Meet the Investors Funding the Fast-Casual Boom

In early October, Danny Meyer made a big announcement. It wasn’t about tipping, or another iteration of the Shake Shack hot chicken sandwich. This one was different. He would be entering the world of private finance, starting a $200 million investment fund, with stakes in reservation-making app Resy and the New York City-based Joe Coffee. His fund, Enlightened Hospitality Investments LP (EHI), now joins a group of newly formed investment funds cleverly eyeing (and investing in) restaurants.

It’s quite an about-face from the climate just a decade ago. “Ten years ago, investment took place much farther down in the growth cycle of a concept,” says Greg Golkin, who co-founded the Kitchen Fund in 2016 to invest in early-stage scalable restaurant concepts. “You would see private equity funds or strategics coming in when brands were at scale. If you had an early-stage restaurant concept, you had to source capital from high-net-worth friends and family, or from family offices [a more formal version of investment vehicle for high-net-worth private individuals]. There was no strategic capital in the space early on.”

What’s moved the needle for many investors — and caused the creation of new funds like EHI and the Kitchen Fund, and the frenzied interest of growth investors like L. Catterton, Roark, and Karpreilly, who had previously taken positions in Chopt, Primanti Bros., Burger Lounge, California Fish Grill — is the fast-casual revolution.

“It used to be that when you opened one restaurant, you had one restaurant until you were so busy that you could not serve one more meal,” says Basu Ratnam, founder of Inday, a healthy Indian fast-casual restaurant, one of the Kitchen Fund’s first investments. “Then you thought about number two. But now, there’s a different mentality. Now you have people opening with immediate plans to scale.”

That’s in part because “away from home eating” has skyrocketed in recent years. In 2015, for the first time ever, people in the U.S. spent more money dining out then buying groceries, according to data collected by Bloomberg.

The high-return allure of the success stories like Shake Shack, Chipotle, and Sweetgreen has also made investors hungry to get in early on the next big idea. Entrepreneurs are listening, creating restaurant brands that promise investors growth and scalability. The fastest-growing categories are healthy fast-casual concepts like salads and grain bowls, “as well as anything that focuses on sustainability and organics,” says Anish Gandhi, managing director at the investment bank Brookwood Associates.

Gandhi is also seeing interest in Mediterranean concepts like hummus and kebabs and “multi-ethnic” concepts like Sushirrito and Velvet Taco. Velvet Taco, which debuted in 2011 and opened its second location in 2014, offers dishes like chicken tikka tacos and received a significant strategic growth investment from private-equity firm private equity firm L Catterton in 2016. It now has seven locations across the country.

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The earliest stage investment fund player on the field is the Kitchen Fund, which writes checks in the single-digit millions to concepts that have just one or two units. At the moment, this is a space uncrowded with other investment funds, likely because it’s too risky for those without a deep knowledge of restaurant operations and finance. Kitchen Fund, which has positions in six companies — Inday (gluten-free fast-casual Indian), Hummus & Pita, Pie Hole (sweet and savory homemade pies), Cava (fast-casual salads, grain bowls, and pita sandwiches), and Curry Up Now — has both.

Golkin spent his career as a successful restaurant investor with positions in Sweetgreen, Cava, and the Chickery, while his partner Dan Rowe, who is the founder and CEO of franchise development group Fransmart, has turned dozens of emerging restaurant concepts, including Five Guys and Qdoba, into global chains. That means Kitchen Fund companies get capital, but also their brain trust and a roster of network partners: supply lines, infrastructure building, financial planning, marketing, accounting, geographic expansion, and more.

That expertise has proven invaluable to companies in their nascent stages of growth. “Greg is this incredibly sharp financial analyst in the restaurant business, which means he can look at a P&L [profit and loss statement] and tell you where you are spending too little and where you need to spend less,” says Basu Ratnam, founder of Inday. Thanks to its involvement with Kitchen Fund, Inday will open two more Manhattan stores in the coming months. “And Dan can walk in and tell me, ‘Your food waste is too high.’ But there’s also the creativity and insight that comes from traveling the country looking at brands. They are great minds to just bounce ideas off.”

The duo’s experience not only helps their companies grow, but it’s also crucial to identifying which businesses are truly capable of growth and scale, and therefore investment. Golkin takes into account everything from an authentic story — something that differentiates a brand — to its business model and management team. “There are a lot of shiny objects out there, concepts with one unit that look amazing,” he says. “What’s most critical is to be able to figure out whether a concept is a flash in the pan or something that can scale.”

Once a company has proven it can scale and moves up the growth cycle, to say five to 10 units, they are ripe for Meyer’s EHI, which aims to make $10 to $20 million investments in companies in the seven- to 10-unit sweet spot. EHI’s portfolio will be made up of 60-70 percent in chef-driven fast-casual space; the rest is tied to hospitality-facing technology.

Mark Leavitt, chief investment officer at EHI, says part of the fund’s inspiration was a sense of admiration for the hospitality community and its ability to generate concepts with growth potential. “Honestly, we were inspired by ideas that we wish we had thought of ourselves,” Leavitt says. “We don’t have a monopoly on good ideas. So many people [are] doing interesting things. Setting up a private equity fund gives us a strategic advantage because we can help these brands grow, and at the same time... we can bring [their successful] practices to our company.”

Leavitt says EHI also looks for companies that share a culture consistent with Meyer’s vision for “enlightened hospitality.” “It’s a philosophy that emphasizes employees over customers, the community, suppliers and even investors. When you put employees first, we believe you drive better returns for shareholders,” says Leavitt.

Like with the Kitchen Fund, the appeal of an EHI investment is not just the $10 million check; it’s the circle of USHG partnerships, which give clients huge leverage in terms of access to real estate, branding, marketing, legal, and supply-chain resources that might be critical to growing a brand.

Like EHI, Anthony Polazzi’s AP Franchised Concepts, which started about 18 months ago, also operates in the five- to 10-unit space. It strikes when companies are showing about $1 to $2 million of EBITDA (the acronym, which stands for “earnings before interest, tax, depreciation, and amortization,” is a measure of a company’s operating performance). Polazzi has spent over a decade working in the restaurant and retail group of private equity firm Sun Capital Partners and launched AP Franchised Concepts to fill the gap between the first round of funding — where you’d see friends and family (or a Kitchen Fund) — and the big players like Catterton or Roark, who are looking to invest in $20, $40, or $50 million increments.

Polazzi says he favors companies that can prove that they have an economic model that can scale a bit; recent investments include the Philadelphia-based Chinese concept Han Dynasty and the San Diego-based Kebab Shop. Polazzi hopes to turn companies into 25-50 unit regional chain swith more than $5 million in EBITDA, the point where private equity can come in and buy a majority stake and take the concept to 100 units.

That 100-unit dream is where a lot of companies (and investors) are resting their fortunes. But searching for the next Shake Shack is a risky business; wrapped inside that dream is a cautionary tale. That’s because restaurants are unique animals built by people and fueled not only by quality food, but by this intangible concept known as hospitality.

“Restaurants are very different than retail concepts,” says Ratnam. “We are not just opening doors and putting things on racks and saying, ‘Here, spend your money.’ This is not clothing, and investors need to understand that.”

What Ratnam fears is a race to scale without the infrastructure to support operations and hospitality. “With so much money pouring into this space, you may see a lot of failures,” he says. “It’s important to take the hospitality and food-service element seriously. The customer experience is intricately tied to your success. You need evangelizers, you need a tribe waiting on line for your food everyday, and you can’t reverse-engineer that.”

Andrea Strong, founder of the pioneering food blog the Strong Buzz, has been writing about restaurants and food for the past 18 years. Jay Bendt is an editorial and book illustrator based out of the Midwest, with a penchant for fantastic storytelling and highly caffeinated drinks.
Editor: Erin DeJesus