Venture Capital in the Restaurant Industry

Abstract

Venture capital is usually made available to young ventures with substantial growth potential. Most often venture capital takes the form of equity financing, with an investment horizon that is generally long and for unspecified periods. Such capital is growth-oriented, frequently unsecured, and subordinate to other types of financing. Recent venture-capital transactions show a bias toward later-stage investing in established concepts and toward investment-banking deals. During the 1990s retail and service businesses began to attract the attention of venture funds. Restaurant examples include Cucina! Cucina!, Takeout Taxi, and House of Blues. Restaurant companies are investment targets because they are popular in the marketplace; have low barriers to entry and good growth potential; don't have the technological and developmental drawbacks of other industries; offer an easy exit for venture investors; and have high price-earnings multiples, based on high growth expectations. Nevertheless, many venture firms view restaurants with caution because restaurants are a cash business with opportunities for fraud and theft; low barriers to entry make it harder to anticipate and protect against new entrants; the restaurant industry generally does not have patent or other legal protection; and service businesses are more difficult to manage than product businesses. There's little evidence to support the common concern of many entrepreneurs who fear losing control of the business to investors. Good venture capitalists add value, acting as management consultants.