Providing up-front cash without investors, loans, or strings attached.
By Johann Moonesinghe as told to Chris Mohney
Johann Moonesinghe is cofounder and CEO of the Austin-based inKind, which helps restaurants finance themselves without traditional investment or loans. Instead, inKind pays cash up-front for credit at the restaurants, which inKind then resells to potential customers.
My background is in technology. When I sold my first company, I did what most people do when they make some money on their tech company—invest in other tech companies. I also love food, and a friend of a friend was opening a whiskey bar—actually a high-end, molecular gastronomy whiskey bar. It was two blocks from my house in DC. I was like, “Awesome. Of course I want to invest in that.” Then in LA, a couple of friends from high school decided to open an arcade bar. I was like, “Yeah. Totally I’ll invest in that too.”
Those places both did really well. And then I invested in about 15 or 20 more restaurants. At the time I thought, “Hey, this is a really cool asset class. I’m making money on the two that I did initially. Nobody else is making money on restaurants, so I must know something nobody else knows.” And then, of course, I realized that I didn’t, because many of the others didn’t turn out so well.
When I got started in technology, I was in the first year of the Techstars incubator, and it was an awesome experience. So I thought, can I do the same thing for chefs? Can I create an incubator? My husband and I—he’s a lawyer, and he had moved here from England—we were like, “Let’s create an incubator together to help chefs that we can invest in with the things that they don’t know, like how to find good real estate, how to negotiate a contract, how to maintain labor and accounting and all these things.” We started this incubator in DC called Prequel. We ran it for five years and learned everything you possibly could want to learn about operations and finance for restaurants. What came out of that experience was really understanding why restaurant finance was broken.
Typically what happens when you start a restaurant is that you find a bunch of investors, and you pay them 100 percent of the profits, or 80 percent of the profits, until their investment is paid back. Which is fair. It makes sense. But in almost 90 percent of cases, those investors never get fully paid back.
When you look at why restaurants close, there are a couple of reasons. It’s not always because they’re not at least breaking even. It’s often because the owner, after five years, realizes that they’ve not made any money. The investors haven’t been paid back yet. It’s like, why am I doing this? Why am I working 100 hours a week? And then if you’re a minority investor in a restaurant, it’s a tough place to be because the chef wants to buy new plates, but you want to get paid your money back. It’s no longer fun, when the whole point was to build a place that you wanted to go eat.
My younger brother and cofounder has a really good friend who owns a restaurant in DC. He was building a website for a charity thing. He asked my brother, “Hey, can you build me this website?” My brother jumped on Squarespace and built a beautiful website. The restaurant owner gave him a $500 gift card to his restaurant. My brother was over the moon. He took his girlfriend, and they had this incredible $500 dinner with wine and cocktails. And he was like, “This is awesome. I got $500 for building a website.” And the restaurant owner was like, “That cost me $100 or $150, which is awesome, because I got a great website from it.” We were like, wait a minute. There’s some arbitrage here between the value that a customer feels and the value that a restaurant feels about this $500 gift card.
By then, I’d been involved in about 30 restaurants. I looked back at them and knew that the investment model was broken. So we thought, can we create a better model for financing restaurants that’s actually good for them? Because the people who design restaurant investments aren’t restaurateurs.
Restaurants don’t have a lot of cash, so paying an investor or loan back in cash is hard. But restaurants have a lot of food, and a lot of alcohol. They have a lot of product. Customers value that product more than the restaurant owners do. So the glass of wine that the restaurant sells for $10 costs them $3. The restaurateur values that glass of wine at $3, and the customer values it at $10.
A restaurateur in our incubator wanted $50,000 from me as an investment. I was like, “This doesn’t make sense for me to invest in and become a partner.” That’s the same time when the gift card thing happened with my brother. That was the “aha” moment. Instead of investing, we bought credit from the restaurant, not knowing how we were going to sell the credit. It just seemed like a better way to do it. Because we had the incubator, we were able to sell the credit. We called customers that had come into the incubator and said, “Hey, this restaurant’s opening. If you spend $500, we’ll give you $600. If you spend $1,000, I’ll give you $1,500.” We sold all the credits in 65 days. I looked at that and I was like, “Whoa, this was actually the best restaurant investment that I’ve ever made.”
So we created this system where we buy food and beverage credits. We give restaurants cash for that food and beverage credit so they can open or expand. It’s without any dilution, without any other owners, without a loan. They don’t have to pay us back. We resell that credit to consumers in a very sophisticated way, which drives in a lot of customers and works to build loyalty. Then the restaurants just serve the food.
Pre-COVID, we had financed about 450 restaurants, and 449 of them have reopened. That’s across the country, and even in Australia. Everybody is back to some type of an opening.
I have conversations every single day with restaurant groups that get offers from landlords to take their empty restaurant spaces. One group had a major landlord come to them and say, “We have 12 built-out restaurants that are empty in great markets. Will you guys open restaurants in these markets?” Before, if a big group opened a major new venue, they’d put $10 million into it. Which takes forever—three years at least—to get paid back to the investors. Now they’re able to open into existing spaces that already have the infrastructure, already have the kitchens, already have everything built out. They can open with $1 million or less. That’s game-changing for the industry.
Or take a place like Two Hands here in Austin, which is based out of New York, but we funded them here. They built out a cafe before the pandemic, and they probably put $2 million into it. Now they could take over a closed cafe and put in $200,000.
Landlords that didn’t play nice with their restaurant tenants are in trouble because now they have lots of empty spaces and not that many operators to take them. We just committed $10 million to Parker Restaurant Group in Chicago. A week ago we committed to fund Michael Mina. We’re aggressively helping restaurants grow because we know that when the pandemic ends, it’s going to be the Roaring Twenties for restaurants.
But if you consider where people are looking to grow now, it’s not in California and New York. That could happen be later, but it’s going to be a lot longer. Restaurants are doing so much better in Texas and in Florida. We have restaurants that are more profitable in Texas now than pre-pandemic. We can argue about the morals of it, or the politics of it—but from a business perspective, being in those markets through lockdown, rather than being in New York or LA or San Francisco or Chicago, has been great for those restaurants. And restaurants we’re working with in other markets are looking at expanding more into Florida or Texas. That’s definitely a trend.
Now Miami is an interesting market. Miami in general, compared to pre-COVID, is down. But relatively speaking, compared to other markets, Miami is doing really well. We can see that in our data. We have probably five or six restaurants in Miami, and relative to their peers in other cities, especially in New York or California, they are doing way, way, way better. Even though revenue is down, sometimes profit is up because the restaurants have gotten a lot more efficient. They’ve realized they can operate with less labor. They also got PPP funding—if you have revenue in those states, the funding is even more beneficial because it covers the employees that you need to work there. If you’re in New York and you got PPP funding, and you can’t be open anyway, what are you supposed to do with your PPP funding?
And then in Texas, the Mexican restaurant group that we’re talking to right now—I think they have eight locations in Houston, and their profit is probably up 40 percent since last year. They’re great operators. They run their restaurants really well. They also happen to be in warm weather and have nice patios.
Landlords don’t want to take risks anymore, so they’re going to want to see proven restaurant operators that have existing units or tons of restaurant experience. It’s going to be really hard for first-time restaurant owners to start up. But if you can get in with the landlords, if they trust you, they’re going to give you a good deal because they aren’t looking to make money on these spaces—they’re looking to not lose money. You’re going to see good operators expanding significantly. The groups we’re talking to are going to double in size in the next two years.
These days, a private equity partner won’t move money into restaurants because the economics for a PE firm—where you have to get paid out of profits—don’t make sense. During COVID, your restaurants aren’t making as much money, and it’s going to take possibly years in certain markets like New York and San Francisco to come back. Private equity is no longer funding restaurants. Individual people aren’t funding restaurants. Banks certainly aren’t giving loans to restaurants.
But inKind is aggressively funding restaurants—we’re the only ones, actually—and we’re doing it in a way that’s great for the restaurants because they don’t have to pay us back, and we bring in all these customers. During COVID, working with Yardbird, we sent 1,600 customers just to their Dallas location. I’m actually meeting with them to talk about nine new locations they want us to fund. Before it might have cost them $5 million to open a spot, while now we can give them $500,000 per spot, and they can open and keep all the profits.
Then again, the tougher the market, the better the deals from the landlords. If you’re looking to open a restaurant in New York or San Francisco, now’s a great time to talk to a landlord. If you already have a restaurant in a market like that, it’s going to be tough. All you can do is cut costs and try to stay around. That’s your best bet. But even if you’re one unit in New York or San Francisco, if you can make it through COVID—if you’re operationally smart, and you can figure it out—there will be an opportunity to add three units or five units, because the landlords are going to say, “Wow, this guy knows what he’s doing. I’m going to give him my space at a great deal.” Before it would have taken years and years to build up the capital and the trust to do that. Now they can do it in a year.
Right now, the future is still dark. It’s still hard. It’s definitely still a struggle. But I think when people get through this in the next three or four months, there’s going to be a super-bright future for restaurants.