42 replies to this topic

[jglazer75]

Moderator Note...this question has been split off from the general discussion thread so that it can be addressed specifically.

I had a question that I think goes more to the practical aspects of starting ANY restaurant, but which I think may also raise interesting questions about THIS one in particular. As a disclaimer, I understand that much of the answer may be 'confidential' so don't be afraid to say "none of your beeswax." And feel free to answer as generally or specifically as you'd like.

How does one go about arranging financing for such an operation? What percentage is your 'own' money and how much is outside equity and how much is financed? How did you did you decide on the needed amount of start-up capital? Did you form a close-corporation or is it a partnership? Who did you look to for financing? Is it people you know and are close to or did you go through an organization that matches investors to projects? Do they (the investors) have any input on the creative process or did they hand over money and say "go to it" no strings attached? How does this project differ from other, more "conventional," restaurant start-ups?

Like I said, I know this a fairly confidential-type question, but for many of us who are outsiders to the process these are questions that you never see answered. But if I were considering opening a restaurant (which I'm not) I would definitely want to know before I ever even started. I guess I wanted to start this thread at the very beginning of the project because I know at this point the project has been on-going for a few months now, so I wanted to try to catch up to 'where we are today.'

ps. good luck, this project sound phenomenal and I'm looking forward to seeing what the food lab churns out? Is there a plan for pictures of the results??

[phaelon56]

I had a question that I think goes more to the practical aspects of starting ANY restaurant, but which I think may also raise interesting questions about THIS one in particular. ......

How does one go about arranging financing for such an operation?

This very topic has been covered in great detail on BondGirl's

Blog: Starting a restaurant in NYC

She's actually still in the throes of the planning and financing stages if I recall correctly. You'll find lots of discussio about her varied experiences with the financing issues - all of it quite fascinating and pertinent to restaurants in general (apart from the fact that it just costs so darn much to start a place in NYC).

[nick.kokonas]

As you stated, much of the information you requested is confidential
and private. But I can answer you generally and still give a decent
answer to your questions.

Chef Achatz had already drawn up a general business plan before we
began discussing the possibility of working together. I read that
plan thoroughly to help me understand the scope of the project and
type of restaurant Chef Achatz wanted to build. Chef Achatz and I
spent many hours discussing his vision for what ultimately became
known as Alinea.

From there, I outlined the type of information we would need to
adequately estimate the amount of start-up capital needed. Some of
that information was easy to find but time consuming to execute. For
example, Chef Achatz prepared several spreadsheets outlining all of
the necessary front-of-house and back-of-house purchase requirements
in detail -- literally down to the "13 Cambro Red Lids at $2 each =
$26" level. That was hundreds of line items. Again, that was the
easy, known information.

Then we began to survey real estate pricing in the likely areas we
would want to locate a restaurant. This was done at the gross -sq.-ft
level, and we already knew roughly how many square feet we would need.
So that became another series of price ranges. We then met with
architects and designers to ballpark building costs given various
types of construction. On and on. Payroll, professional fees, legal
work, etc. This entailed hundreds of emails between us, and 3-4
months of work.

Ultimately, we arrived at a point where we felt confident that we had
gathered all of the "build-out" information we could. There were many
unknowns and many estimates, but all were based on realistic goals and
researched information.

This was then presented as a business plan. The plan consisted of
approximately 10 spreadsheets, one long written piece detailing the
vision of the restaurant and a timeline and description of methods of
executing the plan. This being Grant and a high end restaurant, we
packaged the plan in a beautiful box on hand made paper, along with a
digital copy of the plan, press kit, etc. etc. And of course, a
miniature 4 course tasting menu in small vials consisting of a dry
martini, lamb, and desserts!

I have started several businesses and invested in others, so I had a
group of people who knew and trusted my work -- and I would be
investing a substantial amount personally. In addition, the investors
were highly appreciative of Grant's cuisine and believed that he would
ultimately be successful. The money raise was done with a small group
of committed investors who believe in Alinea both as a business and as
Grant's vision. It is important to us that Alinea works as both a
grand restaurant, and as an investment for the backers who believe in
our work.

Generally speaking, arranging financing in the sense that you mean is
not possible for a business like this. Alinea is to be built from
scratch, and as such has no credit history and no cash-flow history.
Unless personally gauranteed, no bank on earth would loan money to
such a start-up.

I do not wish to discuss the type of business structure we created or
how management is compensated. I will say that I relied more on my
experience with private equity raises in the technology and real
estate areas than I spent time trying to figure out what a restaurant
"usually" would do. Nor do I expect that there is such a thing as a
"standard" restaurant deal. As with all such business deals, the
resulting agreements are longer and more complicated than one would
expect at first glance.

I do think that our plan differs significantly in that we are a
totally chef driven restaurant... we will live or die by the work,
cuisine, and vision of Chef Achatz. I feel very strongly that nearly
every fincancial investment one can make is an investment in the
people involved, and in this case that fact is more evident and
obvious than in other investments.

In that regard, the investors are active only on the business side of
the restaurant. All are professionals in their fields and have
extensive business experience -- it would be foolish to not get thier
input. But no one is "walking into" the kitchen to tell Grant to make
sure a creme brulee hits the menu! There is no point in investing in
Chef Achatz, and then getting in his way.

For the most part, my work will be 97% done when Alinea opens its doors.


-----

On a personal note, I am very excited to be involved with this eGullet project and am excited for Alinea to embrace the online "foodie" community. I will try to answer any questions as quickly as possible.

[Holly Moore]

A few follow up questions. I understand if some or all of this is confidential.

1. Undercapitalization is probably the most common reason for restaurant failure. What percentage fudge factor are you adding to pre-opening costs to allow for the unexpected?

2. I've heard of setting aside anywhere from 3 to 24 months anticipated operating costs cash reserve. Given the buzz that will come with Alina's opening it might not be as important for you as for the typical operation, but are you setting up a cash reserve to cover start up months and, if so, how many months do you feel is necessary.

3. And really pushing your willingness to share information, are you anticipating that Alina will open at break-even or a profit? If not, how long do you anticipate it will take before you achieve break even?

[KatieLoeb]

Do you have an in-house "CFO" or Controller? If not, is the position still available??

I'd even put up with Chicago winters for an opportunity like that!

[nick.kokonas]

To answer Holly Moore's Questions:

1) We budgeted everything at the high end of what we could expect. For example (and these are hypothetical numbers), we put $50 per square foot for a 5,000 square foot space into our plan, realizing that it was likely that we would pay somewhat less. Some known numbers we budgeted exactly, but others I assumed would cost 20-30% more than expected. On the whole, we have margin for error, though with each expenditure, potential return to investors is diminished. We are operating as smart and tight as is possible.

2) We have set aside a cash reserve in the ballpark of 10-15% of our money raise. We believe that this will be sufficient given the cash flow and fixed costs. Really, we only need to make the fixed costs in order to survive, so those are the outoing dollars I concerned myself with when setting the reserve. If all goes well, we will return that reserve to investors in a relatively short time.

3) That is impossible to say! We are hoping for the best and anticipate doing well.... we are confident that the end result will be an experience that diners will enjoy and want to experience. That said, we are tempering our expectations and planning for the worst... just in case.

Regarding KatieLoeb's question: I think I am the CFO... though I hate business titles! At the very least, I will be fulfilling those duties personally.

[jglazer75]

Can you share staffing requirements, if known? What kind of people will you be looking for? Where will you look for them? What training do you expect? What kind of training will you have to provide?

Thanks for the reply, it was really more than I expected! and a very useful peek under the hood.

[nick.kokonas]

All staffing will be handled by Chef Achatz and our GM, Joe Catterson. We have received quite a few inquiries already, but are not yet accepting any applications.

When we are closer to the opening we will post employment information on our web site. Until then, thanks for the interest....!

[GordonCooks]

May I inquire as to the approx expense of the wine cellar

[nick.kokonas]

I do not wish to comment on that specifically in dollar terms.

Joe Catterson is the Wine Director and will be charged with building the cellar.

Due to the nature of Chef Achatz' cuisine and the tasting menu, or
degustation, format, Alinea will offer wine flights to pair with
particular dishes. In my opinion, Joe is a master at doing this and
it was always my experience that this was the best way to approach a
meal prepared by Grant. In addition, we may offer "reserve" flights
if patrons want that option.

That said, Alinea will have a unique and broad selection of wines by
the bottle, and we intend to make allowances to let a diner "insert" a
chosen bottle off of the list into the flight if they so choose. That
way, the diner can get the best of both worlds: the flight and the
list.

I am sure that at some point in the future Mr. Catterson will address
this board in detail about wine selection, pairings, and building the
cellar....

[slbunge]

I've known a few people who have invested in restaurant ventures, mainly 'American Bistro' sorts of things where I think the draw was potential success via franchising if the restaurant is successful. This, quite obviously, is another animal and I am wondering about the investor mindset as they make their decisions to be financial backers. General terms, not specifics.

It seems to me, that investing in a restaurant such as this might be akin to the way some invest in art: there is certainly confidence about return on the investment but part of the decision to invest is a very personal connection to the art. Whether it be the fact that you get to look at the painting on your wall, share it with the public by lending it, or just that you feel the buzz of supporting an artists (a sort of vicarious living, I suppose).

Based on what I have read here, Mr. Kokonas, it appears that this passion for the Chef's art is at least part of what drives you to be a partner and investor. I am curious about the others in the group. Do they share that passion?

Edit: spelling

Edited by slbunge, 31 August 2004 - 09:31 AM.

[Bond Girl]

I'll throw in my 2 cents here since I am in the process of raising miney for my own restaurant. What I discovered since I began this journey is that you want an investor or group of investors that has some understanding of the restaurant business, otherwise, you'll just have more road blocks to overcome. In that sense Slbunge's analogy to art is very appropriate. More so than the personal connection to the restaurant is the investor's understanding of the operator/chef's vision and his believe that the vision makes good business sense.

In another word, the buyer of a Picasso shouldn't have to ask why the girl in the painting looks looks like a car has ran over her.

[nick.kokonas]

Personal motivations are often difficult to discern -- but here is a shot at it:

I believed after dining at Trio a number of times that Chef Achatz was producing the best cuisine I had ever had. Not only was it highly creative and highly experimental, but it tasted fantastic -- as in, that was the best "xyz" I have ever had. I have been fortunate enough to eat at some of the best restaurants around the world, and I was truly shocked at the level at which he consistently performed. Given his age, it was likely to get even better as he grew in experience. It also seemed like a given that someday soon he would have the opportunity to run his own restaurant.

The opportunity to be associated with a person that operates at a high level is always exciting and professionally fulfilling. My best experiences in business (or in life in general) have been with people who were exceedingly committed to their endeavors, and that committment goes hand in hand ultimately with success.

When I mention to people that I am involved in "building a restaurant" I usually get one of two reactions, or both: 1) I am naively entering a business where someone has duped me into investing money only to see it vanish within a short time; or 2) it is a vanity project to stroke my own ego or feel the 'buzz' that you mention.

Meeting with Grant the person, not "Chef Grant", let me know that he was savvy about the business side of restaurants -- he was involved far more than a typical chef. In fact, he was pragmatic and willing to listen to business considerations. I would not have begun this project with him, or allowed it to go this far, if I did not consider this a solid investment money wise. In addition, there is no way that I would pitch this to investors if I did not feel confident myself. I am solidly in the same position that they are. Though the other investors very much believe in Grant's vision and enjoy his cuisine, ultimately they would not have invested if they did not believe in the business plan.

So, I guess I am a true believer on both fronts: the business and the art. But this is not akin to me buying a painting, or even commissioning one. I have spent, and continue to spend, a majority of my waking hours working on many aspects of Alinea. I have not actually eaten a bite of Grant's cooking since May 4th (an investor's dinner) -- so it has not gotten me any special "access to the art", with the exception of some shared take-out pizzas. He has had to endure my cooking more than I have enjoyed his.

But it continues to be a very fulfilling project and one that I enjoy working on immensely.

As for the risk involved: A good friend told me that he looked at his business risks this way.... if you feel fine when you go to sleep and wake up, you are not taking enough risk. If you are throwing up consistently, you are taking too much risk. A nice, even nausea most of the time is just right. Generally speaking, this risk feels just about right.

[mikeczyz]

He has had to endure my cooking more than I have enjoyed his.

What do you like to cook? Any cookbooks you draw inspiration from? What about other food related literature? Is it nerve wracking cooking for a chef of Chef Achatz' caliber?

These questions may be a bit off-topic from the business plan, but i think we'd all appreciate learning a bit more about what makes you tick.

mike

[soupsister]

Wow, and all this time I thought the "nice, even nausea" was the result of the weekly carry-out taco pizza from the local gas station/deli/pizzaria. It's nice to know it's the right feeling to have when you've invested in your own business.

[herbacidal]

As for the risk involved: A good friend told me that he looked at his business risks this way.... if you feel fine when you go to sleep and wake up, you are not taking enough risk. If you are throwing up consistently, you are taking too much risk. A nice, even nausea most of the time is just right. Generally speaking, this risk feels just about right.

Very nicely put.

Not just this part, but your entire response was balanced and appropriately organized.

[nick.kokonas]

What do you like to cook? Any cookbooks you draw inspiration from? What about other food related literature? Is it nerve wracking cooking for a chef of Chef Achatz' caliber?

Very off topic, but here it is anyways:

I became interested in wine before fine dining and cooking. I read a number of wine related books. I also very much enjoy travel essays, and that led me to the Peregrinations of an Epicure (mentioned in the opening Alinea piece)...and that and a few others like it led me to open up to fine dining.

Some time ago I read Michael Ruhlman's The Making of a Chef, followed a few days later by, The Soul of a Chef. Those books as much as anything had the right blend of travel essay and food essay. They were very inspirational and made me rethink my own approach to cooking. It is ironic that Chef G makes an appearance in The Soul...

Who doesn't enjoy reading Steingarten?

My wife and I both enjoy cooking and entertaining, so we have a myriad of great cookbooks. Too many good ones to mention, really.

I haven't cooked anything but casual lunches for Chef G.... and the first one was nerve wracking, but for no good reason -- you can't try to compete, right? The second one I forgot to salt -- at all -- and great chefs love their salt. So at that point, I just didn't care anymore... it wasn't going to get worse. My wife quipped that she spent 10 minutes making sure the foam was beautiful on his cappucino -- since we were so used to being well treated, it is hard not to want to return the favor.

But before long, it was carry-out pizza time... though we usually drink good wine.

[slbunge]

As for the risk involved:  A good friend told me that he looked at his business risks this way.... if you feel fine when you go to sleep and wake up, you are not taking enough risk.  If you are throwing up consistently, you are taking too much risk.  A nice, even nausea most of the time is just right.  Generally speaking, this risk feels just about right.

Very nicely put.

Not just this part, but your entire response was balanced and appropriately organized.

Agreed. Thanks for the response.

[EllenC]

I would like to know more about your staffing requirements. Please approach it from the standpoint of management. I am most interested in how you decide how many and what type of people to hire as part of your business plan. Believe me, I am not looking for a job, I am just curious how that part of the process works.

Thank you.

[nick.kokonas]

I would like to know more about your staffing requirements.  Please approach it from the standpoint of management.  I am most interested in how you decide how many and what type of people to hire as part of your business plan.  Believe me, I am not looking for a job, I am just curious how that part of the process works.

Thank you.

In this regard Alinea is fortunate to have a unique owner in Chef Achatz. Grant has been involved in the industry since he was a teenager, has worked closely with several inspirational chefs, and has run his own top-notch kitchen for years. Due to his experience and reputation he regularly receives applications from chefs and service personnel who are eager to work with him. He also has a reputation as someone who is a good leader and is good to work for -- from what I have seen he inspires a great degree of loyalty in his staff.

All of the staffing requirements were determined by Chef Achatz. In addition, we have Joe Catterson as our GM, and service will be run by Joe and Grant. I am sure that it will be their combined effort that determines our front of house staff.

[herbacidal]

All of the staffing requirements were determined by Chef Achatz. In addition, we have Joe Catterson as our GM, and service will be run by Joe and Grant. I am sure that it will be their combined effort that determines our front of house staff.

[/quote]

Is Joe Catterson the GM or the sommelier? Not that one can't do both if appropriately supported, but I'm just trying to understand better.


Upon googling, I'm discovered he's both GM and director, according to an earlier Egullet post that I missed.

Edited by herbacidal, 08 September 2004 - 07:50 PM.

[ducphat30]

Really enjoying the thread and am very thankful for your candid responses to such a normally private and often elusive topic, the business plan.

I have a couple of questions feel free to answer as broadly, specifically, as much/little as you'd like.

1) What was the cost of planning the business plan? I know that architects are always looking for an initial investment before they start doing drawings. Did this then become part of the expenses in the business plan?

2)

We have set aside a cash reserve in the ballpark of 10-15% of our money raise. We believe that this will be sufficient given the cash flow and fixed costs. Really, we only need to make the fixed costs in order to survive, so those are the outoing dollars I concerned myself with when setting the reserve. If all goes well, we will return that reserve to investors in a relatively short time.

Are you planning to return the reserve as soon as you have a cash flow established?

3) Was a minimum per person investment set, or were you more interested in finding investors that were in tune with the business plan and Alinea as a project on the whole.

Thanks for your time,

Looking forward to the months ahead.

[nick.kokonas]

Ducphat...

to answer your questions in order:

1) The cost of planning the business plan was largely Grant's and my time -- and there was a lot of that involved. In raw dollars it was probably under $1000, though at that point in time I was largely doing this on spec, so I wasn't keeping close tabs. The architect and the designer were willing to explore the possiblity of taking on this project with us without charge largely because I had worked with both of them on prior projects. Their fees for the actual project work were agreed on later.

2) That is not committed... and is unkown. It all depends what our cash flow looks like and what are reservation book looks like. Ideally yes, we will return a portion of that money within a short time frame... but there will always be some reserve on hand.

3) Officially there was a minimum, but in practice we didn't need it. We were able to raise the money needed between a small, committed group of investors. I had worked with all but one person previously, so the investors understood the way I work and understood the business plan well. The money raise, thankfully, was one of the least painful parts of this process. I am lucky to have such a great core group of business associates who appreciate a good plan -- and fine dining!

[C_Ruark]

Mr. Kokonas,

- Can you outline what was contained in Chef Achatz' initial business plan as it was presented to you? What has been added since?

- What components of the BP seemed to be the most volitile prior to it’s delivery to investors?

Thanks again for allowing us this opportunity to see Alinea develop. Best of Luck!


-CSR

[nick.kokonas]

Mr. Kokonas,

-  Can you outline what was contained in Chef Achatz' initial business plan as it was presented to you?  What has been added since?

-  What components of the BP seemed to be the most volitile prior to it’s delivery to investors?

Thanks again for allowing us this opportunity to see Alinea develop. Best of Luck!


-CSR

Chef's original plan outlined his vision for his restaurant, contained the overview of his professional history, and included 3 distinct sets of financial projections based on seating, check average, etc. etc. I was pretty surprised to see a plan done as well as it was given this was not Chef's area of expertise. I am sure Chef Achatz can add some detail to how he wrote and conceived his plan.

We added significantly to the plan after that. As I mentioned elsewhere, we created an overall budget to build the restaurant and a seperate "goal case" spreadsheet to figure out how to best structure the business and pay the investors. The build-out budget included line items such as furnishings that were then broken down further within the category -- for example, 80 Custom Dining Chairs, 36 Silk Decorative pillows etc. This was done across the board in 16 distinct categories comprising 409 distinct line items. A similar spreadsheet was created for the operation of the restaurant. Both of these were presented to investors.

I am not sure that any part of the plan was significantly more volatile than the other. To a certain extent, we worked backwards from what we thought we could raise and what we could afford to spend on the build-out given reasonable projections. When we didn't know a number, we investigated it. So it was more of a lumbering, slow fill in the blanks than it was a stab, guess, and modify.

Frankly, at this point, I can't even remember some of our early assumptions very well. Perhaps Chef can add some thoughts on that as well.

[C_Ruark]

Mr. Kokonas,

Given the unique qualities of Alinea, what are the safeguards being put into place to protect Alinea's recipes, brand identity, and the like? Are any of these measures above and beyond standard practice in the food service industry?

Again, many thanks for sharing your thoughts.

- CSR

[nick.kokonas]

Mr. Kokonas,

Given the unique qualities of Alinea, what are the safeguards being put into place to protect Alinea's recipes, brand identity, and the like? Are any of these measures above and beyond standard practice in the food service industry?

Again, many thanks for sharing your thoughts.

- CSR

We have in place intellectual property rights agreements with some of the creative professionals involved with Alinea. In addition, where warranted and appropriate, we will be seeking design patents, or trademarks, or copyrights, depending on the category of IP we are trying to protect.

Obviously, we have taken an "open source" type of approach to the whole project, sharing much of our information with the public via eGullet, and with the press when they have inquired. It should be noted, though it is off topic, that we have turned down a number of opportunities and projects that would likely have paid money in the short term, but could have diminished Alinea in the long term.

Since my professional background is not from the food service industry, I am not aware what constitutes typical industry practices.

[project]

There are seven aspects of the Alinea business planning I find curious, surprising, astounding, even amazing. I compare with planning new businesses in 'information technology' with candidate investors the venture capital funds, heavily on Sand Hill Road in CA or Winter Street in MA. There appear to be some examples of some large conflicts in investment strategy.

(1) Business Plan:

Entrepreneurs starting businesses in 'information technology' and contacting candidate investors are commonly advised to have a business description that can be given in 30 seconds as an 'elevator pitch', an 'executive summary' of 3-5 pages, and a 'business plan' of about 25 pages, usually no more than 50 pages, and to place little emphasis on spreadsheet tables or detailed budget projections and to submit documents electronically and not to use color printing, expensive paper or binding, or anything else expensive.

The Alinea business plan on hand made paper with detailed spreadsheet tables and food samples ranges from significantly to astoundingly different.

It sounds like the Alinea plan did not stay under the 50 page limit and depended only a little or not at all on an 'executive summary' or an 'elevator pitch'.

An amazing contrast.

(2) Research:

The US Federal Government heavily funds peer-reviewed research. The main agencies are the DoD, including DARPA, DoE, NSF, and NIH.

Sand Hill Road and Winter Street take such research results in 'information technology' as something that with a dime will at best just cover a 10 cent cup of coffee and usually as just an unwanted distraction. At least the initial product development should be solidly done and in the hands of happy customers, and either using or doing 'research' should not be anywhere in sight as a relevant activity.

Yet, Alinea seems fully eager to exploit research and, possibly, even contribute to it.

An amazing contrast.

(3) Creativity:

In 'information technology', 'creativity' is supposed to be already in the product and, hopefully, protected with patents, and any suggestion for a role for creativity continuing in the future is regarded as an absurd reason for investment comparable to betting on visions seen in the clouds.

Yet, with Alinea, clearly Chef Achatz and the senior staff will be expected to continue to be creative for a major fraction of their time far into the future, over the horizon.

An amazing contrast.

(4) 'Stage':

In 'information technology', the investor general partners and limited partners mostly agree about the appropriate 'stage' for an investment. One of the most important criteria include existing paying customers. In particular, for 'due diligence', the investors are supposed mostly to take the attitude that they personally do not need to, and should not attempt to, understand, evaluate, or judge the product for themselves but just to use the opinions of paying customers.

For Alinea, however, hard work spending funds from investors has been going on for months with no hope of any paying customers before 1Q05. Further, Alinea investors actually got literally to taste the product as they first looked at the business plan. Later they got to taste the product at an investor's dinner.

An amazing contrast.

(5) 'Team':

In 'information technology', it is accepted that there should be a 'team' with a lot of emphasis on generalists and at most secondary emphasis on specialists. The generalists are supposed to have a track record of managing large -- hundreds of employees, hundreds of millions in annual revenue -- rapidly growing businesses that were sold with large gains -- hundreds of millions of dollars -- for the investors. Further, the project is not supposed to be very vulnerable to the loss of any one person.

At Alinea, however, Mr. Kokonas seems to be the closest approximation to a 'generalist' and his work will soon be "97%" done. Chef Achatz is one of the world's most advanced specialists in his industry and is clearly a key person for Alinea.

An amazing contrast.

(6) 'Scalability':

In 'information technology', it is accepted that the desired financial gains can be achieved only with a business that is 'scalable', that can grow quickly to a large size, say, annual revenues of $500 million. For this growth, software is looked on with favor for its near zero per unit cost of production, e.g., just copy a CD; and any business that depends heavily on people, e.g., a 'labor intensive' or 'service' business, is regarded as hopeless.

At Alinea, however, providing an 'experience' to the customers is heavily a 'service' business and 'labor intensive' in the extreme.

An amazing contrast.

(7) Direction:

A large and growing fraction of investors on Sand Hill Road and Winter Street have concluded that for business directions they should not listen to entrepreneurs but should identify, formulate, and plan such directions for themselves and, later, find entrepreneurs to execute the plans.

At Alinea, however, clearly the both the direction and technical details have been at least very heavily, likely at least nearly entirely, from the experience, creativity, thinking, and work of Chef Achatz and done well before the business plan on hand made paper presented to the investors.

An amazing contrast.

More broadly, the Sand Hill Road and Winter Street firms commonly claim that they can be pleased to have even two investments in 10 do well but, for those two, need some significant gains, e.g., invest $5 million and get back $500 million in about five years.

It is true that, if we go to the yacht clubs on the Great Lakes, then we see plenty of evidence of people that have done well in business and, if only from geography, the suspicion has to be strong that the successes had little or nothing to do with Sand Hill Road or Winter Street; thus, these streets clearly do not have the only good path to business success.

Still, that Alinea can be so different on the seven points above and still be an attractive investment shows some large differences of opinion among some serious investors.

So, are there some resolutions for some of these seemingly large conflicts in investment strategy?

Edited by project, 21 November 2004 - 05:46 PM.

[noambenami]

As a veteran of numerous startups in high technology, I thought I'd add my thoughts to this.

The Alinea business plan on hand made paper with detailed spreadsheet tables and food samples ranges from significantly to astoundingly different.

It sounds like the Alinea plan did not stay under the 50 page limit and depended only a little or not at all on an 'executive summary' or an 'elevator pitch'.

An amazing contrast.

Not at all. Anyone investing in Alinea would do so because of Trio. Similarly, most investors will invest in people with a successful track record. The lengths of business plans vary widely and wildly.

Yet, Alinea seems fully eager to exploit research and, possibly, even contribute to it.

An amazing contrast.

Alinea is in no way a research institution, it is a production environment. All gastronomic restaurants create new recipes. If anything, Alinea is very much like a high tech startup in that before the product is released there is an intense product development effort that builds on both original thinking and existing technology. Frankly, the R&D budget for most serious high tech startup represents a much higher fraction of expenditures than at Alinea.

In 'information technology', 'creativity' is supposed to be already in the product and, hopefully, protected with patents, and any suggestion for a role for creativity continuing in the future is regarded as an absurd reason for investment comparable to betting on visions seen in the clouds.
Yet, with Alinea, clearly Chef Achatz and the senior staff will be expected to continue to be creative for a major fraction of their time far into the future, over the horizon.

Not at all. Any tech company that does not engage in continuous product improvement quickly finds itself out of business. Version two follows version one, and there is furious competition between companies on the basis of features. Much more so than at most restaurants.

In 'information technology', the investor general partners and limited partners mostly agree about the appropriate 'stage' for an investment.  One of the most important criteria include existing paying customers.  In particular, for 'due diligence', the investors are supposed mostly to take the attitude that they personally do not need to, and should not attempt to, understand, evaluate, or judge the product for themselves but just to use the opinions of paying customers.

Ever hear of the term "due diligence?" You have no idea how intensively most startups are studied when serious investors come in.

In 'information technology', it is accepted that there should be a 'team' with a lot of emphasis on generalists and at most secondary emphasis on specialists.  The ...At Alinea, however, Mr. Kokonas seems to be the closest approximation to a 'generalist' and his work will soon be "97%" done.  Chef Achatz is one of the world's most advanced specialists in his industry and is clearly a key person for Alinea.

High tech startups are often started by a partnership between technical specialists and management specialists. Look at a company like Google, that was started by a number of technical wizards, or Juniper Networks, or Amazon. All these companies depend on the expertise and vision of a very small core number of highly specialized people.

In 'information technology', it is accepted that the desired financial gains can be achieved only with a business that is 'scalable', that can grow quickly to a large size, say, annual revenues of $500 million.  For this growth, software is looked on with favor for its near zero per unit cost of production, e.g., just copy a CD; and any business that depends heavily on people, e.g., a 'labor intensive' or 'service' business, is regarded as hopeless.

At Alinea, however, providing an 'experience' to the customers is heavily a 'service' business and 'labor intensive' in the extreme.

This is not the opinion of anyone who actually understands software. It is understood that creating and maintaining software is an incredibly expensive and tricky proposition. Consulting is, in fact, looked upon as a much safer business proposition due to the lack of development time and quick time to cash.

A large and growing fraction of investors on Sand Hill Road and Winter Street have concluded that for business directions they should not listen to entrepreneurs but should identify, formulate, and plan such directions for themselves and, later, find entrepreneurs to execute the plans.

At Alinea, however, clearly the both the direction and technical details have been at least very heavily, likely at least nearly entirely, from the experience, creativity, thinking, and work of Chef Achatz and done well before the business plan on hand made paper presented to the investors.

Such innovation incubators as you speak of have never proven themselves in the real world. Innovation is way to erratic and dependent on bright individuals to be put under such controlled conditions.

Frankly, Alinea as a business is a nearly risk-free venture and displays a business profile that looks a lot like a straightforward acquistion:

1. An already proven business is purchased - usually for its existing product line or customer list.

2. It is cleaned up and rebranded.

3. The business is relaunched under a different name.

All Alinea is is a rebranding of Trio under chef Achatz - the product is the chef's creativity and style. The business builds upon the success of, and presumably financial data from, the previous business, and upon the buzz generated by having such an incredible and proven team.

Just my opinion.

[nick.kokonas]

Wow, I thought that the business plan thread was dead!


I am not quite sure where to begin, so a bit of background.

I am indeed the generalist that Project accuses me of being, but I have at times been a specialist. For 10 years I was a derivatives trader, both on exchange floors and off, trading options on equities and futures products, as well as more esoteric financial products. In addition, during that time, I was involved as an early stage investor in a web company (invested in 1997 or so) that was very successful and was sold in March, 2000. I currently serve on the boards of two local IT companies: one a Lucent Spin-off that offers a supply chain management tool to large manufacturing companies -- a manufacturing intelligence program (see: www.gsqa.com ), the other is an online immigration law firm that is really an IT company that supplies a software process to individuals and human resource departments of large companies like American Airlines (see: www.visanow.com ). The point is, I have been involved in several different types of businesses.

I will take your points one at a time:

1) The business plan: Since I was not approaching VC's or Sand Hill type folks, I could do away with the pithy elevator pitch. I was already inside and had the ear of folks that knew and trusted me. I opted to be as thorough as possible. Plus, I was committing a significant amount of money myself, something that many start-ups do not have when walking into a VC (or the scale is different, ie they are looking for $25 million and currently have $200k of their own money). So this was not like a venture or private equity pitch at all. At no time was I ever worried about finding the money to build the restaurant.

2) Our research had more in common with research on a real estate deal than on speculative software or hardware constructs. Unlike research by Darpa and the like (which could be fairly termed speculative), I can indeed point to the average price per square foot triple net lease in the Gold Coast area of Chicago and tell the investors that over the last two years it was $55 per square foot. That is a fact, not speculation. Both are called research, but they are very different.

3) I see no difference between any ongoing production venture and Alinea when it comes to creativity. Intel spends billions per year trying to be innovative and creative. They try to hire creative engineers. I think it is the same here.

4) That assumes that the business will be sold, go public, or throw off cash... so the stage becomes important so everyone can figure out their potential dilution on future stages and calculate their return given the three possible exits. In this case, we will have no further investment (if all goes well) and we will in no case sell Alinea. So we are planning only for earnings. In this case, Alinea is more like buying an old-line manufacturing firm than a tech company.

5) Chef Achatz is more of a generalist than anyone would believe. Giving him proper credit, he is a gifted specialist as a Chef and the business is being built around that completely (there will be an Achatz key-man insurance policy in place). But he is also a manager, designer, and businessman.... an owner as well as a chef. He has been integral to every aspect of the business plan and its execution. When I said my work will be 97% done, I meant by that that my greatest utility will not lie in running the operations of the restaurant. However, on the investment, build-out, design, and planning side, I am pretty handy to have around. I will still be active as needed once Alinea is open.

6) Alinea itself is not scalable... no one is going public or selling this place. There is certainly a price cap and a finite number of diners we can serve. That is the nature of the business. I do know of a few high-end chefs that ended up with more than one restaurant, however (Ducasse, Keller, Vongreichten, Boulud)...

7) That is the current thinking. It was very different in 1998, and will likely be revised again in the future. I don't think that the VC's themselves always believe in these investment trends, and the good ones ignore them completely and keep an open mind.

Still, that Alinea can be so different on the seven points above and still be an attractive investment shows some large differences of opinion among some serious investors.

I don't think that is true. It simply means that there are many different ways to make money... I don't think that there are differences of opinion, just different types of businesses. Do these VC's never make a real estate investment with their mega-bucks just because it isn't scalable or doesn't fit their criterion for tech investments? Of course not.

I should like to add that I agree with everything that noambenami said as well... in the future we may want to use him/her as our business-plan spokesperson!