When should you approach VCs/Institutional Investors?

While the restaurant business is not exactly a very VC (Venture Capital) friendly business (see my earlier post on this - http://restobizindia.blogspot.in/2011/03/restaurant-business-angel-investment.html), there have been a few transactions in this space recently (Mast Kalandar - Investment by Helion Ventures, Fasoos - Investment by Seqouia Capital). Given the expected growth in the Restaurant industry in the next few years, I expect investment transactions to increase in this space. So if you are a start-up in the restaurant space, what do you need to do to attract VCs and when is a good time for you to approach them?

Based on my interactions with about half a dozen partners in VC firms, here are some broad guidelines. Professional/Institutional investors evaluate opportunities using the following 4 criteria:

1) Growth potential of the opportunity area - will this space allow a few businesses to the tune of 100 Cr each to be set up in 5 to 7 years. In general investors invest in not more than 1 or 2 businesses in a specific area to de-risk their investments. Currently the appetite for early stage investments in the restaurant space is low (especially given that VC investments in Yo China, Kaati Zone, Booster Juice etc. do not seem to have generated returns for the investors yet - even after about 5-6 years. Typical VC investors seem to look for an exit in 5-7 years). So if a VC has invested in a restaurant business already, chances are they will not make additional investments. Other VCs will also be cautious. This will change in the future once a few businesses succeed and generate significant returns for the investors.
2) Quality of the Management team - Self explanatory
3) Scalability of the specific business model with some validation - This, in my opinion, is the most critical yard-stick. The broad consensus is that you need to have about 10 operational and profitable units, with atleast 1 unit in another city. At this number, the team has proven that they can manage scale to some extent, the business model is validated to a large extent and if funds are available, the same model can be replicated quickly without too much further experimentation. Having a unit in another city is some validation that the model will work in multiple cities and the management team has the ability to manage remote operations. At this stage of your business, a VC will put in money to help you scale to about 100 units in 5-7 years and exit through a IPO or by selling to a large private equity player.
4) Price at which the investment opportunity is available - Equity % in return for the investment. This is again self-explanatory. A VC will be expecting a 10x return at a minimum on the investment. So expect to give up reasonable equity for the money.

In summary, the right and the earliest time for you to approach VCs would be when you have atleast 10 profitable and operational units with atleast 1 unit in another city. By bootstrapping, this will realistically take you anywhere between 3-10 years depending on how capital intensive your business is and how much money you personally have access to. In this business, it is unlikely that you will get money based on a 1/2 units, a concept and business model on paper. 

Cafe Amul - Is this truly a "Diamond in the Rough" in the Franchising space?

From my earlier posts, you would have seen that I am not a fan of franchising in the food business, except for very few opportunities - see my post on this: http://restobizindia.blogspot.in/2011/03/franchising-f-word.html

I was out with a few friends on Saturday and we wanted to do a quick "Coffee Break", use the rest-rooms, sit and chat for about 10-15 minutes taking a break. Not wanting to spend too much money by going to a Cafe Coffee Day, I took them to a "Cafe Amul" in the area which served coffee for 15 bucks. This was my 5th visit to this Cafe Amul. During all my previous visits, I was not very impressed with the concept and felt that Amul was still experimenting with the concept & format. I was even more shocked to learn that this was actually a franchise. A brand and company like Amul experimenting at a Franchisee's expense - I was disappointed.

During this visit, a gentlemen approached our table, introduced himself as a representative from Amul and wanted our feedback on the Cafe Amul concept. I gave him candid feedback and out of curiosity started asking him questions about the Cafe Amul proposition and their plans with it. He mentioned that they have 3 formats - Amul Scooping parlors (simple ice-cream kiosks), Amul parlors without a kitchen (just sandwiches, ready to eat stuff & ice-creams etc.) and then Cafe Amul (with a hot kitchen serving fresh food and snacks). Their proposition was to offer Value for Money all day dining options (Dosas, Sandwiches, Parathas, Pizzas etc.) in a comfortable casual setting. He also told me that the franchise had a lot of flexibility in designing menu options that suited the specific location and those that could be operationally managed. I probed him further on their commercial model and his response stunned me. He told me that Amul did not charge a franchise fee, nor did they have a revenue share.  They only required franchises to pay a refundable deposit of 3 lakhs (More details available on their website http://www.amul.com/m/cafe-amul). They of course made money on supplying Amul products to the franchise, but the cost for these products is the same as it is for any retail store selling Amul products and in some cases even lesser. So why was Amul doing this? His response was that this a brand building effort from their side and being a cooperative, they wanted to help entrepreneurs leverage the Amul brand (trust, VFM, good quality etc.). They would anyway make money since their products would be sold and also used in the Cafes.

Well, like Juice Junction (see my post on this http://restobizindia.blogspot.in/2011/03/featured-business-juice-junction.html ), this model seems to be almost unreal in today's competitive and cut-throat business world. I sincerely do hope that Amul manages to tweak the offerings (there is some serious work to be done on this - they still seem to be in the experimentation mode) to make Cafe Amul appealing enough to customers to meet the revenue/profitability targets and wish them and all their franchises success. Way to go Amul.

Kindly see my follow-up post on Cafe Amul - http://restobizindia.blogspot.in/2012/03/cafe-amul-what-they-need-to-get-right.html