Why Invest in Restaurants? Why Not!

You have all heard some variance of the adage, “Nine out of ten restaurants fail within the first year.” I can’t argue that makes it hard to sell restaurants as an investment. Except for one thing—it isn’t true.

Not even close.

In fact, only 17% of restaurants fail within the first year, the lowest number of any service providing business including real estate agents and brokerages. This myth has been debunked over and over, but the data I am using comes from a comprehensive study by two economists. The summary was published in Forbes.

Hmm. How then, given that the facts override the myth does it linger? Well there is one theory, but this isn’t a column about what are facts, do they matter, and can I make up my own facts if I want to? I’ll save that for another time (teaser: you in fact can’t make up your own facts).

Accepting for now that facts are facts, I think this quote from the researchers sums it up:

“Perhaps due to the visibility and volume of restaurant startups, the public perception is that restaurants often fail. However, as shown in this paper, restaurant turnover rates are not very different from startups of many other different industries.”

The fact is, what we do is for all to see. If the price of gas on a big sign is an indicator of the entire energy sector, or the economy for that matter, then the restaurant on the corner of your block, or the turnover in the entire neighborhood, is a sure sign of the risk of the industry, right?

Hardly.

Humans are notoriously terrible at estimating risk (if we were good at it, we would never drive a car), and the fact that our business successes and failures play out literally in the streets for all to see doesn’t help defeat false narratives.

The reality, however, is that many restaurants and bars and other food and drink businesses make it. In fact, many of these businesses scale far beyond their first store, and there are many opportunities for follow on investments and exits.

Don’t believe me? Fair enough. But would you believe Steve Case? The billionaire co-founder of AOL and founder of venture capital fund, Revolution LLC is very bullish on food. To the tune of tens of millions of dollars over several rounds poured into local startup, Sweetgreen (personal favorite: Rad Thai) and other food ventures. From its inception as a tiny salad spot in Georgetown, Sweetgreen has grown exponentially and is now valued at over $500 million. That’s a lot of green.

That’s one example, and a high profile one at that, but I assure you the list goes on. Whether it is Cava Grill raising $60 million (mostly from Revolution), or Spider Kelly’s entering our seventh year with rosy sales forecasts, examples of successful companies in this business abound.

But sure, there is risk. There are no guarantees, and it is a tricky business—customers are fickle and competition is fierce.

So, what is the secret? How do you improve your odds of picking the right opportunity and mitigating the risk? Ahem. Allow me to introduce myself…

By carefully selecting the founders I work with, patiently curating the concepts so they are ready for primetime and balancing out our portfolio to diversify, I am working hard to put our investors in the best possible position. And of course, I am jumping in with them, side by side.

Will that guarantee success? Absolutely not. But I sure as Hell can beat a 90% fail rate. And you shouldn’t need Steve Case to know that.

Reach out if you want to learn more.

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