Growth Equity Investing in Hospitality & Hospitality Tech

So we collectively thought that together our skill sets would be complementary and we could potentially be dangerous together in the investment world. So I joined him and brought along a guy named Pete Mavrovitis, who had worked with me since being randomly assigned to my group in 2004 in the investment banking world. So Pete joined Danny and me, and we then raised a 220 million fund. For fund one, we built out our investment team. We've made 17 investments, and just raised our second fund of 330 million. So it's 50% larger than the first. And we're managing a little over half a billion dollars in assets now.
EMS:Mark, you're in a very exciting space right now, hospitality and hospitality tech. And I wanted you to share your outlook for the industry.
ML:So market selloff notwithstanding, we remain really bullish on the businesses that value hospitality as an essential ingredient. When we set the fund up, and our fund is called Enlightened Hospitality, this comes from Danny's book Setting the Table. Enlightened hospitality is the concept that to drive outsized returns you have to prioritize your employees first. And it's a virtuous circle. Early days when Danny wrote the book and described this, as a University of Chicago business school guy, I said, "That's really not what we learned in school," which says if you prioritize your shareholders first, everything flows from there.

Danny's theory was that to have a better customer experience, you have unhappy employees, it breaks down, and says it's really a virtuous circle of employees first, customers second, community third, suppliers fourth, and investors fifth. And it's a virtuous circle. So if something breaks down, it kind of all breaks down. But the theory was people that do that, and it gets called different things, conscious capitalism flies under this banner, but if you take that approach, you will drive better returns.

And ultimately, this is a game where we're trying to figure out how to reduce our risks and handicap better. And we thought finding like-minded entrepreneurs that took care of their employees was the best way to drive better returns. And it also becomes a bit of a self-selection process because the companies that are attracted to us, and we look at about 100 deals for every investment we make, companies that are attracted to us are those that are looking for help and value hospitality the same way we do.

We have the fund, as I mentioned, it's technology. And I'll come back to that in a second. But an example of what we've seen that's worked is Tacombi, which is fast, casual Mexican brand. We've been speaking to them for about three years. They've got 11 locations in New York. They've just opened up in Miami and DC. And we think they've got the foundation to kind of be the Shake Shack of authentic Mexican food. So we're looking for brands like that that we think can scale and have widespread appeal.

I guess the other thing we look at is we say we want to find companies that have ideas we wish we thought of ourselves with management teams we wish we had hired to do them for us. So that's kind of the gaining item. And then in the food space, we look and say we want food that's craveable and brands that have a tribe. And we can talk a little bit later about what a tribe means and how you respond to your social network and your community. But that's what we look for on kind of the food and CPG space, consumer package goods space.

On the technology side, we spent a lot of time trying to find companies that are addressing pain points that restaurants have. So that's been around things like labor scheduling, about reservations, about really how to take a business that for a long time was way behind the curve in technology, it was really a pen and paper type of business. When Danny opened Union Square Cafe, the reservation book was all done longhand on paper. Danny was attracted to OpenTables saying, "The ability to get data on my customers and share it amongst my restaurants is very valuable. I don't need this to fill up seats in my restaurant because they're full, but I need better data."

So that's kind of what we look for in the technology space. Another example of that, we just invested in a company called 7shifts, which deals with labor scheduling, and labor's been a big problem and challenge in the technology side.
EMS:Mark, absolutely. And more specifically, what are some of the greatest opportunities you see right now and in the future and why?
ML:So if you look at the tech space across hospitality, as I said, it was a business that for a long time couldn't afford to invest in technology and the business has become sufficiently competitive that you can't afford not to invest in technology now. It really helped our fund that half the fund has been in technology because during the pandemic the rate of adoption of technology we feel accelerated probably three to four years faster than it would've during ordinary times.

The areas that are of interest to us right now are things like artificial intelligence, the robotics space, which really get to the root of labor efficiencies and scheduling, and things like that are areas that are interesting to us. We invested in a company recently called PreciTaste, which does exactly this. They put cameras through drive-thru lanes and in the front or back of restaurants and can look and see what kind of cars are coming through, how many people are in those cars, what they typically order because when people go to a fast casual restaurant they generally order the same thing every time. McDonald's is a big customer. It helps them say, "You need to put on more fries. You need fewer burgers with the type of crowd that's coming through right now."

So it ends up causing less food waste, which is attractive to a restaurant owner. And it also increased throughput because you can basically fill the orders faster because you've got what you have anticipated people are going to order. And the beauty of AI is the more you use it, the smarter it gets and the more repetitions increase the efficiency of the business. So those are things we look at that's of interest.

The other area that we've made investments that we think is early stages right now is the plant-based area around the food space. We invested in a company called NotCo, which was done by some MIT engineers. They set it up in Chile, set up an algorithm to basically say if you take any kind of food, what kind of mix of plants and vegetables recreate the taste of that food? So they started with the contract for mayonnaise in Chile, which is a big business. They then did burgers in Argentina. And we invested and they got basically the milk substitutes for Starbucks in North America. And Shake Shack has recently started using them on a limited basis in New York, making plant-based chocolate milkshake substitutes. So we're excited about that one. We're investors in Banza, which is a rapidly growing chickpea pasta company. Same kind of thing, we think people want to eat healthier and in ways that are better for the environment.
EMS:Yeah, absolutely. On a personal note, Banza, I love their pasta and eat that a few times a week.
ML:It is great stuff.
EMS:Yeah, absolutely. Mark, just shifting gears a little bit, I wanted to ask you what are some of the greatest challenges you're currently facing right now?
ML:So the challenge that kind of the community we invest in, the biggest challenge right now is around labor, shortages of labor, which is why AI is interesting, it's why robotics is interesting. It seems like there's been a probably permanent contraction in labor pool, certainly in urban areas interested in working in restaurants. We're hoping with the passage of time that returns to a more normal thing. But we're not counting on that happening. So labor's a challenge.

Inflation's definitely driving food costs up right now, which is another challenge. I would say recessionary fears are an issue. But despite all that, we think sitting with basically 90% of our second fund with a lot of dry powder, we're seeing prices return to kind of more normalized levels. And to me, that's a better environment to be competing in because if you're better than your competitors, you can win that way and you don't have to worry about irrational, inefficient capital coming in to providers that probably don't deserve to have that capital.
EMS:Absolutely. Mark, I'd be remiss if I failed to ask you about ESG and DEI given those are buzz words for our space right now. And I wanted to ask you how your firm is addressing these topics.
ML:So I've always been a big believer that to win you need diverse teams. And this goes back to my investment banking days in an industry that was really not diverse. And I always had the highest performing and most diverse teams. And that wasn't an accident. It's kind of like who wants to compete with a team that's giving you one narrow set of perspectives? So we think it's critically important to have a broad cross section of perspectives, backgrounds, ideas. And to me, diversity is not just race, it's not just gender, it's kind of a whole broadway of perspective. Out of our 17 investments, 11 of them have either female or underrepresented groups as founders and CEOs. So we're ahead of the curve on that way. Four out of seven of our investment team fits the same criteria.
EMS:Mark, we've covered a lot of ground today and I wanted to see if you have any final thoughts to share with us.
ML:You know, when we set up the fund and we're trying to decide what are we going to do with this money and how are we going to screen things and basically how are we going to underwrite, Danny had the concept that we described as the shopping cart concept. And the idea is when you're in line at a grocery store and you look at the person in front of you, you make some kind of subjective judgment about them based on what's in their shopping cart. And we said, "When we think about brands, it's always how will that look in our shopping cart?" And when people look at our portfolio, we want them to look and say, "Of course, that's what they have in there. That makes perfect sense given what they stand for and who they are." So that's kind of a overriding screen that I think has served us well as we've put the portfolio together.

One last point on that, we recently had a community and company conference, which we used to do pre-pandemic once a year. We'd get all our portfolio companies and we have a bunch of limited partners that are active in the food space, we would get them all together along with Shake Shack and the Union Square Hospitality team to compare kind of best practices in the area. During the pandemic, these became increasingly important, and Danny would lead these probably every six months with our portfolio companies. And at that point, it was what are we doing? What's going to happen on the other side? And how do we keep our businesses afloat?

So that was a big part of it. It was great to have everybody back in person. One of the best comments was someone who had been on a handful of these Zoom calls saying it's really surprising to me to see that so many people in this group have legs. It was actually great getting everybody back together and comparing notes and spending a, it was basically about five or six hours together.

And I think that type of kind of closer interaction just reinforces to me why we all... Our team has been back in the office for a little over a year at this point. And I think that's critically important as a way to train your younger people and for them to get the experiences they need. You know, I think sitting in your bedroom in your parents houses is ultimately not the best way to learn and enhance your career. So it's been great to get everybody back together. I'm hoping we're in the early stages of kind of a resurgence around this.
EMS:Yeah, absolutely. Well, Mark, I want to thank you so much for joining me on my podcast. And thank you for listening to the EisnerAmper podcast series. Visit eiseramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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