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The meez Podcast
Josh Sharkey (Entrepreneur, professional chef, and founder/CEO of meez, the culinaryOS for food professionals) interviews world class entrepreneurs in the food space that are shifting the paradigm of how we innovate and operate in our industry.
The meez Podcast
Drew Skolnik on Navigating Growth Equity: Investing in Restaurants and Food Brands
#71. In this episode of The meez Podcast, Josh Sharkey sits down with Drew Skolnik, a partner at KarpReilly, a prominent private growth equity firm known for its successful investments in the food and beverage industry. KarpReilly has invested in well-known brands such as Habit Burger Grill, Cooper’s Hawk, Made In, S&S and Spindrift.
The discussion delves into the intricacies of growth equity, exploring how it differs from venture capital, what firms like KarpReilly look for when investing in restaurants and food brands, and the typical scale at which they get involved. With insights from Drew, listeners will gain an understanding of the common indicators of success that these investors seek, the duration of their investments, and the due diligence process. This episode offers a deep dive into the role of growth equity in helping restaurants and food brands scale and succeed.
Where to find Drew Skolnik:
Where to find KarpReilly:
Where to find host Josh Sharkey:
In this episode, we cover:
(02:35): Drew's background
(04:32): Why Drew and KarpReilly (KR) invest in restaurants and food
(15:52): At what stage does KR get involved?
(22:16): Ways in which KR assesses a team's quality
(27:03): What Drew looks for in ownership stakes
(33:55): How long KR holds investment for
(39:01): What Drew is interested in regarding the food space
(46:37): What Drew is interested in outside his portfolio
[00:00:00] Josh Sharkey:
You're listening to Season 2 of The meez Podcast. I'm your host Josh Sharkey, the founder and CEO of meez, a culinary operating system for food professionals. On the show, we're going to talk to high performers in the food business, everything from chefs to CEOs, technologists, writers, investors, and more about how they innovate and operate and how they consistently execute at a high level.
[00:00:24]
And I would really love it if you could drop us a five star review anywhere that you listen to your podcast. That could be Apple. That could be Spotify. It could be Google. I'm not picky anywhere works, but I really appreciate the support. And as always, I hope you enjoy the show. Hello, ladies and gentlemen.
[00:00:44]
In today's episode, we are going to talk about private equity and investing. And. What's that like? And how does it work? And we're going to be talking to the partner at a firm called Karp Reilly. If you haven't heard of Karp Reilly, they're a bit of an institution. They've invested in everything from Made In cookware to Salt & Straw to Spindrift to Starbird Chicken.
[00:01:07]
They've a bunch of incredible, very successful investments. And I had a lot of questions today just to sort of shed light on how does it work? What is the difference between private equity and venture capital? What do they look for when they're investing in a restaurant? Typically private equity is coming in when the restaurant has a bit of scale, right?
[00:01:27]
Maybe five, 10, 20, 100 locations. So not when you just first get started. You want to see how it works as it starts to scale. But I wanted to understand more of the common threads that they find as indicators of success. in the restaurants or food brands that they invest in. How long do they hold these investments for?
[00:01:46]
How do they get involved? How do they do their due diligence? And everything in between. Being a partner at the firm, Drew gets really in the weeds with a lot of these investments. So we went pretty deep on how all of this works. And I'm excited for you to hear how this world of private equity helps restaurants and other food brands scale. And as always, I really hope that you enjoy this conversation as much as I do.
[00:02:13]
Thanks for coming to the show, by the way. And I wanted to sort of start off just sort of like level set for everyone who you are and about Karp Reilly, the firm and how you ended up there.
[00:02:24] Drew Skolnik:
Yeah, well, first of all, thank you so much for having me. This is my first time on a podcast, so honored and excited to dive in.
[00:02:35]
My background personally is pretty boring. I spent my entire career on the finance side of the world, started in investment banking. I stumbled into, you know, the consumer retail world. In my, my first job, just following some, some good people and some smart people into the space and totally fell in love with it.
[00:02:55]
I've been working with restaurants since my, my time back in the investment banking world. And you know, really what, what drove me to Karp Reilly and, and, you know, the most important thing about Karp Reilly. Is, you know, is an opportunity to dive even deeper into that world with earlier stage businesses and get to work closely with founders and management teams. I love working with founders and management teams.
[00:03:18]
That energy is is infectious, and it is just what motivates me to be able to help them. I mean, it's a challenging journey, and the CEO seat. Is a tough one. And so, you know, really pride ourselves and myself on doing whatever, you know, we can to be resources to, you know, our, our operating partners and the most unique element about Karp Reilly relative to other investors is our significantly outsized internal capital commitment.
[00:03:53]
So most funds, one or 2 percent of the capital is from the investors themselves. And the other 98 percent are from third party limited partners, as they're called. Karp Reilly, since our, our first fund back in 2007, has always been north of 30 percent of the capital coming from internal, the partners themselves.
[00:04:13]
So we really have genuine alignment. With the existing owners and management teams and have real skin in the game. So that, that drives a lot of how we think about the world and and partnership.
[00:04:25] Josh Sharkey:
Nice. Yeah, it's good to see more of the GPs as opposed to LPs . Yeah, exactly. Getting in the, getting some skin in the game.
[00:04:32] Josh Sharkey:
Well, you know, you all have a lot of different types of businesses that you invest in, but for the purposes of today, we're gonna revolve all of this around hospitality, restaurants and and CPG as well. So I wanted to ask just. Very high level. Why do you all invest in, in restaurants and food brands?
[00:04:50] Drew Skolnik:
Yeah, so we invest across the consumer and retail landscape, as you alluded to, and restaurants has been the longest running pillar of that.
[00:04:58]
Karp Reilly in its early days had a lot of success in the restaurant and four wall retail world. The four wall, you know, retail with apparel and home goods has evolved with the advent of, you know, the internet and the evolution there. Restaurants has been really consistent and we love the restaurant space and have developed a unique network.
[00:05:23]
Instead of experiences within the space and personally, you know, from an investment philosophy perspective, what I really love is, and I think it's so counterintuitive to the rap that restaurants get as being a bad place to invest is that once you have a model that is working. It's not that difficult to predict how it's going to scale.
[00:05:45]
Now, it's really difficult, and I think the most difficult out of all of the various categories we work with, with CPG and apparel. Restaurants, day in and day out, you really have to execute and sustain that at a high level for a long time. You can't grow too fast without the wheels coming off. And we appreciate the fact that the risks are operating risks more so than product market fit.
[00:06:13]
You'll know by the second or third or fourth restaurant location that the model works, that it can be productive, that it resonates with consumers. And so I love. Not having to try to predict the future. I don't think anyone's really good at predicting the future. And, and I certainly fall into that camp.
So really appreciate, you know, just the simplicity of knowing what growth looks like.
[00:06:39] Josh Sharkey:
Yeah. It's so interesting. Cause you know, I, I recently was listening to Bill Ackman talk about how He loved restaurants as an investment. Of course, when he talks about restaurants, he's talking about very, very heavily scaled things like Chipotle, like, which is very similar to what you're saying.
[00:06:54]
And it's, it is a very difficult business model in that there are so many factors that are somewhat out of our control. Weather, supply chain, Trends, you have hourly labor, you have, you know, like shortages and agricultural shortages and things that, that, that spike cost of goods. It's obviously a very competitive space, short attention span, and it's a very difficult business model, but there are a lot that, that succeed and it seems that typically you succeed when you're, when you're able to sort of find scalability.
[00:07:25]
And you all probably look at a lot of, deals in the restaurant space, I'm assuming. Are there any sort of common threads or heuristics that you see that indicate success and scalability of a restaurant when they're early on before they've kind of like, you know, hockey stick to real scale?
[00:07:43] Drew Skolnik:
Yeah. And quickly I'll hit on that point because restaurants are certainly subject to those secular trends, and we have had to evolve our restaurant investing practice with the times.
[00:07:53]
Back in the 90s, we were investing in concepts like Mimi's Cafe and Marie Callender's, you know, those family restaurant type concepts, to the Habit Burger Grill and Cafe Rio and Cafe Zupa as fast casual started to gain traction. More recently, These hot social media darlings like Salt & Straw Starbird Chicken.
[00:08:15]
And so we philosophically try not to stay too far out ahead of those trends and make sure we are riding the right tailwinds. A growing restaurant is capital intensive and complicated like we were just talking about. Talking about. So we really like to make sure we have those, those tailwinds behind us.
[00:08:34]
Some of those common threads for success. There are so many to hit on. I don't know where to start. It really exemplifies the art rather than the science of investing in restaurants. First and foremost, it is. It always comes down to the people. Restaurants are a people business more than anything else, you know, in my purview, and it really requires a great leader and a great operator.
[00:09:00]
And there's, there's just no replacement for that dedication that you get from an amazing leadership team. Beyond that. You get into, you know, the value proposition, is the food consistent and great quality for the price, is there differentiation of the concept and reason to be, some of that stuff that's not so, um, mathematical and quantitative, critically important factors that indicate scalability, and if you check those qualitative information.
[00:09:30]
boxes, every restaurant growth story ultimately comes down to unit economics and we are focused on best in class cash on cash return on investment or payback. So how much does it cost to build out an additional location versus the four wall cashflow that that location spits off beyond that, a couple of other factors that come to my mind.
[00:09:56]
Seeing success across a diversity of real estate types or markets, operationally simple models versus operationally complex models. We've had success with both. You can grow a simpler model faster, fewer pieces that might break. And then, you know, one of the other elements that we really do try to quantify is, is whether the brand has.
[00:10:20]
raving fans and really drivers of, of frequency and that word of mouth advertising. And when you inevitably enter new markets, will the reputation of the brand proceed you because entering new markets is the hardest thing about growing a restaurant concept are none. And so we're always cognizant about having a competitive advantage towards that piece of the pie.
[00:10:45]
And you know, one other element that. We're always cognizant of is, is the cuisine itself, right? We're not unique to the restaurant world, but you have to pick your lane a little bit and certain cuisine in and of itself is a little bit regional. Um, spent a lot of time around the barbeque landscape. And I think part of the reason why you don't see a national barbecue fast casual concept is because.
[00:11:15]
Barbecue in the Carolinas and Texas and California are all different. And I think it's an amazing place to operate. But there are sometimes just innate challenges, even if you check every other box.
[00:11:28] Josh Sharkey:
I never thought about that with barbeque. I mean, there are some, definitely some, I mean, I think of like City Barbeques that really incredible brand and scaling.
[00:11:35]
I don't know if they're, I think they're going to the South, you know, of all of those factors, right? When you're looking at a new deal, is there one that you weight more heavily than others? And I'm going to kind of lead the witness a bit with my thought here, at least is that it would seem like demand is the most important thing, because even if you have incredible And you've created, you know, something that can scale well, and it's simple.
[00:12:02]
If nobody, if it's not like something that people are like, you know, hankering after all the time, then that you can't really, you can't create that demand. And I ask this because I'm curious when you're looking at investments, because I imagine in private equity, there's a, there's a certain tipping point of when you get involved versus when you don't.
[00:12:20]
And how early In the stage of the business, you get involved, but I'm, I'm so curious if there are times you look at something like, wow, this thing, people love it and they have a few locations now and they are just like so busy, but the unit economics are terrible or not good, but they should be and they can be.
[00:12:39]
And you think, you know what we can, we can help or do all of those things have to sort of like be aligned in order to step in.
[00:12:45] Drew Skolnik:
Yeah, it begs the question, why, right? And we have absolutely made investments in brands that the unit economics were not where we thought they should be. And the, the challenge that, that we face is that no one on the Karp Reilly team is Has any operating experience.
[00:13:08]
So we are not the types of investors that are going to come in and tell you how to run your business or, or think that we know better than you. We have a ton of board level experience and, you know, we talk about it as an inch deep and a mile wide. And so a lot, we've seen every mistake in the book be made and very much view it as our job to
[00:13:32]
help our portfolio companies avoid making the mistakes that we've already made. And you can make your own mistakes and hopefully they're, they're smaller. So volume is, is critical for us. And it's what you hit on completely. And it gives you just a lot more margin for error in that. Again, as you enter a new market, as you're opening your hundredth location, as opposed to your 10th.
[00:13:57]
It is exceptionally rare to be able to sustain your, your core market early unit economics and really demand volume. So we're always forecasting some decline in volume as you leave your home market. The second element here, and this is somewhat unique to Karp Reilly's philosophy, is that we strongly prefer.
[00:14:23]
Best in class volumes, because we have a philosophy of, of continuing loss of investing early in overhead in advance of the growth, as opposed to constantly playing catch up. And if you want to, for lack of a better word, over invest in GNA in those early days, you need sufficient. Volumes and sufficient four wall cash flow from your best units to cover that.
[00:14:54]
And you can make a lot of money in restaurants, investing in, in franchisable, uh, You know, lower AUV concepts, but for our philosophy and really focusing on de risking that growth by making sure you have the best team, the best systems, the best processes earlier than you quote unquote, need them, you need your best units to spit off sufficient dollars of cash as opposed to just margins and ROI.
[00:15:27] Josh Sharkey:
It sounds like top line is, is one of the most important parts of the puzzle for you.
[00:15:29] Drew Skolnik:
Quantitatively, yes. I think the hardest thing about what we do is, I'm not talking about this a bunch, I think the most important parts are some of the qualitative elements and it, you know, the, who is the, what does the leadership team look like?
[00:15:41]
And is, you know, Is the value proposition sustainable? Is it differentiated as you enter new markets? But yes, from a quantitative perspective, that's the most important thing from my vantage point.
[00:15:52] Josh Sharkey:
Yeah. Yeah. So I don't want to oversimplify. I know it's not simple. At what stage do you like to get involved?
[00:15:57] Drew Skolnik:
Yeah. We're a unique platform in that we can be flexible. And we find ourselves a little bit at the intersection of, of venture capital and private equity. And so we've had success investing in restaurants as early as four or five, six locations, very modest amounts of, of EBITDA. Um, and we've also had success investing in, in restaurants.
[00:16:19]
That are scaled for lack of a better word, uh, you know, later in their, their journey. So, so we, we will look at anything in the restaurant space. We're not looking at 500 million, you know, valuation businesses that that's really the journey we help to take our brands on from, from when we invest. We we've had a number of exits in that.
[00:16:44]
500 million to a billion dollar range. There are folks with better tool kits than we have for how to get the most. You know, leverage and squeeze the most efficiency out of a restaurant. Our skill set is really in that growth phase when you're still growing 20, 25, 30 percent annually.
[00:17:06] Josh Sharkey:
I want to talk a little bit about like due diligence now. Are there table stake metrics or data or things that you look at that, you know, without these numbers or these metrics, it's not really something you would even entertain?
[00:17:19] Drew Skolnik:
Yeah. We're a pretty analytical firm. And so despite the early stage at which we invest, right. And our, our sweet spot for investing is a 10 to 20 plus million dollar check size.
[00:17:33]
So it's still relatively early stage. And so. In restaurants in particular, there is a lot of data at your disposal. You have a first party relationship with the customer and several different locations in which you can analyze. So we'll almost always start with monthly PNLs by location. Weekly sales by location.
[00:17:57]
Ideally since inception, we want to understand the ramps and the comps over a long period of time. Dive into the build out costs as we were talking about, as well as the four wall profitability, all existing locations, that's one of the. More challenging things to do to extract retroactively. So my advice to any early stage restauranteur would be make sure you're, you're tracking those early and staying organized around your, your build out costs, because that is, that is a critical part of the growth equation.
[00:18:29]
And then always, you know, the makeup of the team, understanding square footage and seeding trends and by location, really trying to. Inform our view as to what might be the optimal way to scale this business. Just going a layer deeper when looking at those same store sales trends, understanding traffic versus price versus, you know, mix and other, and then always wanting to understand the composition of the overhead.
[00:18:57]
Is this a team that is. Quote unquote overbuilt relative to the size or underbuilt relative to the size. And are those GNA dollars being well spent for us? Our preference is an overbuilt team, and we will not ding an early stage restaurant for having too much GNA, so long as that GNA is well spent. And there are, you know, we've looked at a number of concepts that have too much GNA, and it's not clear that it's actually supporting restaurant ops and de risking that growth.
[00:19:32]
The same is true in the other direction. If, if it seems your team is underbuilt and your systems and your processes are not sufficient to support growth, that's also a red flag from our vantage point. So there is a little bit of a Goldilocks there on, on the GNA side, where you have to have a sufficient amount of overhead per unit as a percent of sales such that you are ready for scale, but not so much that it tanks your, your Your profitability and for a long period of time.
[00:20:02] Josh Sharkey:
Outside of the, you know, the CEO and maybe a COO or some sort of operations role. Are there other really critical roles that you want to see in place at that scale that like 5 to 7 units?
[00:20:13] Drew Skolnik:
Yeah, it depends on the concept. Some are more reliant on marketing as a function. Others. Development is more critical at that stage. And in this day and age, you know, a CTO or a VP of technology is becoming more and more critical earlier.
[00:20:34]
10 years ago, I never would have said that you probably didn't need a CTO until you had 200 units today. That is a piece of the puzzle that you need some capabilities, if not a competitive advantage, you know, really a leader and an ops execution expert are the critical pieces of the puzzle in my experience, while that would be sufficient for Karp Reilly to invest, it's pretty rare that you can generate outsized volumes and be growing Without a really capable team at the helm.
[00:21:13] Josh Sharkey:
Yeah. Yeah. It is funny. I mean, I think 15 years ago at best we had like, uh, someone running IT, which all the wires were running. It was like the CFO on the side. Yeah. You know, they made sure the speakers were working and the wires and security and that was about it. Now there's so much more, you know, going on.
[00:21:31]
Well, I am curious, have you ever had a deal that you really, really liked, but there was some red flag where like, we just can't do it that you, that you had to pass on? Yeah. Yeah.
[00:21:39] Drew Skolnik:
You know, we've had a few where it's taken a long, I, you know, I think to our, back to our investments in, in Eureka out in California, as well as in, in Ramen Tatsuya down in Austin.
[00:21:52]
We got to know the founders four or five years before we ultimately made the investment. And for a while felt like it had gotten away and ultimately did come back. So those, those ring in my mind, but more often than not. It's.
[00:22:11] Josh Sharkey:
You've talked a lot about the leadership. So obviously the quantitative stuff is a lot easier to measure, right?
[00:22:16]
As long as the, the numbers are there. But are there any maybe novel ways in which you, you all at Karp probably assess how good the team is? How do you make that assessment?
[00:22:26] Drew Skolnik:
Yeah, retention is the easiest way to quantify that. I think good leaders have a, a unique ability to retain their talent. Good. And motivate their teams.
[00:22:41]
And, and ultimately at this stage, that leader is a salesperson. You have to sell new hires, you have to sell existing employees, you have to sell landlords, and you know, every partner along the way, and obviously everyone in the restaurant is selling the guest. Everyone has their questions that they'll poke and prod and really want to understand what motivates the founder, is that founder resilient?
[00:23:10]
Because there are tough times in every restaurant growth story, even the ones that from the outside look like they're up and to the right, there are dark days, and you want to make sure that this is someone that you want to work with, that Is resilient when those tough times do come and that you honestly can, can just have a good relationship with their, their late nights and weekends.
[00:23:36]
And, and again, tough business conversations that, that are inevitable. So you just want to make sure that you find the right partner. And, and I will always say this to a founder that you need to do your diligence on your investor, your partner, as much as they're doing on you and absolutely should. Be doing reference calls.
[00:23:59]
This is a small industry where, where I think one of the beautiful things about the restaurant space is that founders and management teams are so helpful to one another and are so open to communicating, sharing, collaborating, because I think unlike other categories or, you know, other sectors of the consumer world, everyone knows.
[00:24:23]
You're competing with one another, but everyone knows that even your best customer does not only eat at your restaurant. And so it is there, there's plenty of wallet share to go around. Whereas if, if, if I were one energy drink and you were another energy drink. More likely than not, the customer is either going to drink mine every day or yours every day.
[00:24:46]
Uh, and I, I think there's, there just ends up being more collaboration in the restaurant space. I bring that up just because that's often how we are referencing the, the founders and management teams that we work with and how I think those teams should try and reference any investor or partner. We, we, you know, are totally open kimono on that and, and encourage, share contact info for every, every management team member, founder that we've worked with, because that, that fit and that philosophical alignment is as important as anything.
[00:25:21] Josh Sharkey:
This show is brought to you by, you guessed it, meez. meez helps thousands of restaurants and food service businesses all over the world. Build profitable menus and scale their business successfully. If you're looking to organize your recipe IP and train your team to put out a consistent product every day in less time than ever before, then meez is just for you.
[00:25:41]
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[00:26:07] Josh Sharkey:
Visit www.getmeezcom, that's G E T M E E Z Dot com to learn more and check out the show notes moving forward, because we're gonna be adding promotions and discount codes so that all of you, lovely and brilliant me podcast listeners, get a sweet deal on meez.
[00:26:30]
Yeah, yeah, it is. It is a, a nice thing that it's not a zero sum with restaurants because there's a lot of days in the week, a lot of things, the, so, you know, you've been talking a lot about the, the structure of the investment. I, I don't know if you have a take on this, but I am curious, when do you think it makes sense?
[00:26:45]
To take on private equity versus venture capital or other instruments of investment. Part of what I also want to understand you, you mentioned that you typically have a check size around 10, 20 million as part of this. I'd be curious, like what, what is like the ownership stake that you're looking for in a business when you, when you get involved?
[00:27:03] Drew Skolnik:
Yeah. So these terms are a little bit amorphous. So let me try and generalize to set the stage. Well, let's say a private equity investor is someone who's writing a 20. 20 million plus check and venture capital is, is really in that single digit range. We've positioned ourselves so that we can sit at the intersection and be relevant capital for a brand that wants that venture approach.
[00:27:33]
Cash to the balance sheet to accelerate growth or that, that private equity approach where the founder or existing shareholders want to take some chips off the table, also put some cash to the balance sheet to, to accelerate growth can very much be all things to all people. And it's a very unique element about the Karp Reilly.
[00:27:53]
Venture Capital often has connotations around expected growth rates and a little bit of a desire to, to shoot the moon. And so I think this, this is really what I was alluding to with some of the philosophical alignment. In my experience, it's, it's really tough. In restaurants to try and shoot the moon.
[00:28:16]
And sometimes that can lead to disappointed or pushy investors who wanted you to keep growing at a hundred percent year over year, like you were when you were two or four or eight locations, and that gets exponentially more difficult as you scale, really talking through what that growth journey. Might look like with that investor and aligning some founders, Management teams are ready to go try and double every single year for the first 10 years that that type of risk profile.
[00:28:50]
Doesn't really fit the mold for Karp Reilly, but there are a lot of investors who are ready to take those risks because the upside is enormous. And there are success stories that look like that. We are a little bit more risk averse than your typical venture capital investor. On the flip side, when you get into the traditional private equity realm, the business really needs sufficient and stable EBITDA investors like to use a little bit of leverage, sometimes a lot of bit of leverage, and their growth expectations relatedly tend to be much less than a venture investor.
[00:29:31]
They're more focused on the stability of those cash flows, ability to service the debt while growing. And that approach. Tends to be better suited for a more stable, more professional and mature management team. And so a lot of founders clash with that. Philosophy, right? And I understand it, right? It's the world I live in.
[00:29:59]
It's the folks we rub elbows with, but it's very much focused on stability and the numbers, and that's not often what drives founders, nor is it often the skill set of founders. Founders have. Vision, they're willing to take risks, they're willing to throw caution to the wind sometimes as you're on this growth journey that and you have to we find ourselves in this position where there's there's give and take management teams certainly have to professionalize systems and processes have to improve because what works when you're a 10 unit restaurant chain, spending time in every restaurant, knowing every GM, That doesn't scale to when you're 100, 200, 300 locations.
[00:30:44]
And you need someone who has management skills as their core competency, as opposed to vision and salesmanship and knowledge of, you know, the, the food and the customer, like a, uh, you know, a founder, a chef, a restaurateur might. And so there's no right answer for, for everyone. It depends on the stage of, of your, your business.
[00:31:10]
What your personal motivations are, right? Plenty of founders are capable and more importantly, have the desire to run that 200, 300 location concept. Some, some don't, some know that about themselves. I don't want to be a, CEO of a big organization. I like being the CEO of a small organization where I know everybody, but I don't want to have to give annual reviews and, and go through all of the professionalizing that is necessary when you're employing thousands of people.
[00:31:45]
Yeah. It's different game. And then the other thing I would just hit on that, that we often, we see a lot are unit level financing models. Where restaurateurs chefs will raise capital at four specific location and charge a management fee for the first few restaurants and raise capital from friends and family or industry folks.
[00:32:09]
And that investing looks a little bit more like. You
know, the real estate development model, it's sort of a debt equity hybrid where the first cash back goes to those investors. It can be a great option before the brand has brand equity itself, but it does lead to cash flows going out the door instead of being reinvested into the team or growth and ultimately takes time because it's a bit of a treadmill.
[00:32:36]
Every time you want to open a new location, you have to go solicit Capital first, but it's an option that works for, for a lot of folks before you're ready to, uh, get in bed with someone as a larger owner. One piece of your question I didn't answer is if, if there's a threshold ownership stake for, for Karp Reilly, um, it's rare, we'll make an investment where we own less than 20, 25%.
[00:33:01]
That, that relates more to the amount of involvement, you know, we commit to a given portfolio company. We view it as our responsibility to be resources and therefore be available to the companies we partner with. And that tends not to make sense if you own too small of the pie, but we're really flexible.
[00:33:24]
We are minority investors in a lot of our, our restaurants and a lot of our portfolio companies. And some we own nearly a hundred percent. And so we, we operate no differently in those constructs. Uh, we, we're very much, you know, partnership mentality that like I was saying before, we know we're not operators.
[00:33:45]
And so we, we rely on founders and management teams to run these businesses and just view ourselves as, as resources to help them along the journey.
[00:33:55] Josh Sharkey:
How long do you typically hold an investment for?
[00:33:58] Drew Skolnik:
Yeah, Karp Reilly is definitely on the longer end of, of the traditional growth equity hold period. Many are in that 3 to 5 year range.
[00:34:09]
Karp Reilly is typically in that 6, 7, 8, 9 year range. Some of our restaurant investing, we've held north of 10 years. And it goes back a little bit to the skin in the game. We're brand builders at our core, right? And so. We always are taking the long term vision, investing in that overhead before it's, it's necessary to de risk and continue to build that brand value over time.
[00:34:38]
And. We're, we're there for patient. We're not trying to optimize EBITDA the first few years of our, of our investment. We want to make sure that we're setting the company up for success in the long run. And that really resonates with founders who all obviously have that owners mentality as well, and want to build something that's lasting.
[00:35:00]
And so we, we didn't go in saying we will have a X year hold and therefore this will be our investment style. That's our style. We are so keenly focused on delivering a consistent product and building that brand over time that what we've realized is we wouldn't be optimizing our outcomes if we. Exited in the, I'll say the bottom of that J curve where you are clearly still investing back into the business.
[00:35:31]
And so we, we've seen a lot of our success stories. When you look at the Habit Burger Grill and Cooper's Hawk and Cafe Rio, the EBITDA did not grow very much in the early years of our investment. And the tail end of our investment was genuinely hockey stick like, and those businesses after we exited have continued to be successful because we build these businesses the right way.
[00:35:56]
And we only want to partner with founders and management teams have that same philosophy, not a house of cards. Let's start we can and exit it to the next person only for it to fall apart because it was not. Built the right way.
[00:36:11] Josh Sharkey:
Yeah. And is that, so that next person, whether it's, you know, however, however long it's time horizon is, is it typically another PE firm or is it IPO?
[00:36:19]
Or do you like, what, how do you think about what the exit looks like? Typically for Karp Reilly?
[00:36:24] Drew Skolnik:
It depends on the business in the restaurant space. There's, there's not as much strategic activity as there is in CPG or apparel or other, other industries that we touch. So restaurants, it is mostly. financial acquirers like private equity firms or the public markets.
[00:36:41]
Uh, we took the Happy Burger Public back in 2014. It was actually subsequently acquired by Yum in 2020. But then, you know, we sold Cafe Rio to a private equity firm. We sold Cooper's Hawk to a private equity firm. The majority of the exits in the restaurant space, if I went back and put pen to paper would be to financial sponsors.
[00:37:04]
And yeah, I think that's just a factor of the successes are at a size where they're attractive to private equity buyers. And with a lot of the businesses we work with, the end of our whole period, they're still a little bit too small for the public markets. Cooper's Hawk is a good, good example. I would not be surprised if, if the next buyer looked to, to take that business public and continue the growth journey, but it was a little bit too small when we went to,
[00:37:37] Josh Sharkey:
And is there like a, a target markup that you're looking for when you buy a business or what the exit should be?
[00:37:42] Drew Skolnik:
We always talk around our table as looking for 10 plus, X multiples on our investment. Of course, that's, you know, the, the home runs, but we, we always want to see that potential. And so you were hitting on questions around scalability and indicators of, of early success. And it's always through that lens.
[00:38:06]
Okay, here's a restaurant we're looking at that, that's based in, in Denver. Would this restaurant also work in Phoenix, in Vegas, in Salt Lake City, in Texas? And, and trying to understand if there are 10 locations today or 20 locations today. Do we see the path to 100 or 200 locations within the next 10 years, this pace with this team, with this concept.
[00:38:34]
And so you can make Excel say anything you want, really coming at it from the approach of if this goes well, is that outcome realistic?
[00:38:48] Josh Sharkey:
Yeah, I got you.
[00:38:49] Drew Skolnik:
And a million things can go wrong along the way as everyone knows, but that's often what we're, we're looking for. And, and that's, that's another reason why we coalesce around this stage and this exercise. Yeah, that makes sense.
[00:39:01] Josh Sharkey:
For a minute, let's talk about personally what you're, what you're interested in and what you're excited about right now in terms of like, are there things that you're seeing in the food space today that are somewhat, you know, like super interesting or novel or new and, and just generally speaking, like, what are you looking at right now that seems pretty exciting?
[00:39:17] Drew Skolnik:
Yeah, so I get excited every day. I love working with founders and every time you meet a new founder and hear of a new concept that really has their personality and their personal story in it, it excites me. So I love what I do. I love working with early stage brands. It is a tough time in restaurant land right now.
[00:39:43]
There are a lot of headwinds and It is hindering growth for, for all but the, the best of performers. I'm curious to see if that seemingly subdued growth leads to some of these headwinds easing off. Buildout costs are at all time highs. Labor availability continues to be a challenge. Food costs have been volatile.
[00:40:15]
It's a tough time. And, you know, not to mention there's just the long term trends in minimum wage. We have a lot of restaurants that operate in California, which is an increasingly difficult market to operate in. So, I'm always on the lookout for those up and coming concepts that are refreshing or, or putting their own stamp on a space and introducing me to, uh, uh, their take on cuisine that I wasn't familiar with before.
[00:40:47]
And I, you know, I think to home state bringing those Texas style breakfast tacos to Southern California and. You know, wh when, when I first tried those tacos, my, my mind was blown. Ramen Tatsuya, the first concept to, to bring ramen down to the Austin market, but infusing it with, with Tatsu, Texas, you know, upbringing.
[00:41:11]
And so I, I, I love new flavors and new, new takes on things, and I, and I'm, I'm always excited by, by what's out there right now. Personally, I've always been a, a bit of a tech geek. And I'm geeking out about the opportunities to leverage AI and automation, thinking about, you know, from the finance side, sales forecasts, everyone seeing headless sales forecasts and setting pars and scheduling and having machine learning improve those processes.
[00:41:44]
A couple of the concepts within our portfolio have really leaned into that and seeing some, some incredible fruits of their labor. The team at Cafe Zupas has developed their own AI internally, and it's really the back end of what we do. Everything in their restaurant these days, everything in, in the restaurant and how they operate is being driven by these AI forecasts and AI feeding the operations team to make better decisions.
[00:42:16] Josh Sharkey:
Do you see a lot of your, a lot of these brands? I am going to ask you outside your portfolio what you're excited about. Do you see a lot of these brands building their own proprietary models or just leveraging models to build their own forecasting tools? It seems like these are becoming more ubiquitous and off the shelf.
[00:42:32]
You can, you can do a lot of damage if you have somebody in house. Do you see that happening a lot more or leveraging, you know, third party technology?
[00:42:40] Drew Skolnik:
Almost all are leveraging third party technology. That that's the easier lift. The Cafe Zupas guys like to do things the hard way. And this has been an enormous lift and it's paying off without getting into too much of the background.
[00:42:55]
The Zupas founders come from the tech world. And so they were ready and willing to dive in and saw the way we could custom tailor the application to the Cafe Zupas model. There are a couple elements of the Zupas model that had us not fitting perfectly into the mold of those third party providers. And so they built.
[00:43:17]
A better, more relevant system for ourselves for nine out of 10 brands. The off the shelf applications are great and I think only getting better and I add to your point integrating artificial intelligence and, and, you know, better tools for those early stage restaurants.
[00:43:36] Josh Sharkey:
Have you seen any of anything off the shelf that you've seen a lot of success with in your brands or brands that you're looking at?
[00:43:42] Drew Skolnik:
You know, we had talked with Butcher's Daughter. Works with slang AI, which is a, um, artificial intelligence phone answering system that had remarkable benefit saved the managers so much time in answering the phones and also was a better customer experience because the phone is getting answered. And when the phone did ring through the managers picking it up because they knew it was something that wasn't a basic question that was answerable by artificial intelligence.
[00:44:13]
The best systems like that also feed back and provide information to management about what questions are people asking, what questions are not being answered and gave them the idea of instituting a bottomless brunch program, because a lot of people were asking about that. And so not only saving time in the restaurants, but also.
[00:44:38]
aggregating and synthesizing the data so that we can make more informed decisions. That's a perfect example of how we've benefited.
[00:44:46] Josh Sharkey:
Do you spend any time looking at the tech stack or technologies that are interesting, that are helping these food brands?
[00:44:52] Drew Skolnik:
We're simple folks, so we don't invest in the tech stack. We are often trying to help our portfolio companies Assess the various options for suppliers. And that's everything from software providers, service providers, commodity purchasing.
[00:45:14] Josh Sharkey:
Gotcha. Yeah, so you're just generally sort of consulting them on all the opportunities out there.
[00:45:20] Drew Skolnik:
Yeah. And so, so through that, we, we've explored a little bit of, of investing in restaurant tech.
[00:45:25]
It's not for Karp Reilly as a fund. We developed those relationships and there are some personal investments in restaurant tech businesses that work with a number of our restaurants.
[00:45:37] Josh Sharkey:
Yeah, given the investment profile of the unit economics, I'm sure, I'm sure tech that.
[00:45:43] Drew Skolnik:
Very different model. But we, we, we love when the sharing of ideas across the portfolio is, is one of our biggest value adds, I think, where we can.
[00:45:52]
Introduce one of our concepts to this technology software provider that we've met with and vetted, hopefully, if it works, we then can introduce that to all of our concepts and we worked some of the kinks out and we'll negotiate a deal on behalf of the portfolio. So that that's all part of our portfolio optimization effort and our COO runs that for us.
[00:46:17]
So there, I mean, there are dozens of software providers that now work with a wide swath of the Karp Reilly portfolio that we were able to vet with one or two guinea pigs for lack of a better word and roll out to the whole portfolio and benefits.
[00:46:37] Josh Sharkey:
So we talked a lot about your portfolio, but anything outside of your portfolio that you're really excited about right now?
[00:46:42] Drew Skolnik:
I'm excited to see if the public markets can open back up. You know, I think putting the private equity lens on for a minute, it has been a long stretch of, you know, You exits across the investing landscape, and that creates pressure points on the whole system seems as though the debt markets have improved, which is often a leading indicator for the MNA environment, the IPO markets, and there have been a number of rumored.
[00:47:15]
Businesses that are looking to test the waters on, on both the MNA side and on the IPO side. So probably not the answer you're looking for.
[00:47:26] Josh Sharkey:
What's the next restaurant to IPO? If you had to take a bet.
[00:47:28] Drew Skolnik:
Oh man. I know Panera has been rumored. TF Chang's. I mentioned Cooper's Hawk from everything that's come across my radar.
[00:47:38]
They continue to perform extremely well. And. I think would be an excellent IPO candidate in the, in the not too distant future. It's been a while at this point since, since we've seen, you know, a restaurant IPO. And I think any of those could kick the door open. But there tends to be a lot of risk to going first.
[00:47:58]
And so everyone, Sort of sits and waits until the market. Yeah, it's definitely been a while. Yeah, you don't want to go and have to pull the process.
[00:48:08] Josh Sharkey:
Anyways, man, this was great. I appreciate you sharing more insights on the world of private equity and Karp Riley. And I know you said that your background is boring, but I think everybody is really interested in understanding like, you know, how to think about, you know, when you want to scale your business, what you should do.
[00:48:25]
I think maybe for closing, do you have any advice for restaurateurs? Or even just, you know, any food business, CPG company that is starting to scale, you know, maybe they're on their second or the third location and they want to start thinking about what is the next, you know, check look like the things, any advice or resources for them?
[00:48:45] Drew Skolnik:
Yeah, well, first and foremost, I love podcasts. I'm a big consumer of podcasts. So podcasts like meez is a great resource for the community and want to thank you for putting out great content. The community itself is. The best resource I again, I've seen in the restaurant industry more than any other where a founder or management team that has gone through these steps in the journey before.
[00:49:13]
Maybe they've taken capital from, from venture capital or private equity. They'll talk about it and they'll be really open as to what the experience was like. I don't think there's any replacement for hearing that firsthand experience. So that's what I've seen the most informed early stage. Management teams are the ones that have relationships with folks that are a few years ahead of them.
[00:49:40]
I think it just can be invaluable because, again, you see what they would do differently. You can hear what they would do differently, and that's what I love to try and facilitate within the Karp Reilly portfolio as well, where we have investments in restaurant groups as small as five or six locations, and we have investments in restaurant groups that are a hundred locations.
[00:50:01]
And still relationships with the restaurants we've exited that are well in excess of that. And so that journey, there are a lot of the same pitfalls and a lot of the same learnings that you can get from other founders or management teams. I would also say, reach out to Karp Reilly. Um, my email is on our website.
[00:50:23]
We all love talking with people. Early stage restauranteurs founders across the consumer retail spectrum. If something's too early for us, we won't be shy about saying that, but it's always worth 15 minutes to chat and pick one and you get to know each other, get to pick brains, and we can try to connect you with some resources who might be relevant.
[00:50:48]
So I'll make the shameless plug there, but we are always looking to meet with those up and coming growing restaurants across the country.
[00:50:57] Josh Sharkey:
Love it. All right. There you go. Email drew, go to karpreilly.com. And you can learn more there. Awesome, man. Well, thank you for spending some time here. This was fun, and I really appreciate it.
[00:51:07] Drew Skolnik: No, thank you so much for having me. This is exciting.
[00:51:27] Josh Sharkey:
Thanks for tuning into The meez Podcast. The music from the show is a remix of the song Art Mirror by an old friend, hip hop artist, Fresh Daily. For show notes and more, visit getmeez.com/podcast. That's G E T M E E Z. com forward slash podcast.If you enjoyed the show, I'd love it if you can share it with fellow entrepreneurs and culinary pros, and give us a five star rating wherever you listen to your podcasts. Keep innovating, don't settle, make today a little bit better than yesterday, and remember, it's impossible for us to learn what we think we already know. See you next time.