they want to do it for the big ones - lunch and dinner.

2) Though health experts advocate eating Breakfast like a king, we still eat Dinner like a King and breakfast like a pauper. Changing this fundamental mindset if at all possible, will take several decades. Once the mindset changes, we still have the issue of getting people to pay big bucks for breakfast.

3) Breakfast items in India are generally low value items - Idly, Dosa etc. in the south, and Poha, Parathas etc. in the north. Customers are unwilling to pay 200-300 bucks for this.

4) Most of the hotels offer breakfast as a buffet to service their in-room guests. The cost of breakfast is typically included in the room rates - even otherwise the rates are quite attractive for the spread (The lavish Leela Bangalore breakfast buffet costs about 500 bucks). So the customer expectation around what he can get for breakfast for a small amount of money is huge. A restaurant will not have the volumes on an ongoing basis to do a lavish buffet, and if they don't do a big buffet, customers will not come. So it is kind of a Catch 22 situation. From a customer's perspective - "When I can get a breakfast buffet in a 5 star hotel for around 400-500 bucks, why would I want to go to anywhere else?"

5) Staffing up to support breakfast is difficult for standalone restaurants as it will require additional staff to be hired as the bulk of the staff will be needed for lunch and dinner. So any restaurant/joint that serves breakfast is typically open throughout the day so you can staff 2 shifts. Doing just breakfast makes this difficult.

I could go on with this, but I guess you get the message - don't waste time and money trying to offer breakfast at your restaurant - this will be a really tough one to crack.

Using a Consultant to start a Restaurant Business

Over a dozen people have asked me to recommend a good consultant to help them conceptualize and start a restaurant/food service business. The next question they asked was if it was worth the money to hire a consultant. This is a very tricky question and depends on the profile of the consultant, past record of helping start-up restaurant businesses and the fee they would charge. But here are some general guidelines you can use:

1) My personal belief is that consultants are more helpful for established businesses looking to fine-tune their business model/operational processes.
2) For start-ups they are useful for creating theoretical business viability plans i.e. while you are still evaluating whether to invest or not.
3) They can provide you some useful contacts - brokers, interior designers, kitchen equipment manufacturers etc. But you can find a lot of these nowadays quite easily though services like Justdial, meet with a few vendors and evaluate them. The value of using a consultant for putting you in touch with useful contacts is overstated in my opinion.
4) As a new restaurant business, if you are hiring a consultant, here are the kind of areas you will really need support and guidance on - so make sure if the consultant can deliver along these lines:
a) Refine your business concept to one that can make money for you. This will mean doing a reasonably accurate cost estimate/analysis with all the components involved.
b) Refining your product proposition very clearly - will the customer clearly understand what your USP is and will they be willing to pay what your business model wants them to pay? This will also include giving you very specific inputs on what to include in the menu and what not, how to price he products etc.
c) At the location you have chosen, will you be able to realistically achieve the customer volumes that your business plan forecasts. i.e. will you be able to get say "100" customer walking in everyday, if that is what your business plan is built on.
d) Help with hiring staff across all levels - the chef, the kitchen staff, the stewards, delivery boys, washing staff, assistants etc. This is an area consultants may be very weak on.
e) Telling you how and what to budget for marketing and identifying options where you can get the most bang for the buck and why? Most consultants are comfortable with a few avenues (e.g. newspaper advertising) and they will push you towards that irrespective of whether that will work for your specific business or not.
f) Help you with licenses (you will get little support from them on this - check my post on licenses required for a restaurant
g) Giving you MIS templates and teaching you how to measure and track the progress of your business. I haven't seen consultants having these - very scary as they are advising you on how to run your business without even prividing you with the basic tools to help you find out where you stand.
f) Essentially you will need a consultant who can tell you what to do if he were investing his own money into the business. This is where I see a conflict - consultants are focused on keeping you happy to get their fees - so they won't tell you that something is a dumb idea - e.g. it is in their interest that you identify a location and start your business soon, so that they can collect their fees quickly. So they will find it difficult to directly tell you that this is a bad location for your concept and drive them towards makign compromises for you, while these compromises help them finish their work quickly. These conflicts typically arise in every single component of starting your business.

5) I would recommend an alternate approach of hiring a really good person to create and run the businesses, even if you end up paying him more than market salary to him, offer an aggressive profit sharing mechanism and also offer some sweat equity. You will end up paying this individual almost the same as you would to a consultant, but this individual will be more interested in making your business successful than a consultant who has no stake in the business. I have been very surprised with the quality of people available - it's just that they may not be very articulate and it will take you time before you are confident with their skills - essentially think of the second level staff in good restaurants/hotels - e.g. not the Chef, but the F&B manager or the assistant chef in a good restaurant in a hotel like Taj. Finding a really good person with whom you can build trust and business chemistry will not be easy - but will be worth the effort.

Rental - How much can you afford to stretch?

As a restaurant business how much rental can you really afford to pay?

Unfortunately the answer is easy, but accepting it, especially for those who are currently hunting for a space for their restaurant business, will be difficult.

For most restaurant businesses to be profitable and sustainable, the rental will need to be less than 15% of the estimated revenues. So if you are planning a budget restaurant that can generate revenues of about Rs.15,000 per day, the maximum rental you can afford is Rs. 67,500. Do remember that you need to pay service tax of 10.3% on the rental amount - so you realistically can afford a place that charges a rental of 60K.

If you are planning a fine-dining/expensive restaurant that can generate about 30K-40K revenues every day, you can afford a rental of about Rs. 1.5 lakhs per month. Do remember that for generating 30-40K revenues you would probably need a restaurant with about 100 seats, which means you are looking at a 3500-4000 sft space in a prime location - not easy to find at a rental of 1.5 lakhs.

In most cities in India, this really means that starting and running a viable restaurant business is going to be tough, till the real estate rentals become affordable and reasonable again.

Growing a New Restaurant Business

Let’s say you have come up with a restaurant/QSR concept and have invested in setting up 1 unit. If the unit is doing reasonable business, how do you go about getting investment and scaling up your business?

Though the answer to this would depend very much on the concept, the founding team etc., I have tried to provide some broad guidelines on the areas you can focus on depending on how well your single/few units are doing.

The Key Figure you need to look is “Operating Margins”.

Operating Margins = Revenues – Costs (Food Costs + All Other Overhead Costs). You need to look at average figures (atleast for 6 months).

Typically most founders pretty much work full-time running the business, but do not take a salary in the initial few years. If you are running the business on a full time basis, and are not taking a salary, you should include a salary component for yourself (equivalent of what you would need to pay someone to do what you do) and then calculate these figures. Essentially, you should consider that you are playing 2roles - one of an investor and one of a employee.

If after including all these costs,
1) Your margins are over 25%, you have a really good business going on. VCs and Institutional investors may be interested.
2) If your margins are between 15-25%, you have an OK business going on. You may be able to find a high net worth indvidual/angel investor to establish your ability to successfully operate multiple units.
3) If your margins are below 15%, you are not ready for outside investors yet. More than scaling, you will be better off figuring out ways to improve your margins. Any additional investment required may have to come from yourself, friends & family.

Remember this: For an entrepreneur
1) Revenues, Number of locations, brand etc. is Vanity
2) Profitability is Sanity
3) And Cash is Reality

Given that the restaurant business is a Cash Flow generating business (unless you run a catering business), Collections is a non-issue. So I would urge you to focus on Profitability and figure out ways to get it up to the 25% level.

If you believe that you can get profitability to the 25% mark, by opening 2/3 more units (atleast your salary costs will get averaged out across the units) then you need to do that using your own resources (maybe with help from friends & family).

Buying an existing Restaurant Business

If you browse through the classified sections of newspapers, you will invariably find a restuarant or two for sale every week. If any of these seem to be a very attractive deal, what do you do?

For a newbie, my recommendation would be to avoid resale units, unless the complete set-up can be reused as is, without making any changes, whatsover.

Here are the big reasons:

1) Irrespective of what the seller tells you, I can bet that 9 out of 10 times, the reason the restaurant is up for sale, is that it is not making money (not even enough to cover operational running costs).

2) If you are going to make changes to the restaurant - kitchen set-up, interiors, seating etc., the effort will typically not be worth it and may also be frustrating. You will eventually spend more money than you expected to and would feel that you might have been better off starting from scratch.

3) Now here is the big trouble - If you are going to do exactly the same thing as the previous owner, what makes you think that you would make money while the previous guy wasn't able to? Chances are, your business will see a similar fate.

4) If you going to offer something different and can reuse the exact same set-up, then your chances of success go up a little. But then, you will have to evaluate diligently why the previous business wasn't working.

5) Most new restaurants shut shop within a year if it does not make money. So if a business comes up for sale after running in that location for 3+ years, it may be worthwhile looking into.

6) In most situations, the owner of the property will increase the rental to current market rates when the ownership of the restaurant transfers. So factor this into the negotiations.