Venture Capital & Hospitality: An Unexpected Recipe?
28th January 2020
What comes to mind when we think of Venture Capitalists, and the type of businesses they support? I imagine Silicon Valley and mobile apps! The kind of tech companies that start in the garage of a pastel-coloured T-shirt-wearing college dropout and somehow generate billions six months later (which reminds me, I must buy more pastel… and rent a garage).
This plucky entrepreneur is a year away from selling your private data to politicians!
It might surprise you, then, that venture capital is one of the most significant sources of funding in the modern hospitality business. Chances are that when you walk down the high street and look at your favourite restaurants, a sizeable chunk of them have been supported by this form of venture investment.
This begs the question: why does the hospitality sector continue to be such an attractive prospect for private equity firms, despite not offering up the type of astronomical returns of tech? As anyone in hospitality will tell you, expecting Facebook or Google-level returns from a restaurant or hotel is foolhardy, to say the least!
The face you make when someone expects to earn $68 billion in the hospitality business
That said, it is undeniable there is still an awful lot of money to be made. The restaurant industry alone in the UK is worth over £38 billion, and us Brits on average spend around £18 a week eating out – double what the average Brit spends on childcare (food babies > real babies). Even those VC companies who traditionally dabble in tech and software start-ups are racing to have a slice of the pie.
Take for example Pembroke VCT, whose criteria for investment is that companies must generate revenues of £500,000+, are investors in apps, fashion brands (including Alexa Chung!) and SAAS platforms. Amongst that mix of typical profit-machines, their portfolio also includes hospitality giants such as Chilango, La Bottega and Five Guys—the latter of which now has close to 80 outlets in the UK.
I mean, technically these are five guy, but if they try to sell you a burger I would run
On a related note, one of the most prominent Silicon Valley investors Marc Andressen has said that “one of the ways you convey the operational excellency [of a company] is the quality of the plan.” Restaurant and leisure companies, regardless of their size, are able to attract venture capitalist with the promise of well-laid business plans and realistic growth projections, both of which are arguably easier to produce in their sector than in the more volatile tech start-up industry. For VC investors, the likelihood of ROI is just as important as the potential amount. It’s the archetypal risk vs. reward equation.
However, simple ROI is just one aspect of what motivates venture capitalists. Indeed, for the best ones, what excites them most is the prospect of adding tangible value to a business. Pembroke, for example, point out their investment gets directed “where we are confident our resources and experience can be most instrumental in their growth.” One of the most prominent hospitality venture capitalists in the UK, Paul Campbell of Hill Capital Partners LLP, similarly exults the importance of VC funding adding targeted value, as opposed to blind investment for investment’s sake. Campbell prefers to invest in companies where the owners (and their passion) remain involved in the company and claims prospective business partners are “often surprised that I spend about as much time talking about them as people as I do about the business.”
The results speak for themselves, Hill Capital Partners’ portfolio boasts numerous household names, including Hickory’s Smokehouse, Tortia, Pizza Express, Gourmet Burger Kitchen, The Alchemist and Gusto. What this all points to is the huge potential of venture capitalist funding to help hospitality companies achieve peak operational success. It is this ability which has helped make this form of funding one of the most legitimate and valuable funding sources within the hospitality sector as we know it today.