Financing

Get your house in order before bringing on investors

At the Investment Summit, held on an actual summit in Southern California, restaurant investors shared advice for bringing in financial partners.
Mount San Jacinto Investment Summit
The Investment Summit was held atop Mount San Jacinto in Palm Springs, Calif., reached by aerial tramway. |Photo: Shutterstock

Plan to look for investors? The first thing you need to do is get your house in order.

But for an emerging restaurant concept, that can be a challenging task.

At an Investment Summit on Sunday—which was literally on the summit of Mt. San Jacinto in Palm Springs, Calif.—several prominent investors who work with emerging brands offered some advice about what they look for in considering investments.

Finding the right investor partners is very much like a marriage, and, for many people, will last longer, said Satya Ponnuru, general partner of NewSpring Franchise. So it’s important to be prepared for potential storms ahead that could impact the match.

“In any great partnership or marriage, it will be the challenge that defines you, not how things are going when it’s great,” said Ponnuru.

Here are some strategies for getting your house in order before approaching potential investors:

Organize your business so you’re functionally sound.

Not everything has to be perfect, said Andrew Smith, managing director and co-founder of Savory Fund, which includes in its portfolio brands like Swig, Crack Shack, Pincho Burgers + Kebabs, and Mo’ Bettahs. But restaurant companies need to be ready for scrutiny when investors dig in and try to understand your business before they part with their money.

Invest in your leadership.

That means defining clear roles for your leadership team and making sure everyone is swimming in their own lane, said Smith.

Sarah Lockyer, chief brand officer for the executive search firm The Elliot Group and president of The Elliot Leadership Institute, said one of the biggest mistakes leaders make is trying to do too much, and not hiring specific talents in specific roles.

But companies have to start with a strong mission, vision or set of values for the brand, which can help clarify the talents needed.

Smith said he looks for passion in leaders, people who have vision for the long term who can communicate why they want to grow. “You have to have your why,” he said.

Build in adaptability.

Locker said she’s often asked by restaurant operators how they can keep their culture as they grow. But, quoting New York restaurateur Danny Meyer, Lockyer said culture has to evolve as a restaurant company grows, not stay the same.

Focus on store-level economics first.

There’s no getting around the need for strong financials and it’s tougher than ever to show restaurant-level margins and drive traffic, but that should be your focus, before growing units.

Simplify operations.

A super-complex operation is a red flag for investors, especially if it’s a franchise brand. Look for operational efficiencies to simplify.

“Not every investment can be a super heavy lift,” Lauren Fernandez, CEO and founder of Full Course and The Fernandez Company, which has invested in very young restaurant brands.

Other investors shared their views on the climate of the industry and what they’re looking for in investment targets.

All said they generally look for a return on their investment within two to four years. But they acknowledged the challenges the industry faces today, such as real estate and construction costs, that continue to hinder growth.

Jim Balis, managing director of the strategic operations group, at CapitalSpring, said the restaurant industry these days is more employee-focused, rather than customer focused.

“The current situation is really about your team members and keeping them engaged,” he said.

Fernandez said she’s pragmatically optimistic about restaurant investments, but that she currently favors fast-casual concepts because she sees some tightening of wallets ahead.

Ponnuru of NewSpring Franchise, on the other hand, sees tailwinds for restaurants, especially compared with other industries.

“We think now is a great time” for restaurant investing, he said.

The pandemic was a cataclysmic event, but one that demonstrated the restaurant industry’s resilience and the specific strength of those who managed through it, he said.

The Investment Summit was part of the Create conference hosted by Nation’s Restaurant News at the Margaritaville Resort and was sponsored in part by The Elliot Group and Savory Fund.

UPDATE: This story was updated to correct an attribution and clarify a comment.

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