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NaanStop and Full Course Photo Credit Brandon Amato.jpg
Full Course CEO Lauren Fernandez with the co-founders of NaanStop.

What emerging restaurant brands should consider ahead of investment

Two investors offer their perspectives on when brands should pursue investment.

Many restaurant owners are enticed by the prospect of growing their business. Outside investments like private equity are often the quickest way to jumpstart growth. 

However, experts in this space say operators should carefully consider why they’re looking for an investment and if they’re ready for the challenges and changes that come with growth. 

And, of course, they’ll need a concept that’s attractive to investors. 

“The intersection of operations, finance, and solid entrepreneurship is that sweet spot” for investment, said Lauren Fernandez, CEO of restaurant incubator and investment firm Full Course. Her company supports emerging concepts, and the Full Course fund aims to invest between $2 and $5 million in five early-stage food brands by the end of 2024. 

“It’s a fine needle to thread,” she added. “Not all restaurant operators have those things. And let’s not forget here, you still have to serve great food and be very good people.”

Are you ready for capital and the growth that comes with it?

Andrew Smith, the cofounder and managing director of the Savory Fund, said taking on capital for the right reasons, at the right time, with the right people is probably the most important factor to consider. Savory, a private equity firm, typically invests between $4 million and $15 million into emerging restaurant concepts.

Early-stage investors might have clauses written into their deals that give those investors final approval of any additional investments, Smith cautioned. 

Of course, not taking on investors doesn’t mean undercapitalizing your business. Often, Fernandez and Smith work with brands that have already raised capital through friends and family and high-net-worth individuals who are fans of the concept. 

“If you have access to fair-term debt or you can privately raise debt, sometimes that’s a better option than giving away equity,” Fernandez said. 

If you are considering taking on investors, consider this analogy, Fernandez said. “You have an apple. The apple is going to get more valuable with time. But right now, it’s just an apple, and every bite that you take out of that and give away as equity now is going to cost you six times that later.”

Smith and Fernandez actually spend a lot of time talking restaurant owners out of taking investments. 

Sometimes, a concept or operation just isn’t ready yet. Some businesses are struggling financially and really need bailout money. And some restaurants just aren’t built for scale. A unique restaurant that relies on an owner’s interaction with diners might be a huge success. But that owner can’t be replicated, and another location won’t be the same.  

The second chapter

Despite the odds, some restaurant brands are ready for the next step. 

That’s where investors like Smith and Fernandez come in. They are uniquely qualified to guide restaurants in their growth strategy. In addition to managing restaurant-focused investment funds, they’ve both operated restaurants in the past. Full Course and Savory Fund offer various operational and development guidance and resources to the restaurants they work with. 

Many investors are looking for concepts that have successfully completed what Smith refers to as the “second chapter.” These restaurants have proved the concept, have solid unit-level economics, and are past the startup phase. The second chapter can look different for different concepts. 

For the smoothie and bowl chain South Block — a Savory Fund investment — the second chapter meant opening fifteen units.

For the Indian fast-casual concept NaanStop — one of Full Course’s investments — they were ready for an investor when they reached three units and had a successful catering business. 

“We wanted to be the name in Indian food in America,” said Neal Idnani, who cofounded NaanStop with his brother, Samir.

And they couldn’t get there alone, he added. “That was part of the impetus for partnering with somebody, was that we knew that we didn’t have all the answers. We were not so prideful to say, ‘We can’t do this all by ourselves.’ That expertise was far more important to us than capital.”

Idnani knew NaanStop’s processes and procedures needed to be “codified” before going to investors.

“Having your day-to-day processes in an ironclad checklist that anybody can replicate, and then having your business operated by a manager versus by the operator — I think these are essential steps and are things that an investor wants to see,” he said. Investors will know “they can come in and scale this business rapidly, rather than coming in and building all the processes.” 

South Block founder Amir Mostafavi knew he would have to open his books to investors, and he advises operators looking for investments to be prepared.

“You’ve got to have all your legal in order. All your leases are in good shape. All your accounting is in very good shape,” he said. “There’s going to be a lot of diligence. It’s going to be very hard.” 

Full Course invested in NaanStop in 2022. Details on the investment were not disclosed, but the restaurant plans to add more company-owned stores, non-traditional locations, retail products, and eventually franchised locations. 

Savory backed South Block earlier this year as part of its $200 million fund. South Block plans to open new stores, including nontraditional locations. Terms of the deal were not disclosed. 

What to expect when you’re working with investors

It can be challenging to get operators out of the kitchen or the dining room, Fernandez said. But operators should get comfortable letting their employees solve day-to-day problems while they focus on processes and procedures, she said.

“The devil is in the details,” she said. “Taking the time to painstakingly document this stuff in a business is absolutely mission-critical. … We’re going to pull you out of the hustle and bustle of the grind. And then we’re going to make you get painfully detailed. And for some of them, it’s just a very abrupt shift. And I think that that’s one thing that I would encourage people to be open-eyed about.”

Of course, with more money and help, operators might be able to offload some of the work they’ve found less fulfilling — like taxes. No one wants to do their taxes, Smith said.

“Everyone thinks founders don’t want you to come in and tell them what to do — that’s such a lie,” said Smith. “You want help. What you don’t want to lose is the authenticity of the brand, the voice of the brand, the vibe of the brand, the culture of the brand. And we don’t either as investors; we let them control that.”

For Idnani, focusing on growth meant coaching, training, and building leaders to do the work he used to do. And then getting out of their way.

“As the operations guy, I just really love being in the stores contributing to a positive experience, and I’ve been able to do that in a different way,” he said. “I can step back and just watch the machine run. … I still contribute to that, but it’s not happening because I’m doing it.”

Although he’s not doing everything himself, Idnani has plenty on his plate. 

“My advice to operators is to take care of your mental health. It’s stressful growing a company. It’s stressful being responsible for so many people and their livelihood and balancing your needs of growth with cash flow,” he said. “[With an investor] the stress gets different, and your responsibilities change, but they don’t necessarily lesson.”

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