Nick Kokonas - Know What You Are Selling – [Founder’s Field Guide, EP.8]

Episode summary: My guest today is Nick Kokonas, the co-founder of the 3 of the best restaurants and bars in America - Alinea, Next, and The Aviary as well as the co-founder and CEO of Tock, a comprehensive booking system for restaurants. This was one of my favorite conversations in the history of the show. Nick is a philosophy major turned derivatives trader that is now one of the most well-known names in the restaurant and hospitality industry. We cover so many topics I can’t list them here, but I’ll remember it for why it's so important for a business to really know what it's selling and then actually sell it.

Nick also pulls back the curtain on why restaurants and even book publishers can be great businesses if you do them in the right way. I felt like this conversation could have gone on for hours and I hope you enjoy it. This episode is brought to you by Microsoft for Startups. Microsoft for Startups is a global program dedicated to helping “enterprise-ready” B2B startups successfully scale their companies. If you’re a founder running a B2B company targeting the enterprise, you should definitely check them out. This episode is also brought to you by Solo Stove.

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That's com and use code PATRICK5. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way and this series is dedicated to stories and lessons from builders of all types. You can find more episodes at com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management.

This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. My guest today is Nick Kakonis, the co-founder of three of the best restaurants and bars in America and the world, Alinea, Next, and The Aviary, as well as the co-founder and CEO of Talk, a comprehensive booking system for restaurants. This was one of my favorite conversations in the history of the show. Nick is a philosophy major turned derivatives trader.

and now one of the most well-known and respected names in the restaurant and hospitality industries. We cover so many topics, I can't list them here, but I'll remember it for why it's so important for a business to really know what it's selling and then actually sell it. Nick also pulls back the curtain on why restaurants and even book publishers can be great businesses if you do them the right way. I felt like this conversation could have gone on for hours, and I hope you enjoy it. Nick, I thought a neat place to begin our conversation today is with a quote of yours that I found that has three parts.

I'm going to read the quote and then I'd love to walk through each of the three parts. What you said was, own something, make lots of decisions that have outcomes, try to be right 51% of the time, do that often and repeat. I love this quote and maybe we'll start with own something. What do you mean by that in as much detail as you can provide? And welcome. Thank you. My thing is I grew up with a dad. who he would say he was an entrepreneur by necessity. No one would hire him.

I looked around at some of the immigrants and his cousins and people in our family who were immigrants. And the way to create wealth in America was different for different populations. And for the Greeks, half of my family that's Greek, it was own something. It wasn't go to college and become a lawyer or doctor or something like that. It was, hey, if you own it. and you grow, you make more money. I grew up in that environment. And then also just by studying wealth creation, it's actually really rare that you can, sure, you can become a C-level, C-suite, publicly traded company executive or something like that.

That's going to take you 30 years and a lot of education and all of that. So for me, it was always like, I want to own things for two reasons. One, because that's a more likely path to wealth creation. And two, I want to own it because I want to have responsibility for it. Ultimately, I don't want my fate decided by someone else. What about the second part of this, which is make lots of decisions that have outcomes? Sounds kind of obvious, but my guess is there's lots of nuance in the dangers of making decisions around things that don't have outcomes.

I guess this one's harder to explain. Right when you said that at the outset, I was like, oh, that's going to be the tough part to explain. Because in one sense, everything has an outcome. But not everything has a measurable outcome. If you're working on a software product and you change the color of something, you can A, B, C, D, E, F, G, test it all you want. That sort of iterative thing has outcomes. But more than that, just trying different products entirely, different lines of revenue for your business, different...

aspects of what you're doing, whether it be, whether you're a writer or you're a painter or whatever it may be, you need to get to some sort of completion where there is an outcome that can be measured. That's all that means. I see a lot of people starting businesses and spending time drawing logos in a notebook, so to speak. And that's not a measurable thing. You haven't produced anything. You haven't tested it. There's no end to the next part of the question, which is like, you're the casino. You have thousands and thousands of outcomes and you're right more than half.

you're going to win, even though 49% of the time you lose. Do you think that that 51% is better than say 80%? By it being 51%, you're moving and making enough decisions with high enough velocity. There's more room for learning with a lower percentage being right? No, no, no, no, no, no. That wasn't intended that way. It was more like you could be wrong an awful lot and still come out ahead. And I think that in managing decisions and managing people. in feeling good about your work and yourself, it's easy to get down very quickly in any business because you're going to have a whole bunch of things that don't work.

I mean, we're all human. No one likes to have their stuff not do well. No one likes to fail the test. Learning to be wrong and accept that as a process or indeed an inevitable outcome if you're doing things correctly means that you can be correct and wrong at the same time, if that makes sense. Yeah, I'd much rather be right 80% of the time and hopefully we drive towards that. But I grew up, I was a derivatives trader. Really becoming the house of the casino is the goal. You don't need a lot of edge in running a blackjack game.

You just need a little bit and then you need a lot of players. And that's all that this is. That's that whole statement in a nutshell. We're going to apply that thinking to the restaurant business a lot in our conversation today. But to set the stage, I'd love to hear. the way through which you came to be familiar with the restaurant business in the first place. What was the first event or exposure that got you interested in this part of the world? No one's really asked that ever. So the very first exposure was the Greeks.

If you're a Greek in Chicago, my joke is always like, if you're a Greek in Chicago and you don't own a restaurant by the time you're 40, they give you a hot dog joint on the West side for free because they just feel bad for you. So I grew up and my dad in the 60s before I was born, owned a diner. That was the upward mobility for sort of the uneducated Greeks. And so I knew somebody who owned a restaurant my whole life. Mind you, I did well academically throughout my life.

And so my dad was always going, look, go become a lawyer, go become an engineer or something like that. You don't want to own a restaurant. It's a terrible business. So my first exposure was all of these people telling me not to do it. But meanwhile, they were at their kids' basketball games. They were the dads who were present for their families. And they were the people who controlled their own situation, as we spoke about. Even though as all of them were telling me, hey, you're the white sheep of the family, go get a graduate degree.

I was looking at it and going like, well, geez, they seem like they're doing pretty darn well. And I don't really want to work at Goldman anyway. That was my first exposure to the restaurant business. And then when I graduated from college, we actually knew a very famous restaurant that was going out of business. I had spoken to my dad about, hey, we should try to buy that. And he was really just wildly against it. He allowed me to have the conversation, but he was wildly against it. Sadly, he died in 2001.

So he never saw any of my involvement in the restaurant business. And perhaps that's better. I think he probably would have tried to talk me out of it. Can you describe why? in your opinion, there still is this view that restaurants are just bad businesses, that too often they're vanity businesses or it's like trying to make a movie or something. The economics just don't work. What's always interesting to me is that most businesses are not great businesses. If there is a great business out there with high margins, there's something else about it that's hard to get into.

It's very interesting to me that everyone says, oh, yeah, restaurant business is terrible. I mean, I remember when we started building Alinea, just getting a slight bit ahead. But this will make sense to your question. When we started building Alinea, there was a suburban restaurant in Chicago. And I really liked it. And the guy was a good-looking chef. And he seemed like he had his stuff together. And I kind of knew him a little bit. And I said, oh, by the way, I'm embarking on building a restaurant. And he said, well, you don't want to do that.

It's a terrible business and it's all sorts of awful stuff and all that. I said, why did you build four more? If you build one and it's such a terrible business, why did you build four more? Why is it that there are some celebrity chefs that have 35? It's not because they like to get punched in the face. Clearly, you can make money in it. Also, coming from a floor trader, derivatives trader background, when I got down there, like all anyone told you about. how terrible it is oh my god you're gonna get beat up it's a terrible environment people are mean 99 out of 100 people don't make it their first year and then even the one out of 100 that makes it only 99 of 100 then fail after it's only one out of a thousand ever becomes a millionaire or whatever and i was like so you're saying there's a chance i like businesses that are hard because if i can figure them out whether that be a great arbitrage and derivatives

or that's the restaurant business or publishing, which I think is an awesome business. I just go like, well, people are full of shit. They're defending their position. And the fact of the matter is, is that there are a lot of people in the restaurant business that are not in business, so to speak. They did it out of passion or they did it, as you said, as a vanity project, or they thought that there were great entertainers at home and they knew how to throw a dinner party. So they decided to open a restaurant.

I was accused of all of those things when I started building Alinea with Grant. So much so, I would just drill into him, this will be run as a business first. It's not an art project, it's a business. If we run it well as a business, then we can invest more in the art and it becomes a virtuous cycle. I think that the barrier to entry to the restaurant business is actually relatively low compared to many other businesses, especially in terms of actual knowledge requirements. You can't just start a software company as a sole proprietor if you don't know how to program.

So the barrier to entry there is fairly high. Barrier to entry to a restaurant is you sign a lease and build a kitchen and start cooking. It's a lot, but it's doable. And consequently, there's gonna be a high failure rate. I should note for the audience that I think at the one time I did go to Alinea years ago, it was literally ranked the single best restaurant in the world. So I think it's very interesting that you say, you and Grant agreed that you would run it as a business first at its inception.

In what ways did that cause your behavior or your plan to depart from the typical new high-end restaurant opening? Well, first of all, we set it up in a way that the investors, I was also the largest investor and I was on the management side, but I set up the structure of the business more like if you were setting up a startup. There was an investor group LLC. There was the restaurant itself. And there's a management company, three different companies to start one company. And I made sure that all of the interests of all three were aligned for the long term, which means that 15 years later, the investors in Alinea still get a really nice check every year.

A lot of restaurants lure people into the investment group by saying, well, you'll always have a preferred table or you'll always have this or that. And we did the opposite. We said, every one of the investors will pay, including myself. Like if I dine there, All the investors get 20% off. If you send someone there and you send a friend, you pay. And that way, someone who comes here 80 times a year contributes. Same as someone who comes here twice a year. How will we run it in terms of volume?

If you're shooting for perfection in a Michelin three-star restaurant, you do 40 to 50 to 60 people a night. And that's it. That's a lot easier than doing 120 people a night. A lot easier at that level. So we were always looking for ways to expand revenue, to grow, to... come up with innovative ways of actually making it a business. And by making it a business, we could then reinvest in the experience of our customers. And if anything, it gives you a giant head start. I show when I'm talking to chefs or restaurant owners, I show a picture of five artists, Picasso and Da Vinci and all these people.

And I'm like, four of the five of these guys died rich on their art. And one of them cut off his ear. If you want to die for your art and cut off your ear, go right ahead. I'm fine with that. I just don't want to be invested in that as a business. Picasso was prolific, but he was also really clever. And he was a genius. So they're not mutually exclusive. And I think that's the attitude we took right at the beginning. There's an old Picasso documentary from the 20s. And I didn't really know Grant very well when we started this whole thing.

And I dragged him over to my house and I was like, you will watch this. And it was just Picasso painting. It wasn't doing anything else. And he was like, why am I watching this? I was like, he made that in the 20s to promote himself. Think about that. The best artist, living artist at that time agreed to do this thing, to show the process. Why? And we ran it almost like a political campaign. We had words that we would avoid every interview. What words would you avoid and what words would you use?

That sounds very interesting. Two words that we would avoid were avant-garde. and science. So Grant considered his cooking avant-garde. He even thought about calling the restaurant AG. I was like, well, you automatically eliminate 90% of the people. No one wants to eat science. It's one thing to talk about the science of what everyone was calling molecular gastronomy. But even that was a misunderstood term because it was actually coined by Hervé Tisse. And it was about the component aspect, almost like pointillism. It wasn't about manipulating individual molecules. So we would have press call us.

and ask, oh, well, you practice molecular gastronomy. You're really into science then because you're moving molecules of food around. The guy's a chef. He's not a physicist. So those two words we avoided because I think that they alienated potential customers. And then the two words that we used in every interview and still do, fun and delicious, because it's so simple, but so hard to find. Because when you go to a great restaurant, whether that be your corner bar, or the best Michelin experience you've ever had while you're traveling. I guarantee you it's fun.

It's not snooty. It's not someone looking down their nose at you. You feel like you're part of this pageant that's going on and fine dining. And you should be part of it. You should be one of the actors, not an audience member. And then delicious is obvious. Has to be delicious. Otherwise, it's just a farce. Every interview you ever see of us still to this day. When someone asks about the science or the process or whatnot, I'm doing it right now. Everything we do has to be fun and it has to be delicious or we will not do it.

I'll just give a quick testimonial. When I was there, the way that dessert was served was that Grant came to our table, laid down this kind of funny latex tablecloth and basically created for like a half an hour, a Jackson Pollock dessert, all sorts of different ingredients, like literally painted the dessert on. our table, which was incredibly fun. And of course, me being me, I'm like asking him about where does this latex come from? Is it going to impact the taste? He said, I was like the first person that asked him that question.

And he was talking about its origin in like the S&M industry in Europe or something, like some crazy place. Yeah, yeah, yeah. That's actually true. So this is a good way to show how in any business you ask the right questions. So one of the questions that we wanted to answer was that we asked the question, But when in your life do you feel like something's new? The older you get, the fewer new experiences that you have. And so when you have one, you kind of crave that. You're like, wow, that was really cool.

At the same time, you become more closed to them as you get older. It's natural, I think. We were like, how do you become more childlike? What is a way to make an adult feel like a kid again? A number of the dishes at Alinea. came out of that question. One was the balloon dessert. It's like an edible balloon. When you're a kid, you get a helium balloon and literally you can play with that thing for hours. It's like magical. It floats. That's really cool. We sorted out how to make an edible helium balloon.

It's so simple. It's just like a taffy. It's nothing crazy delicious, but it's wildly fun because you feel like a kid again. How in the world does a Michelin star restaurant can give you a floating balloon and then make a mess of yourself while you eat it? We were asking that question And I remember going to a museum where everything was really big. So they had like a table so that if you were a five foot ten adult and you sat down at a table, you would physically feel like you were when you were three.

The plates were big. The chairs were big. The counter was really high. I don't even remember where it was, but it really stuck in my mind. And I said, like, well, we should make everything giant to make you feel literally small again. And so I came up with this idea of a table plate. literally a plate the size of a table. And we made a couple up. It was very Willy Wonka and Alice in Wonderland and all that had giant forks and knives and stuff. It was really stupid. Like as soon as you actually did that, it was kind of like, well, you're going to hit someone in the head with this 80 pound plate.

And where are you going to store it? Wash it. There's practical considerations. In the midst of all that, I would talk to Grant. at the pass in the kitchen and he would be plating things. I'd be watching him do the saucing and plating and all that. And occasionally I'd pick up a spoon and I'd do a plate. He'd fix it. I see what he's doing and yet I can't replicate it, even though it looks simple. There is a brushstroke there born of thousands and thousands and thousands of repetition. I know what it should look like.

It's just like painting. And I went back to that Picasso documentary and I was kind of like, We should send the chefs into the dining room. Everyone wants to see the chefs anyway. And we should just have them plate on this giant plate. So it's kind of killing two birds with one stone there. The idea went away for like four or five months after the big plates because it didn't work. And just thought it was dead. And then Martin Kastner at Crucial Detail was like, well, why does it need to be a rigid plate?

You could use a different substance. And we were looking for gray latex. He found it at a sex shop in Paris. Rolls of gray latex. On the internet, like he wasn't trolling about the sex shops in Paris. We figured out, we called them, we're like, who manufactures this for you? And they're like, what are you into? And we're like, where are you doing it for food? Table food art. Yeah, yeah, yeah. That's the story of how that came to be. But I think that encapsulates a lot of our thinking. That was a six or seven month project.

And then we figured out how to do it once. And we would do one table a night. And we would go, there's no way we can do this for every table. And then four weeks later, we were doing it 30 times a night. It's a magical thing, like Netflix. Chef's Table had that on billboards in Los Angeles promoting the show. So for me, it's a really weird thing because it came out of this process of three or four or five people talking about how do I make you feel like a kid again?

And clearly it stuck out in your mind as a new, weird, fun experience, which is really what we're shooting for. Just to pour evidence on the pile, I still tell people about that all the time. And it's interesting to me how often businesses seem to want to go down the fairway and sort of... not be risky, and how incredibly boring, but also how bad a business decision that is. Because if it was just a lava cake or something, I wouldn't talk about it. There is an important distinction here, and that is this.

People have copied that now. Anything good gets copied. And if you Google up restaurants in South America and Asia that are copying it, they don't copy it well. They'll literally just take a bunch of food and dump it on a table. No, no, no, no, no. If you're going to try to do this very risky, kind of potentially polarizing thing, you have to make it elegant and beautiful too. Execution, the ideas are great. I tell people all the time, you can have all the great ideas in the world. If you do not execute them at a high level, it's going to fall flat.

Grant, when we first opened, wanted to show movement and food and he had this little bacon on a wire thing and stuff. And now there's a bunch of steakhouses that put thick steakhouse bacon on a clothespin. Our thing may have been done and we only did it for four months, but they didn't really get the point of it. It looked beautiful at least. And now they've got clothespins holding bacon on a wire. You have to figure out the core of why it's special. And that's a tricky thing to do a lot of times.

Going back to the kind of way the business itself is run and the service delivered, you guys have been extremely innovative in things like ticketing, selling meals ahead of time, not at the restaurant, things like dynamic pricing. Can you talk through how you arrived maybe at those two concepts at first and the impact that they had on the business once they were in place? I had never spent a day working in a restaurant. And then even after we opened Alinea, my role was to coordinate. I was like the producer of a film.

I found everybody, got them involved, worked with the architect, the interior designer, did all the permitting, the liquor license, the legal, all that sort of stuff. But I didn't actually work in a restaurant ever until the day we opened. And I certainly didn't intend on working at the restaurant. I expected that I would do the financials and the books and things like that. But I would also hand that off to the general manager, say, or things like that. About 18 months after we opened, Grant was diagnosed with stage four cancer and at the time was given six months to live.

He's 11 years cancer free. That's a story in and of itself. But at that moment, I went in to the restaurant, started going in every night for service, not doing just the business side, but really looking at the other aspects of it. I just would look around and be like, why in the world do we have an empty table right now when we have 60 people on the waitlist? Well, they just didn't show up. And of course, I knew that. When I went to other restaurants, I'd have an eight o'clock reservation, be told to wait at the bar for 45 minutes.

And I started asking like really, really basic questions. Why is it that I go to a restaurant, have an eight o'clock reservation, and then I'm told to wait for 45 minutes? Is it because they're disorganized or so many people came? And it's like, no, actually they lied to me and told me they had an eight o'clock table when they knew that they didn't have one till nine o'clock. And why would they do that? Well, because if they told me nine o'clock, I would have gone to the restaurant down the street that lied to me and told me eight o'clock.

And then conversely, a lot of people lied to the restaurant. They would call Alinea back then and they would say like, hey, we want a table for six on March 23rd. Say, I'm really sorry. All we have is a table for four. They would say, OK, I'll take it. And then they show up with six people or worse. They want a table for two. They say, I'm sorry, we only have a table for six. OK, we'll take it. We'll just bring four friends. They show up as two. All of a sudden you have two people sitting at a six top and you've just forgone a thousand dollars of revenue.

Now you multiply that out over the course of the year and we were losing over a million dollars of revenue through those two things happening. One of the basic things that people don't do in the restaurant industry, and it drives me nuts, even with our own staff, is no one multiplies it out by seven days a week, 52 weeks a year. So if you have something that's costing you even $20 a day, Add it up. It's a low margin business because you're not looking at these chunks of revenue. I was just going, why in the world, if we have a wait list of 200 people, can we not just limit it to the people who actually are willing to come in and take a little bit of a deposit first?

And what's fascinating about that is that when I said that to people, I was like, look, baseball games, concerts, theater, every other form of entertainment. does some sort of ticketing. And I was told that it was a terrible idea because restaurants are not entertainment. And I was like, what are they? What's really fascinating about restaurants and food in general is that because we are biological creatures that need to eat, people have all sorts of emotional and cultural and ethical baggage on top of what a restaurant is. And you're seeing that now during the pandemic.

And at the heart, though, you don't need to eat out. Eating out is a social endeavor. It's entertainment. It might be art. And it definitely is sustenance as well. At the core of it, we could charge ahead. I was told by everybody I talked to that it was a terrible idea. Literally everybody, except for my wife. Grant thought it was a terrible idea. Our general manager at the time thought it was a terrible idea. Notice I say at the time. It was very, very, very frustrating because I kept having this notion in my head where I'd wake up every day going.

We really should just take a $50 deposit and then the problem is solved. I honestly knew nothing about behavioral economics at the time. I didn't know that these were things that were tested. I just knew that as a derivatives trader, if everything went to zero at the end of a day, that's like an expiring option. And that option value changes the closer you get to expiration. And yet we kept all of our values constant. In other parts of the world, that wasn't the case. I sat down one day in 2014.

and wrote this long essay. But before then, I skipped ahead. When we were building Next, I just decided this is like a theater-like restaurant. It changes three times a year to an entirely new menu. I'm going to sell tickets to this. And again, everyone in my own company thought I was an idiot. So I had to hire an outside programmer, had to not get a phone on purpose. We barely built it in time and it broke right away because it was a homebrew software. But then the first day we sold $562,000 in tickets to a restaurant for the first time ever.

And I remember that as one of the happiest days of my life because I turned on this thing and people did it five or six or seven years of me kind of looking at this going like, I'm pretty sure this will work. I'm pretty sure this will work. And everybody in the industry telling me no and all my employees rolling their eyes at me. I remember I called Grant up and we were opening night for next. And I said, you've got to come to my house. And he was like, dude, we're opening a restaurant tonight.

I can't. Things are falling apart here. And I was like, just come just for 10 minutes. And he showed up literally in his chef whites and clogs. And I must have looked like hell because I had spent like 10 straight days, like a bad movie, eating pizza and drinking wine and trying to get this thing set up. So I hadn't shaved, I hadn't showered. I looked like the big Lebowski. And I took him up to my little third floor office. And I showed him, I'm like, click on that button, that table will become available, and then it will instantly sell.

And he did it. And he's like, what happened? And I was like, we just got $625 in our bank account. And that person's not going to dine for two months. And anyone that you open will instantaneously sell. And he was like, that's amazing. And I was like, yeah, it's fucking amazing. And then he just left. I was like, okay, I'm going to go cook. And that was like one of those moments where you go like, I have a time machine. When I was a trader, there was... Exchange-traded funds were just starting, and the natural hedge for them was the futures at the Mercantile Exchange.

I was the guy who said, we need to connect these two exchanges via a closed-in cellular network so that people can talk to each other instead of using all these hand signals and phone calls. The moment that I got that turned on after over a year of work, getting regulatory approvals for it and everything, I had a five-second time machine on the market. Now, people are down to like picoseconds now with high-frequency trading. But at the time, literally five-second time machine. I could see what was going on in New York five seconds before it arrived in Chicago.

This felt like the same thing. I can run my restaurant in a way that no one else in the world can. And it worked. I mean, we sold every single seat for a year. We made over 30% margins in the first year. We blew out all of our goals while providing people with an incredible value. That opening menu was $85 for a 12-course menu. It was incredibly satisfying and then incredibly frustrating. as well, because even after I did it, people would say, oh, well, that works for that one. In any business, you're kind of constantly having to prove that it works outside of your own niche.

Even if you look back at the articles, they would say, oh, yeah, this is a really unique restaurant. This one's different than all the others. So it works for them, but it won't work for pick your casual pizza place. And I was kind of going like, no, no, no. That's why the variable word is in there. could charge $5 and still affect people's behavior. It took four years, but four years later, I just couldn't take it anymore. And so I started to talk. Do you think before we get into some of the talk origin stories and spend a bunch of time there, do you think that this concept of ticketing, prepayment, and even dynamic pricing can and should be extended to all sorts of other business verticals?

I'm thinking about like salons or spas, anything like that. My original... thought, and if you look back at the old blog post and you Google ticketing for restaurants, Alinea, it's still somewhere out there. I call it the dynamic and variable pricing for time-slotted businesses. Any business that's time-slotted should be dynamically and variably priced, right down to your lawyer, frankly, your dentist. If everyone wants a 10 m. Saturday appointment because of work hours, why doesn't it cost more to go to a dentist or a salon or anything else for that matter?

Personal trainers at 10 m. on a Tuesday, do not have as many clients as 6 m. on a Tuesday. To me, all of those things should be and will be dynamically priced. The tools to do so are not yet widely available. But you look at something like Amazon and Shopify for hard goods, they're doing that already. It's accepted for hard goods. It's less accepted for services. Inevitably, it's going to happen. If I was going to open a dry cleaner or something like that, I would immediately have dynamic pricing. Can you discuss the origin of talk itself?

I think now we can talk about software business that potentially is rolling out the innovative thinking that you have and making it a service for a whole bunch of restaurants to begin all over the country. Why did talk begin? And we'll kind of talk through each stage, including an incredible story through COVID. I came to the restaurant business as an outsider with this weird background. I was a philosophy major in college, studied logic and philosophy of language. and applied it to derivatives and then ended up in the restaurant business, inevitably you start going like, well, I need to know my customers.

I need to start looking at some data here. All of the software available to restaurants at the time, and this is still true, their business model intermediates the relationship between the business and the consumer. OpenTable wants to own that relationship because That's how they monetize it. They get paid a dollar for every diner that books at a restaurant, up until $7 if you enter their promotional plans as the restaurant. So they claim to the restaurant, we delivered the diners, not you, not your great ideas, not the table plate we were talking about and all that.

And I was like, they're not delivering any diners for us. We're doing that. We're making a great experience. And yet I don't know which Patrick O'Shaughnessy is coming in tonight. So I don't know that your wife is left-handed and likes tea. I don't know that you've been to my other five restaurants 22 times because each restaurant is siloed as its own server. And the more I dug into the why of all that, how are these companies monetizing it? What are their pricing plans look like? Who owns the data? Who owns the customer relationship?

I started more and more going, this is right for innovation. And it's just frustrating as hell as a business owner. I didn't build. The predecessor talked to commercialize it. I just built it for my own restaurants because I was dissatisfied with the existing system. And it ended up being a much bigger problem than I thought in terms of solving it, programming it, building out the system, because there's just so many components to it. And that's why no one had started it before. There are whole companies built around a waitlist for a restaurant.

And that's a feature, not an application. But they turned it into an app and they just built a little better waitlist thing and they sold it to Yelp for like 40 million bucks. So I would look at this and go, how is that a thing? That's a weekend project and it's not even executed well. More power to them, mind you. But I would just get incredibly frustrated that there were these little peeks and pokes at it. So finally, I woke up literally one day and read this article in the Wall Street Journal about Reserve and Resi and OpenTable and just went, no one gets it.

No one gets what the real problem is here. I would listen to some leaders in the industry. Wow, they don't get it either. Meanwhile, I knew what the finances of my own restaurants looked like. This doesn't seem as hard of a problem as they're saying. When I would go into conferences and talk to them, it was incredibly dismissed. I wrote this blog post literally on a Saturday morning, woke up, read the article and said, I should probably dump all my thoughts into a blog post. 5,000 words in like four hours and posted it up.

It was read a couple million times in the first couple of months because economists loved it because they were like, oh, this is behavioral economics in action. Restaurant owners that were like, yes, this is what I've been thinking. Now, if 200 restaurant owners email you, you fall into the trap like every startup going like, well, everybody thinks this way. Look, people love this idea. But of course, the 200 restaurants that emailed you are the ones that are the minority. I didn't know that at the time. The crossing the chasm thing is kind of real.

So the early adopters are all going to call you up and say that you're brilliant. We want the software and all that. Well, I fell for that. and called Brian Fitzpatrick and said, look, I need to make this into a company. And he was the head of Google in Chicago at the time. I was like, I need to hire two engineers and build this thing out. I was seriously under imagining what it would take. That naivete is great to have when you're starting a company. I'd invested in other software companies.

I grew up programming as a kid, not that I can program at all now, but I knew what was sort of required. And he quit Google. I didn't expect him to, but he just said, I want to quit and start this with you. And we hired a few really great engineers who had heard me, one of whom heard me give a talk at Google, actually, about dynamic and variable pricing for time-slided businesses. And it was a talk about derivatives and how derivatives can apply to things other than financial products. These folks are super geeky engineers and understood the math and statistics of these things and whatnot, and were enamored of trying to apply that to an industry that's 5% of GDP.

So we started out with a group of five people, literally in a closet. We had like a spare storeroom in the Alinea offices. That's how it started. It's been fascinating to actually sell this thing to the industry. Can you talk about what it was like in the earliest days and how you decided which restaurants customers to focus on and which features to deliver to them first? I always find this to be a huge challenge in building software is you kind of know where you're going in the end state, but the sequencing is really critical to success or failure and hard to stay disciplined on.

So how did that go in the early days of talk? Who did you focus on and what did you deliver first? And what was your strategy for deciding those two things? I looked at what everyone else was doing. And what everyone else was doing, our competitors worldwide, they looked at every booking system worldwide. And what they all did was that they copied part or as much as they could of the feature set of OpenTable and then gave the product away for free to gather market share. That is a standard playbook kind of thing to do, which is, hey, we'll make the slightly better iterative mousetrap and then underprice the competition.

We tout a new feature or two, but really we're not trying to break new ground here because we don't want to scare people. That is exactly what was getting funded at the time. And I looked at the products and I was like, this doesn't do anything for me that I couldn't do on OpenTable. And yeah, it might be free. But if you give something away from free, the people that you attract are the people who need free. So in a weird way, you get the worst customers. If people are that price sensitive.

They're probably not thriving. So we sat down and for the first six weeks of the company, we literally just whiteboarded out everything. What is the target customer in the first six months? The one thing I could prove beyond a shadow of a doubt was that for a certain kind of prefix high-end restaurant, this would be a game-changing thing. It would make them millions of dollars. They were also tended to be the high-profile restaurants and the restaurants that could take risk. So we were like, double down on the high-end thing. It's kind of like the Tesla approach.

Let's build the fancy car first and then work our way down market. Everyone else is trying to build the Volkswagen bug and sell a ton of them by giving them away for free. I remember talking to VCs at the time. They're going like, what's your TAM? And I'm like, my TAM is a giant percentage of GDP in the world. Yeah, but you're only for high-end restaurants. I'm like, no, no, no, no. We're starting with that. And we will go down market. I mean, I had very famous VCs tell me that this will never work.

You need to have a B2C strategy. These other guys are paying $25 to $50 per download on advertising and promotion, whereas we're getting... thousands at the time, just a couple thousand, but thousands of new clients every time we add a high-end restaurant because people are seeking out that restaurant. That goes back to my point that the network of OpenTable wasn't finding the restaurant. It's like if we got the French Laundry and Eleven Madison Park and the Fat Duck and Talier Crenn and all these Michelin three-star restaurants, people are going to go to them no matter what the booking system was because they didn't care what the booking system was.

So we'll get our first million users for free and then we'll provide a great ROI. on the $700 a month we're charging to these restaurants. And by the way, we'll process millions of dollars. We'll pull that from the POS systems. We'll be a payment processing company at the core. That's how we will make our money in the long run. And I'm telling you, nobody believed it in the VC world. Now, not nobody believed it because I had some really great VCs that very quickly believed it once we had 50 to 80 to 100 restaurants on.

Origin Ventures, Jason, Helzer. I served as a judge at the New Venture Challenge at the University of Chicago Booth School of Business. Sat next to him a couple times on that, and I was like, oh, this guy gets it. He asks the tough questions here and all that. He always said to me, if you're ever going to take money for talk, let me know. While we never intended to, I recognized about a year into it that this is going to be a long-term project, 10-year project. It's going to take hundreds of people to build it, not dozens.

I went out to raise money. I called him up. He came in. They talked for an hour. We had a term sheet at a crazy valuation an hour later. And that was because for years, he saw how I personally operated and he knew that I was committed to doing it well. But the business model didn't resonate with most people until, honestly, this year. People now see that creating a network in, say, New York and Los Angeles and San Francisco is not as resilient. as creating a network in Kansas City, Minneapolis, and those cities as well.

You need everywhere, and you need all sorts of different restaurants, and you need to figure out how to provide the ROI to all strata of these businesses. As soon as we had all the features that could provide a great ROI for really high-end restaurants, we started going hard down market, fast, on purpose. and building out all of those features and breaking them. And then all of our engineers went and worked in restaurants as hosts. These are people who spent their time staring at a computer screen or suddenly checking people in at a restaurant.

So they suddenly had empathy for the end user. And we didn't conduct focus groups. We didn't bring the restaurants into our offices. We did the opposite. We took our people and we put them into the restaurant. Two incredible insights, the one being that last one there, putting people in there, but also the value of spending care and time choosing your first customers. It's so interesting how much of a business gets determined by who it picks as its first customers. I feel like that doesn't get talked about enough. And who you don't pick too.

There were restaurants and restaurant groups that wanted to use us three years ago. When I saw what they needed and what they wanted to do, I just went, we're not quite ready for you yet. And they were like ready to sign on. And I was like, no, we'll fail if we do this right now because we don't have this particular waitlist feature or a walk-in feature. There's so many different aspects. Like a restaurant actually sells 10 different things. At the time, we can only service two of the 10. And meanwhile, they had five other systems that were servicing all 10.

And I was like, you know what? When we're ready for you, I will call you. And then I want you to take me seriously. And we did that over and over and over again. We didn't even have a sales team at all until three years in, which is crazy. We grew the company very, very capital efficiently. And one of the ways we did that is, can we onboard more than 100 restaurants this month? No? Okay, well, let's just concentrate on doing 50 then and do it perfectly. That discipline is rare.

See it over and over again. I think it's a Chicago thing too, or maybe it's just that I always ran profitable businesses. The concept of the phrase burn in a startup. is just the worst word in the world because I'm not burning money. I'm investing it. The time horizon on investing money in a startup, tech startup especially, is a lot longer than people think. For every Instagram out there where you get a ton of users and then all of a sudden it's like this ballooning unicorn and their first raise is $100 million in a billion-dollar valuation or they sell it for a billion dollars or whatever, the vast majority of SaaS-based companies have to work capital efficiently early on.

Anytime I saw a negative month, which was going to be for a long time, I was just viscerally upset. Intellectually, I knew that in order to grow something that's scalable, you're going to have to have a long time horizon of investment. That said, my restaurants are making money in the second month that they were open. Now, they're paying back a giant upfront investment. I could kind of go like, well, yeah, in 18 months or 24 months, we'll have all that paid off. And for as long as it runs after that, it's profitable.

The trading firm was the same way. It was profitable. It was very strange to me that working for a business that wouldn't be profitable for years. And I think because of that, we attracted people who understood and welcomed that mindset. But that also was a mindset that turned off a lot of investors prior to COVID. I want to talk about what Talk did during COVID, but I feel obligated to do some setup first around just the restaurant business, generally speaking. You talked about the 10 ways it makes money. It makes me think of the old adage, a third, a third, a third of the margin goes to the manufacturer, the wholesaler, and the retailer in a lot of businesses.

And I would just love to hear, you always hear the restaurants make their money on booze. I would love you just to describe sort of the canonical restaurant business model from the food in the ground through to the retail price at the restaurant. Generally speaking, How does a simple restaurant business work so that we can lay that groundwork before talking about how COVID changed things? I'm not going to use a simple one. I'm going to use a complicated one and then go backwards. So Gramercy Tavern is one of, I think, the best restaurants in America.

It's a great place. It's iconic. Let's use Gramercy Tavern. When you arrive at the front door of Gramercy Tavern, they have no idea what you're going to do. And when I say that, I mean that very literally. They have no idea what you're going to buy. They have a bar area there that's casual. That serves more casual fare. They have a walk-up bar that you could be at. So now we have two different things that they're selling, your casual restaurant and your bar. Then in the main dining room, you sit down and they have an a la carte menu, which is amazing.

Michael Anthony's great chef, great place. Then you have a tasting menu. They tell the people sitting down, if you want to do the tasting menu, you all need to do the tasting menu. And then we have two kinds of tasting menu. We have the regular omnivore one and we have a vegetarian tasting menu. Then if you do the tasting menu, you can add on wine pairings or you can buy the wine list. And then they have private dining. So they have two private dining rooms there that are sold for special inclusions, corporate events, all that sort of stuff.

Plus they have a cookbook. So eight things that they are selling, the bar, the casual, the a la carte, two prefix menus, private dining, and merchandise. When you go to book that, the only thing you say is I'm showing up. That's incredibly, incredibly inefficient. And what they'll say is they'll say, well, yeah, but only 4% of the people buy the tasting menu. But that's because you're relying on the server to surprise them with this as an option. And then everyone at the table needs to agree to it at that moment.

If one person doesn't agree with it, it gets vetoed and everyone orders a la carte. If you put that up on a Saturday night when your demand is three times your supply, there's 700 people that want to go there, but you only have 250 seats. I'm making that number up. If you say, well, I'm going to put 100 of these up for sale as tasting menus only, you will sell all 100. And you will know before people come in what they're going to get for those people, not the a la carte people.

The people who want to do it at the bar, you have a separate button that says, I want the casual aspect. If you imagine all that same thing applying to a pizza place, your favorite pizza place to go to get pizza on premise, there will be seats in front of the pizza oven that people like to sit at to watch the making of the pizza. There'll be the really nice corner table that seems like the regulars always get. And there will be private events and there will be t-shirts for sale.

So I always went, what are the revenue sources? You mentioned the cost side as well. And there is all of that. But restaurants never concentrated on their revenue side, other than going like, whoever sells the most Mai Tais this month gets a bonus to their servers, which essentially means that you get a terrible sales pitch at the beginning. So my whole thing is we gave restaurants tools to actually sell. The other part of that is that if you sell more efficiently, your margins get better and better because the last dollars in are the dollars you keep.

Your fixed costs are known, rent, utilities, all that sort of stuff. Your cost of goods sold look better and better and better when you have less waste. So it's actually good for the environment. It's good for your food costs. It's usually 30 to 35% labor, 30 to 35% food costs. 30% on your fixed costs and insurance and overhead and all that. What are you left with? 10%. Well, if you can eliminate food costs, if you can run more efficiently, if you can have high demand on a Tuesday at 930 at night, you will make 20 to 30% restaurant.

I've had dozens of restaurants I've talked to where they said it's completely impossible to make more than 20%. It's just not possible. Over and over and over again, I see that when they make these small changes, even the casual places on the revenue side, suddenly it unlocks money that they just were like, wow, the denominator is the same and the numerator got big. It's just not that hard, but no one does it. No one runs it efficiently. And people are scared of change. People are like, well, what about our customers that want to call on the telephone?

Or what about the people? What about the great customer that doesn't want the tasting menu? And I was like, great, hold back four tables. Click that button and hold back four tables. I'm not telling you to change the entirety of your business for every person. I'm saying run some of those experiments we talked about at the beginning and see what the outcomes are. And I've been incredibly unimpressed in general with the industry of their willingness to do that. What do you think the generalizable lessons are from these learnings at talk about?

specifying revenue sources and exposing them to customers more deliberately, reducing uncertainty. If you were just thinking about business, generally speaking, what lessons do you think could be very broadly applied, not just to restaurants? Know what you're selling and then actually sell it, which sounds incredibly obvious. It's so stupid. No, I know. It's so stupid. I'm telling you what, there should be a business course on that. If I ask Gramercy Tavern what you're selling, they'd say food. And I'd go, no, you're actually selling seven different experiences plus some merchandise. Meanwhile, you haven't categorized those experiences until after someone comes in.

You haven't even informed the consumer that they exist. Do you want to be surprised when you go to pick up your car that you bought? Would it be really weird if the car had a different color and they tried to sell you on that one? Yeah, you'd walk out of the place. One of the talks I give to all of our new employees at Talk and to the industry is called Tuesday is Not Saturday and seven other things you already know but are doing nothing about. It's really obvious. You don't need to be an expert in the restaurant business to know every restaurant in the world, probably, or 99% with some anomaly, are busier on Saturday night than Tuesday night.

Okay, so we have that. You're not going to get an argument even from a diner. Yeah, more people eat out on Saturday night. What are you going to do about that? How are you going to get more people in on Tuesday? What levers are you going to pull to get them in? And for some reason, the whole industry... With the exception of the early bird special in the 70s and the blue plate special and the diners, the high-end industry just went like, yeah, no, we're too good for that. We're not going to pull the pricing lever because we might piss off the people on Saturday night.

Because that was the argument given to me by my own employees. Well, won't the people on Saturday be pissed that they're paying more? No. Do people sitting on the 50-yard line on the 10th row, are they pissed off that they spent $500 on the football game instead of $80 to be in nosebleeds? No. That's like a normal thing. The other thing is people can't buy what you aren't selling. You have to have the information readily available where people live. And people live on the internet now on their phones. And if you are not selling there, not just saying, hey, come to my restaurant, eat this delicious thing.

But if you're not selling those experiences, if you're not saying, hey, we've got this awesome corner table at our pizza place that everybody wants. And it's a $10 deposit per person because we can't have no shows at that table. The sunk cost of that $10 per person is mentally done a week before they arrive. They end up spending more once they get there and they're happier because they need to wait for the table and they got the best table in the place. It's like win, win, win. Having those levers and those tools to actually sell, regardless of what business it is, is massive.

Same thing goes for publishing. We publish all of our own books. Last week sold $120,000 of books in a week for a restaurant with margins much better than the restaurant. But we actually sell them ourselves. I have mailing lists. I have websites. I have Instagram and Facebook. We're running a couple thousand dollars of ads per day. And we own the rights to the book. Done. Not that hard. That goes back to the original thing. Own it. The publisher doesn't own our books. We do. And sell it. This is not hard stuff.

Amazing to me that so many people in the industry don't, there's a lot of artists in the industry that view commerce as antithetical to their ethical beliefs, as weird as that sounds. And yet so much of that makes the whole artistic expression and creative part of this more possible. By running it successfully like a business, you create more opportunity to do more of the thing they want to do. Yeah, yeah. I mean, at the end of the day, you can't operate if you're losing money. And there are restaurants out there, by the way, that have run for decades, nonprofits essentially, and they don't mind.

And that's fine. That's totally valid for them. But that's not what I wanted to do. And I think a lot of times people say, well, you guys can do that because you're Alinea. You can charge ahead because you're Alinea or you can sell your own books because you're Alinea. And I always say, no, no, no, we're Alinea because we do those things. You're getting the order wrong. It's hard to do. It sucks. There's been many times we've done stupid things that haven't worked. And then you junk them and you move on.

Any other lessons that you've learned from publishing? You mentioned that earlier as something that you do and you enjoy doing. You mentioned the higher margins. Any other thoughts on publishing, which I think, again, like restaurants, many would knee-jerk reactions say is a bad business. If you ask questions of an industry and they won't tell you the answer, that's always a good sign that someone's getting very wealthy. In publishing, if you ask an author, ask any author, how much did it cost to print the book? What are your cogs? They will not know.

Ask any literary agent that question and they'll think you're off your rocker. Ask any publisher to give you that information transparently and they will rip up your contract. So call the printers in China, pick your favorite book, find out some print brokers here in the US and say, what did the printing of those books cost? Send me a spreadsheet. And when they do, and you find out that a $50 retail book costs about $2 to print, And you're going to get 10% of cover price. They're requiring that you order 5,000 for your own list.

And they're going to give you a quarter million dollar advance. You realize that there is no way they've taken no risk at all. And I wrote up a long medium for those who are interested. If you Google my name and look at my medium, there's why we are self-publishing the aviary book. I posted up the contracts that we were offering. They're all terrible. Certain kinds of books, I think you're much better off going with a publisher for it. If you're going to write an academic book. and you have no built-in audience, chances are you're not going to sell a ton of them on your own.

But if you have an audience already in whatever business you're doing or a large social media following or any of that, doing a book and publishing it yourself is not hard. It takes a lot of effort. Alan Hamburger and Sarah Hamburger came from Pixar Industrial Light Magic. We hired them both to do all of our media and books. We gave them equity in the thing so that they own part of it. Three years later, we have six books out and they... produce millions of dollars of revenue every year. Fascinating. What are a few of the other things that people already knew but do nothing about?

What are the top two or three that you haven't talked about that come to mind? Food costs money. So that's one of them. But the way that everyone looks at food costs and paying for food is very weird in that every restaurant, and this happened when COVID started, so it's a good segue to that. Every famous chef that went on TV said, this is the kind of business where this week's revenues pay for bills from a month ago. And when we started to bring in money through deposits and prepaid reservations, tickets, I suddenly looked and had a bank account that had a couple million dollars in it of forward money, like a lot of other businesses, like the computer business.

You buy a computer and then they ship it to you five days later kind of thing. So you have a float. So I started calling up some of our big vendors for like big expensive items, proteins, meat, fish. luxury items like caviar, foie gras, that sort of stuff, and wine and liquor. And just said, I don't want net 120 anymore. I want to prepay you for the next three months. And they had never had that phone call from a restaurant before. So basic economic theory would say that, well, how much should they discount it?

Let's say there's, we're going to buy steaks and they were $34 a pound wholesale for dry aged ribeye. We're going to pay $34 a pound wholesale, get net 120. And I called the guy and said, I'm going to use 400 pounds of your beef a week for the next four months for our menu, which is about $300,000 of beef. What do we got if I prepay you? And he was like, what do you mean? I'm like, I want to write you a check tomorrow for all of it for four months.

And he was like, well, never one's ever said that. So he called me the next day. He said $18 a pound, half, half price. Wow. That's what I said. I went, I'll pay you 20 if you tell me why. And he said, well, it's very simple. I have to slaughter the cows. Then I put the beef to dry. And for the first 35 days, I can sell it. After 35 days, there's only a handful of places that sell it for more than 35 days. At 60 days, I sell for a dollar a pound for dog food, literally.

So his waste on the slaughter and these animals' lives and the ethics of all of that are because of net 120. Seems like someone should have figured this out. As soon as he said that, everything clicked. And I just went, We need to call every one of our vendors every time and say we will prepay them. Now, I know huge restaurant groups, huge restaurant groups that look at their float as more valuable to have that money in the bank and to pay their vendors net 90, net 120, whatever. What are you earning in interest these days?

1% a year or something like that? It makes no sense to do that. It makes sense to get ahead of that curve, estimate your next month's sales and prepay for the food. Now, there's risk involved in that. But you've mitigated that risk by much, much better food prices. At the Michelin three-star level, we've been able to take our food costs down to a level that honestly our chefs never thought was possible. But we've done that partly through the efficiency of not having no-shows. But then the other flip side of it is that we've also worked on creating forwards contracts for all of our big vendors.

You have to do at least one more. This list is amazing. What's one more thing? And then we'll move on. People can't buy what you don't sell. stranger danger. You don't know who your customers are. So in the restaurant business, anyone can walk in and you have no idea who they are. It's really obvious that that's the case. You have a casual restaurant, people walk in, who is this person? You have no way of knowing them. Almost any other business, you are going to have some information about that customer so that you can remarket to them.

You can take that customer and aggregate them into a pool of customers. Upload them into Facebook and Instagram and say, create a like customer list within three square miles of my restaurant and all that. So all of these tools exist. They're largely free to use as well. And all you need to do is get your customer's email address, not their cell phone number. Their email address is the unique identifier. Other businesses and other booking systems don't want you to have that. Just like the publisher is saying, yeah, we won't tell you how much a book costs to print or we don't know, which is a weird thing to say.

These other booking systems go like, yeah, yeah. People don't like giving their email address. It's much better to have a cell phone number. It's like, no, actually it's not. And that's why Amazon and Netflix and HBO and everyone else uses your email address as your unique identifier. I call that stranger danger. Your customers cannot be strangers. You need to know who they are. And what are you going to do about it? Very simple. When they arrive, you get their email address. It's not that hard. When COVID happened, it represented obviously an existential crisis and still does for a huge swath of the restaurants in the

S. And I think one of the most interesting things that's happened with you and with talk is how you responded and reacted to that. Now that we've laid that groundwork, just love all the lessons you've shared with us so far. Talk us through that episode, which is, of course, ongoing and what you did and what you've learned. The first thing that. I did was I realized, you said it's an existential danger. You can realize that something's an existential risk or danger at any point along the curve of it being an existential risk.

The trickier part is to realizing that something could be an existential risk, has a small chance of happening, but it's non-zero. So right now, it's very obvious that to the restaurant industry, to software companies that serve the hospitality industry, that COVID is an existential risk. We started talking about that February 28th, because at the time, there was evidence in Asia and Italy that this was a very, very serious potential pandemic. Then when Seattle started having some cases at senior care facilities, that's the moment, that was March 8th, where I went.

the whole industry is totally screwed if this happens. And it seems like it's going to happen. As a trader and a trader in an era where you look at other people and you can tell whether they're telling the truth and how panicked they look. Every time I saw senior officials on TV saying that this is nothing to worry about, I worried more and more. They wouldn't even be talking about it if it was nothing to worry about. I immediately went into like kind of a footing of what happens if tomorrow every restaurant in America is shut.

What happens if I have to shut down all of my restaurants and can't serve anybody? What happens if they just go to 50% occupancy? Or what happens if my employees begin getting sick? How do we protect ourselves? That was a moment where I don't want to use the word panic. I didn't panic where I got very, very concerned and serious. And when you're the only guy in the room saying the sky is falling or the sky's about to fall, You can look a little unhinged. I tried to explain to everyone, if something has a 10% chance of happening, but if it happens, it wipes you out, you need to mitigate that risk.

Even if you're wrong and it doesn't happen, great, but at least we were prepared. And I called some other restaurant owners and whatnot. And honestly, people thought I was off my rocker a little bit. My own employees were kind of snickering behind my back because we instituted a five-minute call time, meaning everyone had to come within five minutes. We instituted mandatory temperature checks and hand washing and mask wearing. We did that two and a half weeks before Chicago was shut down and before there were any guidelines to do so. I could see on the look of some of our managers' faces the fact that the guy who sits on his computer all day is telling us to wash our hands every hour, but he has no idea that you can't run a restaurant that way.

You can't run a busy restaurant where everyone stops and washes their hands every hour. Log all that and video record it. to make sure people are doing it and all that. When I noticed that in the room, normally I would have a nice explanation as to why this is the case and all that. And instead I just said, anyone who doesn't do it is fired and you won't have a job for two years anywhere because that's how serious this is going to be if it happens. People went from going, oh, he's unhinged and we're just not going to do it to he's unhinged and he's going to fire us all.

which doesn't mean that they wanted to do it, but it did mean that it got the job done. And what happened was within a week, it became evident that unfortunately we were correct, but that also gave us the opportunity both on the talk side and the Alinea group side to pivot very, very quickly. And we talked to Canlis in Seattle and they were like, we're going to shut the restaurant and we're going to start doing. to go. And we want to figure out how to do that on talk because we love talk and it's changed our business for the better.

And we recognize that there was a way to shoehorn it in, but it wasn't that elegant, but because we're a cloud-based system, because we built our data around dynamic and variable pricing for time-slotted businesses, carry out food is also a time-slotted business. We can adapt to this very quickly. And so we gathered about 20 designers and engineers. We got a week to put out a new product. The people, again, who went, that's not possible, simply were off the team. And everyone else worked 20 hours a day to do it. We got it up and running for Canlis.

Three days after Chicago shut down, we started serving $35 beef Wellingtons out of Alinea, which was newsworthy at the time. Because why would a Michelin three-star serve $35 food? By the following week, we were selling $1,000 a night, plus wine, plus... supplements, plus all those things I talked about where you're actually selling. We're selling books as well every night. And we went from furloughing our employees to hiring everybody back in four and a half, five weeks. Everyone who wanted to come back. And on the talk side, we were able to massively undercut the third-party delivery applications, DoorDash, Uber Eats of the world.

Until then, they were supplemental income to restaurants. So they could say, well, I'm charging 20% to 30% because you have no service cogs. You have no extra labor. We're doing the labor by delivering it the last mile. And restaurants signed up for that. But when it became their only source of revenue, that 30% suddenly looked egregious and painful. We charged a flat 3% because we built the whole thing on the back of our events platform that charged 3%. It wasn't like some... miraculous thing. Frankly, I wish I'd charged six or seven or 10%, but we charged three in the intervening since March.

We've signed up over 3000 restaurants. Our business will be at a billion dollar GMV run rate by the end of the year. An amazing mix of revenue between elevated carry out and to go reservations as places reopen. 70% of everything on talk is a totally free reservation. It's not a ticket. It's not a deposit. It's that bar seat at Grand Mercy Tavern that's totally free. But the ability to sell that tasting menu and your carry out and all these things together make for a more resilient business model. Even as we reopened in the summer, our patios and Alinea did a pop-up on the rooftop and all that.

Even though we had replaced a lot of our revenue with the patios and whatnot, I insisted that we keep the carryout going because at some point I was like, hey, it's going to be winter in Chicago. There's no yurt warm enough, plastic yurt to have two sides open when 20 below Tundra in January in Chicago and it's snowmageddon again. And then I got to carry food out to that. That's not going to work. It's obviously not going to work. I'm amazed that all these restaurants are putting those up because that is a six week solution to a six month problem.

They just closed down dining again in Chicago and we were able to instantaneously wrap up our carryout again. And that's the goal is to have that sort of resiliency even after COVID. Do you think that based on that observation that there's a big risk factor for those DoorDash, Uber Eats kind of delivery last mile services because of how restaurants will inevitably have to change and it impacts their economics so much? Yeah. I mean, if you look, every single one of the US-based delivery applications actually lost more money during COVID, even though their revenue tripled.

As much as they are charging, the last mile delivery to a single location is a model that doesn't make money, which is why there's a lot of consolidation there. I think there are ways to have it make money. And part of the way to do that is what we've done, which is give the consumer a choice between picking it up themselves at the restaurant or paying for the convenience of having it delivered and then splitting that cost with the diner. So if someone picks it up, we charge the restaurant 3% for the order and we charge the consumer a dollar for the order.

That's it. If someone's delivering it, we utilize these third-party delivery last mile applications and we integrate with them seamlessly, but we've essentially convinced them that we're going to charge the consumer a flat five to $7. And if someone's selling a $50 menu and four people order it, so it's a $200 carryout order, which isn't the case with casual places, why should the delivery app get $50 to take it a mile? Doesn't make any sense. I think that there are ways of changing their pricing model that doesn't impact the restaurant as much, still good for consumers and gives consumers a choice, but kind of spreads out the true cost.

of doing that delivery, which is also equitable to the drivers. I'd love to close our conversation with one of the places that we started. I'll call the idea sort of process as art, your Picasso example of going to the trouble to expose the process as part of making people aware of it. The whole conversation, maybe I would sum up as know your customer, know what you're selling and sell it to them. It sounds so simple, but so many implications. What do you think about just businesses in general and how they communicate with their and customers, and whether or not things like, you mentioned Michelin stars a few times, and I think of that as this amazing thing that changes the trajectory of a restaurant, but that ultimately the best thing would be to create that impression directly to the consumer, not through Michelin.

Close with any thoughts on this idea of process as art, direct to consumer, and just the future of business. Yeah, I mean, you have all the tools to know your consumer and interact directly with them. For the first 10 years of Alinea, every single day when I woke up, I emailed two people that were either diners or posted on their blog about their dinner or on Yelp or wherever it may be. Because I figured over the course of a year, I would email 700 customers and they'd be like, holy cow.

That's a very simple thing. It took me about five minutes a day to do. And as social media grew up around it, I just went, oh, that's even more effective way of doing it. I think that knowing your customer literally, who is it? And then having the ability to interact with them in an authentic way is the key to all business. At the end of the day, you buy the person as much as the product. And that's why so many in America, so many executives, both for good and bad, come to be known.

If you say Apple, you think of Steve Jobs still. You think of Tesla, you think of Musk. That's because they're out there actually selling their product and their ideas. But of course, there's a cumulative ideas of thousands of people. but they're the good communicators. And at the end of the day, you're a philosophy major. I was a philosophy major. One of the things I learned in studying philosophy is how to think critically of something that I've learned or read and then how to write about that in a concise and efficient way.

So when I write a business plan, I don't understand the business until I can write about it on a single page. I have chefs all the time email me with business plans and I say, do me a favor, write up one page of what it's. like as a diner to eat at your restaurant. And then I don't hear from them for two months, if ever, because they don't have a clear vision. They have a clear vision of what food they want to give to someone. They don't have a clear vision of who that person is and what sort of emotionally resonant experience that you're creating with them.

All the time, we try to communicate directly with our guests, both on the talk side and the Alinea group side. I've consulted for other businesses as well in the past couple of years. These are the kinds of really stupid questions I get paid money to ask. I'm always amazed when I go in there and I was like, okay, show me your customer list for the last six weeks. And they can't. That just seems insane to me. And let me tell you, almost no restaurant can do that. But there's also a lot of other businesses that can't do that.

So that's incredibly... simple to do, but it's really hard to execute. None of this has been fun. Let me also reiterate, COVID has been terrible. It's been emotionally draining. It's been incredibly difficult on our staff. We've had to hire people back. We've had to refurlough people. We've constantly had to change. We were about to do a pop-up at a hotel, which gave us extra square footage so we can run at 50% capacity. We were about to spend $30,000, $40,000 creating this really cool multimedia experience for diners in there. We were working with sound and lighting companies and all that.

And then they shut Indoor Dining again. The next day, as soon as it was shut, I was like, okay, all that's done. We're not going to do that this year. And then people are like, why not this year? It might only last two weeks. I said, well, we can't outlay all that money and then open for a week and then close for Thanksgiving and open for two weeks and close for Christmas break. So it's become easier to make those quick decisions. But I want to reiterate, none of it's fun. It's all been a struggle.

It's not like I have the answers. We're willing to try things. And it's been very, very difficult and sad, frankly. It's never fun to sustain a business and your employees and not have a goal of thriving. We do keep that as the goal, but it's been challenging. I'll remember this awesome conversation for a lot of reasons, but just for the first principles thinking, no surprise that you're a philosophy major at all. I'll turn to my traditional closing question that I ask everybody, which is to ask you what the kindest thing that anyone's ever done for you is.

I'll make it a little bit generalized. Anytime that someone says thank you for something that was done a long time ago is a nice thing. I try to do that for some of the people who are mentors to me. I think like a really nice act of kindness is just to sort of recognize. somebody when they've done something nice for you or they've helped you out. Or sometimes it's tough love. It's not always a good thing. So recently, I've had a couple instances in the midst of all this. People have called up and said like, hey, I really appreciate that these were difficult decisions.

Or I really appreciate that I wouldn't have started my company without you. Alan Hemberger, who is running all of our publishing stuff, once stole a napkin from millennia. He is an autodidact, amazing guy. He learns so much different stuff. And one day I got a knife in the mail with a story written to it that said, I was so taken by Linnea when I was there years ago. I never imagined working with you guys. And I've never done anything like this, but I actually took one of the napkins and I wanted to return it to you today.

Wow. It was embedded in resin in the handle of a knife that he hand forged from a kiln that he hand built. Wow. So I opened it and I was just like, that is one of the most amazingly cool things anyone's ever done. Now it's not the fact, I mean, it's kind of amazing that he made the knife and all that stuff. What's really cool is that he took the time to do it and sort of said, Hey, this is important to me. Those kinds of little kindnesses are the big ones.

Well, this is so damn fun. Could have done it for three hours. Sorry, we only had an hour and a half, but it's been an absolute pleasure to meet you and to speak and learn from you. Thank you for the time. Thank you very much, Patrick. This episode was brought to you by Microsoft for Startups. Microsoft for Startups is a global program dedicated to helping enterprise-ready B2B startups successfully scale their companies. In this five-part miniseries, we talk to Greylock partner Sam Motamity and Microsoft for Startups lead Jeff Ma about why companies should partner with Microsoft for Startups.

In this week's episode, we talk with Jeff Ma, the Microsoft for Startups lead, about his background and the opportunity he saw taking the job at Microsoft. So Jeff, I think a great place to begin would just be with how you first... partnered up with Microsoft. What was so interesting to you about this new position and new initiative that you're leading? And how did your prior experience fold into making you the right person to lead this initiative of startups at Microsoft? Well, you're assuming I believe I'm the right person, but I guess it all started for me.

I've been an entrepreneur in the Valley for 20 some years. The most recent company that I started was a company called 10Xer, and it was sort of analytics and developer productivity. And we're trying to create a very much of a bottoms up. type of product, meaning individual developers would find it and would want to use it and on and on. And that's everyone's dream, right? The idea that they can create this bottoms up groundswell. But the reality is, as we got about three years into the evolution of the product and of the business, we realized that the problem that we're trying to solve was much bigger in enterprises and companies with lots of engineers.

And also we realized that the sale wasn't really going to come through the individuals. It was actually going to be very top down. So we realized that it was sort of an enterprise sale. And as I started thinking about what enterprise sales look like, I realized how little I knew about it. They were telling me like 12 to 18 months to get through procurement and the sales cycle would take that long. And they talked about all these different things that I had no idea about. And so I realized that as an entrepreneur that had done quite a bit, but never had sold into the enterprise that

there was a huge gap for me and my knowledge in how to sell into the enterprise. So I realized that when I came across the program at Microsoft and how Microsoft could really help startups understand how to sell into the enterprise and become successful doing that, that that was a huge lever and value driver. that some of the other cloud platforms didn't have. Just one more question on your background and kind of how it slots into what you're doing now. So you came from the sort of analytics world, but you've also done a lot of different things.

So you sort of applied a skillset to different industries, different jobs to be done for the consumer. So you're sort of a generalist. Can you say just a bit about that background and whether or not it's relevant to this new role? Yeah. So, I mean, I think a lot of people were surprised when I took this role because it isn't really analytics focused. And to be honest, like the idea of working at Microsoft was something that I wasn't really that interested in when they approached me. But then as I've gotten more into this, as I've continued to do this job and loved it, I've realized that in many ways, it's like the job that I've been working towards my whole life with these variety and diverse experiences.

I know you've had, I think you've had David Epstein on the show who wrote Range and the concept of generalist learning versus specialized learning. I realized that my whole life has been this sort of generalist learning, whether it's being an entrepreneur in the sports world or leading data science and analytics. at Twitter or, you know, being even on television at ESPN or coaching water polo like I did at MIT for seven years, you know, this whole idea of all of the different pieces that I've learned in my life have led me to this place where I fundamentally believe the idea of taking on a task like making startups.

work with Microsoft at scale and changing the way that startups think about Microsoft is this sort of amazing opportunity that all of these sort of life lessons that I've had have brought me to a unique place to sort of solve this problem. Could you give us just a bit of perspective on... sort of the market layout of the major cloud providers and Microsoft's obviously incredibly strong historic relationships with the enterprise. And what so far to you is the felt difference approaching startups about Microsoft's cloud infrastructure versus working with existing large enterprises?

Yes, it's a really interesting point because... As someone that's from the startup world, Silicon Valley, I didn't realize how successful Azure had become or how big a footprint it had, but mostly at enterprises. So what Microsoft has been tremendously good at over the last whatever years is taking a lot of these iconic enterprises from on-prem into the cloud, like convincing them they need to go into the cloud. So they've done a great job getting enterprises onto Azure, where some of our competitors have done a better job supporting innovation, specifically around startups and digitally native companies.

But with that, there's now this tremendous disconnect where you have all these enterprises on one platform, Azure. You have the startups on different clouds that are not Azure. And so with that disconnect, you are actually limiting the amount of innovation you can bring to those enterprises because obviously they want to work with people that are on the same clouds that they're on using the same tooling and the same products and whatnot. So I think that the role that we need to play in Microsoft is really very altruistic in that we need to help startups and we need to help the startup ecosystem bring innovation into the enterprises by getting them to build.

on our platform, specifically on Azure or integrating with things like Teams and using Dynamics and on and on and on. But it is actually like very altruistic as I think about it, because I do think that ultimately it will help create more innovation in the enterprise. To find more episodes or sign up for our weekly summary, visit com. Thanks for listening to Founders Field Guide.