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Arming the Restaurant Rebels with Tock CEO Nick Kokonas

Limited Partner Episode

July 27, 2020
July 27, 2020

We’re joined by Tock CEO Nick Kokonas to discuss how they’re “arming the restaurateur rebels” versus DoorDash / Uber Eats, in much the same way Shopify has done so for ecommerce merchants versus Amazon. This episode is full of lessons on how to execute a counter-positioning playbook to disrupt entrenched incumbents, including the influence of Nick’s friend / Tock investor and Nobel prize winning economist Richard Thaler. Whether you’re an entrepreneur who’s also building a “picks & shovels” type business or an investor interested in the future of the food industry or disruption in general, this is not one to miss.

See Ben's original Tweet that spurred the episode here.

There are lots of great replies to help understand the restaurant tech ecosystem, and of course, Nick chimed in with a tweet that led to him coming on the show. (Thanks to Matt Shobe for connecting us!) You can read distilled observations from all the replies here.

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Marvel
Season 1, Episode 26
LP Show
1/5/2016
July 27, 2020

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
8/28/2019
July 27, 2020

8. ESPN

Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

ESPN
Season 4, Episode 1
LP Show
1/28/2019
July 27, 2020

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

PayPal
Season 1, Episode 11
LP Show
5/8/2016
July 27, 2020

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
6/25/2017
July 27, 2020

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

NeXT
Season 1, Episode 23
LP Show
10/23/2016
July 27, 2020

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Android
Season 1, Episode 20
LP Show
9/16/2016
July 27, 2020

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

YouTube
Season 1, Episode 7
LP Show
2/3/2016
July 27, 2020

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Instagram
Season 1, Episode 2
LP Show
10/31/2015
July 27, 2020

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!

Sponsor:

  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: All right listeners, we have a treat for you today. We are diving into—what we are going to call at a high level—arming the restaurant rebels with Nick Kokonas. I'm stealing that term a little bit from Shopify—arming the rebels against Amazon. And this is thinking about it in the context of the food industry. We're going to get into a lot more than that. But that is the working title that we're going to this episode with. 

I want to introduce you to Nick before he comes on here. Nick Kokonas is the co-owner and co-founder of The Alinea Group of restaurants which has its namesake restaurant Alinea, which has been named the best restaurant in America and the best restaurant in the world by multiple very very reputable food industry associations.

Nick is also the co-founder and CEO of Tock, a reservation and CRM, and now the leading total reinvention software system for the restaurant industry—formerly known as a new reservation system that expanded into a lot more in March. We're excited to have him on and dive into everything about what it means in his entrepreneurial journey, his multiple entrepreneurial journeys, and all the stories behind it. Nick, welcome to the Acquired LP Show.

Nick: Thanks, Ben. Thanks, Dave. How are you?

David: We’re great.

Ben: Doing well, all things considered.

Nick: I'm doing great, sort of.

David: That's all of us these days.

Nick: week is a different week. It's a good week this week.

Ben: I’ll bet. For listeners, a little more context. If you listen to the Canlis episode in our adapting miniseries, we did part back in March in April. This is essentially the other side of the story. Tock is the software platform that Mark Canlis referred to when he was talking about these awesome guys in Chicago, whose reservation system we were trying to hack from our normal day to day to make delivery work.

Nick is Tock. I thought it was cool to get the other side of that story here. The story of how this episode came together comes from a serendipitous Twitter interaction where I was curious and doing some research. And I tweeted, Amazon is to Shopify as Uber Eats is to blank. Who is arming the restaurateur rebels? Nick replied and obviously had some thoughts, and we figured that a really great place to start our discussion today would be this deep dive on arming the restaurateur rebels.

What the market looks like after a wild change in the last five years with food delivery, this global pandemic, and what the future looks like. Nick obviously is the perfect person to discuss this with both from the Tock side, from the restaurant side, and himself as an investor, and with a very interesting story of how all that came to be. We know he'll have great thoughts on this. All those and the broader arming the rebels theme.

Without further ado, let's dive into it. Nick, two major business models that are at war right now. There's a marketplace or an aggregator. You got the Uber Eats. You got the DoorDash of the world now rolled in Postmates to Uber Eats, and then you've got these SaaS platforms which are all helping people go it alone. What do you think about that being actually in that industry? Do you think about bifurcation like that?

Nick: Yes. For sure that's accurate. At the same time, I simplify it a little bit. And I tell our restaurant clients, winery clients, and whatnot, you have to own your own customer. For me, the thing that was really bad about OpenTable 10 years ago was I couldn't have access or own the data of the customers that are clearly coming to my restaurant. Not because they found it on the marketplace, but because they wanted to come to Chicago specifically to eat at Alinea, and yet, they were booked through OpenTable, and then I didn't have their email address. I didn't know where they're from. 

If they showed up at one of my other restaurants, I couldn't go like, oh, yeah. That's the same person and they like to drink tea after their meal. Basic things that you do in hospitality to make the experiences seem a little more magical are the very same things that every business tries to accomplish. How do you accomplish that? You know your customer. When you want to do marketing, it gets a lot less expensive to do it on your own, and only if there were tools that you could drop things into and say email 10,000 people at once.

Well, there are. There are lots of great systems to do that, but you can't do that if you don't have access to your own customers. That and the no show and efficiency model were the reasons that I started Tock back in 2010 for myself. It wasn't Tock then. It was just software that I was building in order to solve some problems for my own business.

The core problem was to own your own customer. To answer your question, if you're on DoorDash, Uber Eats, or whatnot, what do they want to do? They want to own the customer. The attribution of the sale doesn't go to a great restaurant like Canlis. Clearly, anyone in Seattle right now is getting carry-out from Canlis and they just launched a Crab Shack on Tock a couple of days ago. Is going to Canlis not because it sits on Tock. They're going to Canlis because Canlis has been there for 40 years or longer. I don't know exactly, but it's a decades-long restaurant. They're going to Canlis because it has a reputation and earned a reputation for excellence.

I do not pretend that Tock magically got them a customer. We certainly do attempt to find and steer new customers to all the top clients, and we do all sorts of marketing on their behalf. But we don't charge for that in any way. That just makes our platform stronger in the long run. That's the way I look at it. A whole host of wonderful things that happens when you give people the power to own their customers, see the data, and then they can also operate more efficiently.

Historically, the restaurant business has been a very poor margin business, but I don't know that it has to be that way. On top of that, there are all these issues with hospitality workers, minimum wage, tipping models, and a whole host of other things that accrue from that low margin, which gets solved if you solve the margin. At The Alinea group, we pay for healthcare. We have a 401(k) matching program for employees. Those took a decade to put in place, but now there's no reason why you shouldn't be able to do all that.

Ben: The restaurant industry is a famously low margin. I think an argument underpinning a lot of the highly charged feelings right now about should Uber Eats, should DoorDash exist stemmed from this notion. It's already a really low margin industry. When you say it doesn't have to be low margin, you've already got this cost structure where labor is 30%, 40% of the business. Your lease is going to be 20%, 30% of your business.

Nick: No, no, no, no. If you sign a lease that’s 20%, 30% of your business, you have created an existential problem for yourself. I don’t mean to jump in and correct you. 

Ben: No, please do. 

Nick: There are some people who, if you start out undercapitalized and you’re building a restaurant, you might sign a lease where 6% or 7% of your gross goes to pay rent. That is an error.

David: Real quick. Do people, when they sign these leases up, is it a variable thing? Is it written into the lease a percentage of revenue? Or is it a fixed cost that, just based on whatever revenue you do, ends up being—?

Nick: The answer is all of the above. I've seen leases that people have signed where it's the greater of (this is the crazy part) $10,000 a month or 6% of revenue. I see that and I just go like whoa. If all of a sudden you have a hit restaurant, you expand a little bit and you go from doing $2 million in sales to $5 million, the extra $3 million times 6% is an extra $180,000 a year. Why would you ever sign that?

I very, very, very much do fixed leases as low as possible, stepping up 1% a year that kind of thing. Of course, that assumes that you're well enough capitalized at the start to not do that, and sophisticated enough to know that paying a tax on your restaurant forever is a terrible idea, but even if you did that you'd be at 6% or 7%, not 20% or 30%.

Ben: Give me a sense of the rest of the cost structure, and maybe to get two different thin slices. Alinea I'm sure has a very different cost structure than a fast-casual restaurant. What do those look like?

Nick: I like to say that, actually, Alinea does 100 people a night at $300, and some other restaurants do 300 people a night at $100. It actually is more of the same as you would think. If you take in that to the next extension, if you go down by a power of 10, you could do 3000 people at $10 and you now have a taco shop. It's literally the same thing.

You're going to look at something between 25% and 30% of food costs. If you're doing things correctly, 30% labor. You can get a restaurant to 20%-30% margins if you're running it really really well. I give a talk called Tuesday is not Saturday and seven other things you already know but are doing nothing about. One of the core tenets of Tock is Tuesday is not Saturday. What I mean by that is, if I said to you what do you think that means? You haven't heard this before. You own a restaurant and Tuesday is not Saturday. What do you get?

David: We've cheated because we've listened to you before.

Nick: Oh, you have? Okay. At least you admitted it.

Ben: I feel like you should charge a different amount, and you should incentivize people to take those tables differently because they're expiring inventory.

David: Load management.

Nick: You’ve definitely listened to it. It's like you know at the core that the demand on a Tuesday is different than the demand on a Saturday. If you run a ski mountain (or something like that), you would know the first snow everyone's going to go out and they're like, oh, it's not so great. The following week's going to stink. You should change your pricing. You should change your template.

It's the same for dentists as it is for restaurants. And yet weirdly, every restaurant system including the DoorDash, Uber Eats, and whatnot, they don't really give mind to the variability in demand. They don't give mind to how many meals can be taken out of a kitchen in a 15-minute window.

David: Also, in something like a restaurant, you really have to pay attention to the dynamics of fixed versus variable costs. If you're staffing the restaurant that night, that's a fixed cost that you got to cover.

Nick: Yeah, and also people don't think about food waste too. Even if you sold the food at cost, you are bringing in revenue that would otherwise just go to waste. Not to mention all the environmental reasons that you don't want to do that. All of the ethical reasons you don't want to do that. It's just amazing to me that passionate people who open foodservice businesses, most of them are passion projects, at least when they start they are.

Even something like a huge national pizza chain probably started with some guy that went like, hey, I've got an idea to make a pizza, which is done 10 million times. But everyone forgets that. It's really rare that someone goes like, oh, we're going to scale something to 500 different stores from this 1 idea to start with, and those almost never work. I've seen a couple of the past few years. 

What was that one with the quinoa bowls? They came out of Silicon Valley. I heard that and I was like, okay, you're automating something which will eventually be automated. I don't doubt that, but you're not really giving mind to the thing that's the most important, which is the emotional connection of the people with the product.

David: Was it Life Kitchen maybe? Was that the one from Silicon Valley?

Nick: No, no, no. That one was actually a sit-down. I was thinking of one that had these automated bowls that you could go in and you could pick all the ingredients that you want in your bowl and a robot would toss it all in, spin it around, and dump it.

David: That's so Silicon Valley.

Nick: Yeah. Life Kitchen was actually pretty good. I actually knew the investors. They just didn't scale it properly.

David: If you are operating a restaurant or restaurant group really well. You mentioned 20%-30% net that you could achieve with the business. If you look at these food delivery platforms, their take is 20%-30%. Are they leaving restaurants with anything?

Nick: That's exactly what I was going with that. Here's the psychology of your restaurant owner and how they sell to them. You have a successful restaurant that's under the middle-market, just barely under the middle-market. You’re looking at something like a $20-$25 check average in a big city. They have a product that everybody loves. It could be hot wings, burgers, ribs, or whatever. Something that travels in a box.

The rep calls and says basically, look, all you need is an iPad and you can download this thing. We will pick up the food. You don't have to add any labor at all. We'll probably sell an extra $500-$1000 a day on average going out of your back door. You won't have to hire anybody. You don't have to do anything. It's just magically an extra 30 orders of burgers will go out of your back door at $20 each. 

You go, okay, great. That's an extra $600 a day in revenue for me. They say we're going to take 20% of that. Instead of getting $600, you'll get $480, but that's still $480 you wouldn't have. When you multiply that up by a year $500 a day, it's $2500 a week, that's $100,000 a year you're going to get that you wouldn't have otherwise. It's straight to your bottom line. That's what they say. It sounds really compelling, right?

Ben: Assuming this isn't cannibalizing my direct sales where I actually have a relationship with that customer and they come through my front door. Maybe they sit down, maybe they order from me directly, and then it sounds great.

Nick: It sounds great and that's what they're going to say and all of that. What happened was—even for my own restaurants for Roister, we do this fried chicken dinner that's $50 or whatever. It's half of a chicken for $25. It's just beautifully done. It's done three ways. It's very artfully presented, and it feels very worth it when you're there. It's one of the most delicious things you'll ever have via a chicken.

Some of our employees were like, well, look, let's just start sending some out the door. This was four or five years ago. As soon as they did it, I ordered it at my house because I wanted to see how it came. I opened the box and I went, this does not look worth the money. On top of that, they're not only charging the restaurant 20%, they're charging you delivery fees (usually). Depending on which platform you're looking at.

All of a sudden this meal got ridiculously expensive, and everything else was missing. The beautiful plate where the server explains to you everything—the sauces. I called up and I just said shut it down after a week, because the experience wasn't good. Beyond that, I also was like, how much money are we getting here? I realized that with our margins on the food and everything, and if you do take into consideration the labor. Look, if you were really successful at this, you'd have to hire another person to cook or two.

Ben: It's not truly all incremental.

Nick: It's not remotely. When COVID hit, I quickly realized the only possible business that even Alinea, a Michelin 3-star, will have is carryout. Canlis realized that two weeks before me because unfortunately, COVID was in Seattle a couple of weeks before it started moving eastward.

The really smart operators realized quickly that, hey, even though that's not what we do, it is now. See the world as it is now as you want it to be kind of thing. We immediately started taking the data structures of what Tock does on the back end with the times, the variable pricing, the pacing of a kitchen in 15-minute increments, and all these things. By the way, it wasn't my idea. It was our COO Jeff Kaplan's idea. He said, “Hey, I really think we need to do the stuff that Canlis is talking about. It shouldn't be that hard.”

Ben: Nick, can you just explain basically what Tock was in February?

Nick: Yeah, that's a good point. Tock was built per our earlier mention, it was built really to solve a few problems, which is no show rates, run 10%-15% on free reservations, which are all that OpenTable has still. When you book an 8:00 PM Saturday reservation at your favorite restaurant in the big city, they're lying to you. They know there's no chance that they're going to seat you at 8:00 PM. Consequently, about 15% of people are also lying to them. They're not going to show up.

David: It's like an airplane flight.

Ben: It’s the circle of broken trust.

Nick: Yeah. It's the circle of broken trust. That is a great way to describe it. You're going to wait 45 minutes at the bar—bad hospitality, or you're just going to show up because you made two reservations or three that night. People do that and they go, where do we feel going tonight? They pick one of the three. All of that messes things up greatly.

I built Tock originally to solve that problem by charging a deposit. Richard Thaler, the behavioral economist, is an investor in Tock now and a friend of mine, but I had no idea who he was 10 years ago. I just knew that the sunk cost was very real. If people put down $5 or $10 on something, they will call you to cancel to get their $5 or $10 back. It's just very real psychology. This is not an exaggeration. I have watched billionaires cancel Alinea in order to get their money back, which is obviously meaningless to them.

David: That’s amazing.

Ben: That's not just to get on your good side?

Nick: No. They do it automatically. They hit a button. But you see that even they do it. They don't just no show or keep their optionality. If you're worth $1 billion, what is a $500 meal? It's a nickel.

David: I've heard you use this analogy before. It'd be like if the Bears and the Bulls are playing on the same day. You're not going to buy tickets for both of them, you're just going to buy tickets to one of them, and then you're going to show up. And if you can't show up, you're going to get your refund.

Nick: They don't play the game again. You sell the tickets, give them to a friend, or whatever. It started out like that.

Ben: Thing one is being able to charge to make a reservation so that you've sunk cost around not showing up, and you mentioned the second component. 

Nick: The second component was knowing your customer problem that I mentioned earlier so that you could go, who are these people? Not only to serve them better but also when you open your Next Restaurant, I have 100,000 people that have eaten at my first restaurant. I can easily email them and say, hey, we've got a new restaurant starting up. It was mind-blowing to me that I couldn't do that when we were starting Next.

Ben: The state of the art you look at—and I'm going to mention competitors here—Resy, OpenTable. 

Nick: I can’t wait to jump into it.

Ben: They thought about, hey, these are our customers. We'll seat them at the restaurant but they're not the restaurant's customers.

Nick: Yeah, they don't say that, of course. They say the opposite. First of all, they don't get a phone number. Resy has recently switched to requiring an email login, but they have done it in a very haphazard way.

David: Because they want to remove as much friction to getting their own customers.

Nick: Sure. At the end of the day, OpenTable, the report that they give restaurants at the end of the month—and this is something that immediately 100% of your customers came through OpenTable. The only ones that they give you credit for are the ones booked on your website. But if you think about it, if you Google a restaurant, let's say you go to Google and you type in Canlis. If you're on OpenTable, what happens is that OpenTable has good SEO. They've got the first spot and the second spot.

They take out Google AdWords on top—that they hope you don't click, but even if they do, they know that an average of 3.2 diners come. They charge $1.50-$7.50 per diner. They do AdWords arbitrage. They've got the link and the Google knowledge card on the right-hand side, and all that flows through to Google Maps and all that. Where does that attribution should go? It should go to Google. Google knows this. They can't really do anything about it. 

Ben: Right. Organic.

Nick: Where do you not go? You don't go to the Canlis website, probably, because you just want to book. You don't need to know where it is. You don't need to see the art project that is their website.

Ben: Which is beautiful?

Nick: Yeah. Theirs happens to be really beautiful. Most restaurant websites (as we all know) completely suck.

David: With OpenTable, I believe, Nick, (correct me if I'm wrong) anything that OpenTable says they get credit for they charge a fee to the restaurant. 

Nick: Yeah, a larger fee.

David: If it’s booked directly on the restaurant website, then they don't pay the OpenTable.

Nick: No, there’s still a fee. It’s just a lower fee. They're even charging for walk-ins now. I have gotten to restaurants that are on OpenTable and seen literally yellow post-it notes for walk-ins because they don't want to pay the ¢50 per cover for walk-ins.

David: Wow. This is crazy too because my understanding of OpenTable is that it started (at least) like Tock as a SaaS platform, not a marketplace, right? In theory, this should be a tool for restaurants.

Nick: But now it's owned by booking.com. What does booking.com do? They book airlines, hotels, and inventory and take a slice to the middle. It's the same thing. That's why it was so attractive to them. That's why they paid $2.6 billion for it. Even though they wrote it down now by $900 million, and it's been a failing business for booking (by their standards). At the end of the day, people go to most restaurants. 

Look, if you go onto DoorDash, OpenTable, or whatever, you type in Mexican food near me. There is value to that, but you can do that in Google now too. Or on your phone you can just say, hey Siri, show me a Mexican restaurant near me. What's it going to do? It's going to do a generalized search. We built Tock to be mobile web first. Yes, we have an app. Yes, it works on a laptop and whatnot, but about 80% of people do the interaction that I just described where they just type in the name of the restaurant or something near me.

We link to all those things as well. We have the Tock SEO and we have all that. There's no charge to the restaurant for that. The attribution is honest. In other words, if it came through Google, you can go to Google Analytics for your Tock page. We actually give you the Google Analytics web property ID. If it came through social media, we have an Instagram and Facebook Pixel ID.

If you're running social media boosted posts or ads, if someone books via Tock but started at Instagram, then comes in, spends an extra $100 on wine. All that information goes to Tock and attributes back to the ad spent on Instagram. It gives the restaurants the power to do this stuff themselves, own it, and then build on it.

Ben: You're touching on something here that is really important particularly for early-stage startups to understand. That's the way that you do your pricing model. And the factor that it scales with aligns all the incentives for a very long time in your business and determines how your customers are going to act. The customer incentives are misaligned from OpenTable's incentives in your example with the post-it notes where they're going to do a thing that's worse for them so that they can save some money.

Nick: What's interesting is oftentimes, the people who make the decision in a restaurant to get the software are not the end-user of the software. That is something that we understand and try to explain to restaurants. It's something that other companies understand and try to take advantage of. As a restaurant owner, I use Tock every single day. I also used to use Tock's competitors every single day, and it was frustrating that I couldn't just flip open my laptop and watch it live at home. Basic things that you can do with other SaaS products.

There's a lot in Tock. It's a really deep and broad product now. The initial things we were trying to fix were just access to information. Even then, the pricing incentives, I was like, great. On OpenTable, a restaurant that's busy can easily spend $4000 or $5000 a month, but they do so $1 at a time. It feels like small little bites. I was like, we're just going to charge $600, $700, or $800 a month flat and that's it. All the VCs basically were like, well, your TAM is not big enough. Probably you would too, Dave.

David: Probably me back in the day, but we were going to ask how your experience was.

Nick: I'll get to that in a second. I thought wow, this is the most obvious thing in the world. We can price it at 1/10 the price of OpenTable per month. Who's not going to do that? Which of the 35,000 restaurants at the middle-market on OpenTable in the US is not going to do that? The answer was none of them were going to do that, because they were like, wow, that seems really expensive. I was like, what? What are you talking about? They're like, oh, yeah. In August, we shut down completely. We'd still have to spend $700.

I'm like, annualize it. You're spending $60,000 on OpenTable and you're worried about the $600 in August. Are you kidding me? The irrationality of how people buy anything just became like—

David: It’s just like a diner’s booking.

Nick: It was a dystopian universe for me.

Ben: Operating leverage is not an intuitive human concept. Downside protection is. I'm sure what they're thinking is, whoa, this is a tough business I’m in. I don't want to be paying money for something when I don't have a lot of food going out the door. 

Nick: 1000%.

Ben: What they should be doing is saying, wait, if I do really well, then all that should accrue to me, not you.

Nick: Exactly right. We did a lot of tweaking to create new plans. There's a reason why every SaaS product has a three-tiered pricing plan. That is because, at some point, somebody said, hey, let's just make it a flat thing and make it really simple. And then they started talking to actual customers. The actual customers went like, no, no, no, no, no. We're different. We need a different plan.

As unique as they all think they are, they’re not different anywhere in the world. It’s mostly the same problems being solved. Ultimately, a lot of times, there is that disconnect between the owner of a business and the user of the SaaS product. You could have a huge buy-in from the general manager and the workers and saying, this is easier, better, and all of that. If the owner thinks (just for irrational reasons) the OpenTable network, which they’ve been drilled into their head for the last 10 years. 

There’s a major major restaurant group in America—huge. One of the biggest in America, not in terms of the number of units, but just in terms of volume per unit. Some of their units in $40, $50, $60 million per location. They said to me, “But Nick, 89% of our reservations come from OpenTable.”

They said, “Here’s the report. If you look, 89% of our people booked on OpenTable. And then 5% called us and 5% went through some other little thing that we got.” And I said, “Look, here’s the deal. That’s your digital front door. People have to book on it. They have no choice.” I said, “When people come to my house, I have a blue door on my house. 85% of people come through my front door, 15% are walk-in through the back door, through my garden gate, or whatever.” 

I said, “If I rip that door off and I get a new better, awesome looking red door, and it's got a mail slot in it, and all these other [...] and it’s got a little camera so you could see who’s walking up and all these new stuff. 89% of the people are going to go through that front door because that’s my new front door. That’s the front door.” And they go, “Yeah. But OpenTable, 89% of people came through that.” You end up in this circular universe of an argument that’s just like, woah. I don’t know how to convince you of this. 

We’ve learned how to counter this network argument and all that.

David: This is really interesting. How did you break through this?

Nick: Part of it is that we went to smaller markets that went like, if we get 5 or 10 restaurants here on Tock, that’s the 5 or 10 that matter in Kansas City, Minneapolis, or pick your market like that. Again, this will throw off VCs nuts. Everyone’s like, okay, you need a two-way. You need a B2B and a B2C market in New York, Los Angeles, San Francisco, Chicago, and Houston. And I went, “Yeah, we’re concentrating on Kansas City right now.”

They were like, we’re not giving you any money. This guy is nuts. But what I wanted to prove is look, if it works in Kansas City, Charleston, or something like that. All of our competitors went out of business or got bought at not a great price, honestly, because they were giving it away for free on that model. It’s really easy to give away free mediocre software. A couple of hundred restaurants in New York.

And also, the client you tend to get is the client that is desperate for a change. Instead of getting the great client that you can really produce an ROI for and have a proven white paper afterward, you instead get a client that’s going, “[...], I’m going out of business anyway. Maybe OpenTable is the problem. I’ll move to Resy or I’ll move to Reserve. 

David: What you’re really talking back here is taking a SaaS mindset of your product is software, you are producing software, and you’re selling the software versus this marketplace I’m just going to try and group.

Nick: And then I always said, look, when we get to 10, 12, 15 million people that are on Tock and look to Tock as a way to find great experiences. I say experiences because it’s not just reservations for restaurants. It’s dynamic—

David: We used it for winery the other day. It’s great.

Nick: Yeah. Dynamic and variable pricing for time-slotted business. We have galleries and retail shops going on now like 10 a day. When you take the ambiguity out of showing up somewhere and you know your customer—knowing your customer works if you’re selling clothes, shoes, or your paintings. All of these businesses are businesses that need to connect emotionally with their customers. I will use that word a lot. 

We’re selling software, but we’re selling connections. Why is Twitter and Facebook both a great product and a potentially dystopian product? Because people are so emotionally connected to it that they look at it 50 times a day and get this endorphin release of good or bad—outrage or pleasure. That emotional connection in a positive way, if you put it in the hands of a small individual business, is a really good thing. 

As you prefaced in the start, that’s why Tock is more like Shopify. We’re giving individual businesses the tools to do that. And yes, even Shopify is doing a marketplace now because they have had such explosive growth. 

We are building Tock Time, which is not appropriate for the COVID era, it’s almost done. It’s a digital concierge that will essentially do all the stuff on the consumer side. Dave, if you like to go to this kind of winery and your anniversary is coming up in four months (or something like that), we’ll ping you and go, hey, your anniversary is in four months and we’ve seen that you like these things. Here’s the Netflix recommendation engine for wineries and restaurants. Here, we can plan up a little automated itinerary for you. You click one button and book it all, and you look like a good husband. 

David: That is always my goal. 

Nick: It’s always your goal. I didn’t even know if you’re married. At the end of the day, anticipating people’s desires and needs is something that’s really really great with machine learning and all of that. But building that comes at a cost if you’re doing it from scratch and say, hey, we need to get 20 million users. I wanted to build that organically, and that’s what we did. We’re at about 13 million accounts, and we had a half-million a month at this point.

Ben: Let’s talk about the springtime transformation for Tock. You were a system that either I’d go to exploretock.com, or I would go to the restaurant’s website, I would pay money, I would book my table, and then I would show up at that restaurant. There is some other stuff to it. 

Nick: By the way, you don’t need to necessarily pay money. Just to be clear, we’re not ticketing. If it’s a Tuesday night and the demand is low, don’t charge a deposit. About 70% of reservations are totally free on Tock. Again, from a consumer standpoint or from a restauranteur standpoint, they will get nervous about can I charge a deposit? It’s like, sure. On a Friday and Saturday, you can, but on Tuesday you shouldn’t. It’s not just prepaid. 

Ben: Okay. Thanks for clearing that up. First, second week of March comes around. I want you to talk about that moment and what you became after that. And when you talk about how many users you have now and how many restaurants you have now, how did that drive that change?

Nick: We recognize through Canlis and through my own restaurants that the only way to survive would be to move to carryout. It was the only viable option even for a restaurant like Alinea. At the end of the day, we’re in the business to provide food to people. I could talk about experiences and hospitality and all that. That’s not what was going to be needed in March, April, May, and maybe not now either. 

I saw that reservations—we have about 20 or 30 restaurants in Hong Kong on the platform. We don’t have any salespeople in Asia. They’ve just found us. I watched their reservations go from 95% capacity to 0%—literally overnight. I sent an email to our CFO about three years ago that said, “You know Steve, it’s not like every restaurant in America can shut down at once.” I did that because we were processing money and paying out money in tens of millions of dollars a month. You have some existential clearing risk as the middle person in that transaction. 

All of a sudden, I went, oh my God. If every restaurant goes out of business, we’re going to need to refund millions of customers. We have money, but that’ll be all of it. First I was like, this is going to kill my restaurant. Then I went, oh my God, they’re also not going to have any reservations on Tock. Also, Tock is the only platform in the industry that actually does the payment side of things. And also, we forwarded some percentage of that money to some of the restaurants. We have a clearing risk. That was March 6. I can tell you exactly the day because I have it on my calendar. 

David: You’re heart stopped cold. 

Nick: That was the oh [...] day. If you look at that, that was about 10 days to 2 weeks before everyone else had their oh [...] moment. I did a few things that day. I called our board members and said, “We have serious existential risk, clearing risk, and also business risk.” At the beginning of the year, we were about 80 employees, 90 employees. We are scheduled to hire about 50 people this year. I put in a hiring freeze immediately. 

I bought puts on the Nasdaq in every airline and every hotel that you can think of. I was a trader for many years. 

Ben: On behalf of Tock?

Nick: No, no, no. Just on my own behalf. I can’t do that on behalf of Tock. Tock is not a trading firm. I’m going to tell you that I seriously thought about doing that on behalf of Tock. 

David: It sounds like you should have or need a treasury department with all the payment that you’re doing.

Nick: We do. We really do. We have a clearing department and all of that. I was like, wow, we’re really screwed. I called all of our managers in the restaurant and said, “We’re putting in temp checks, PPE, hourly hand washing.” They’re like, “Owner guide does not understand that we cannot wash our hands every hour and still run a restaurant.” And I was just like, “I don’t care. Say no again and you’d be the first people out the door because we’re not going to need all of you in a week.” 

People thought I lost my mind. I mean genuinely thought I lost my mind. But I talked to restaurants on the West Coast, where they’re just seeing 20%, 30%, 40% reduction in bookings before—as like the canary in the coal mine—just from looking at the press. 

Once the unfortunate instance happened with the nursing home in Seattle, that was the catalyst for 20% of Seattle bookings to go to zero. It’s not like everyone noticed that, but there’s a section of people and large numbers where they just went, wow, I’m not going to Seattle right now. I’m going to cancel my Canlis reservation or a number of other restaurants.

When I saw that I was like, that’s the best-case scenario for Tock and my restaurants. It’s a 20% or 30% decline that is short-lived. That’s actually what I thought would happen, but I made the plan for the catastrophe that we’ve got now. And then Jeff called me and said, “Hey, I got an idea. We’ve got the data structures such that—”

Ben: And Jeff is your CTO?

Nick: COO.

Ben: COO.

Nick. He came from ZirMed. He’s bootstrapped to a data science company for the healthcare industry, sold one of them to ZirMed, and ZirMed got sold about two years ago. He left ZirMed. It was bought by Bain Capital for $750 million. I met him at a meeting to see if somebody should run for mayor of Chicago. There are only political consultants there, and Jeff was there with his laptop. 

David: Great recruiting event.

Nick: Jeff was there with his laptop and I was asked. I really liked this person who didn’t end up running. Jeff was there with his laptop, some pivot tables, and some publicly available information going like, “I don’t think any of you political consultants know what you’re talking about.” Normally, I’m the guy raising my hand going, “Okay, this isn’t my realm, but I don’t think you understand statistics.” 

Mind you, they are literally the people who are hired to understand the statistics. Instead, Jeff was doing that. I googled Jeff and I saw his history and what he did. I was like, oh my God. This company got sold. I have been looking for a head of sales and someone to own all the revenue side of things for two years. Afterward, I introduced myself, and he was like, “Man, that was the dumbest [...] idiot I’ve ever been to.”

I was just very intrigued by him, and I invited him out to dinner. What was really funny is after 10 minutes in dinner, I started talking about Tock. He was like, “Yeah, I got a list of questions.” He pulled out a thing. I’m like, “Oh, you knew I was talking to you about this?” He’s like, “Why do you think it was a date?” I was instantly like, this is my person. 

I was juggling a lot of different balls at the time as you might imagine and we are building out, with our CFO, every single restaurant. In three days, we built out the parsing of refunds at the restaurant level, city level, state level, and all of that. A tracker and all of these things which honestly, we should have built at the beginning probably. 

Ben: You’re flashing forward to March here?

Nick: Yeah, it’s March. But that was March 6. Jeff called me and he was like, “Hey, we need to build a carryout thing for Tock. And Canlis wants this and this.” It’s not that much because we already think about things in that way. I immediately went like, oh yeah, when we were on Grubhub, DoorDash, and those guys. They don’t have any notion of kitchen pacing or how many orders you want per hour or any of that. It’s just an incremental sale. 

They know the incremental sales. You’re going to get what? 10 orders, 50 orders an hour if you’re a big restaurant? You’re not going to get 500. But now if you close, you might get 500. Kitchen pacing is important. 

Ben: With Alinea, in a night now, you’re doing 1000, 2000?

Nick: We used to do 128 people a night and it was a 15-course meal. If you do the math on that, again, just going back to my earlier thing. 

Ben: That’s a lot of plates. 

Nick: It is. But it’s the same restaurant. Whether you do 100 people at $300, 300 people at $10, or 1000 people at $30, it’s the same number of plates, it’s the same revenue, and it’s the same everything. That mindset, which I was always like, all restaurants are the same in some way. I immediately went and I said to Grant, “$300 food is not what people need in a pandemic. We don’t need a five-course take-home tasting menu. We need $35 comfort food. It’s still rainy and cold in March in Chicago.” That’s what he started working out. 

On the Tock side, Jeff grabbed our head engineer, Robin Anil—who’s an amazing guy, and a couple of designers, and they just started going at it. When I say started going at it, normally, you know how software development is. You have various prototypes, screens, and Figma. You’re going to review every UX feature. You’re going to do all of that. And this is Robin just going in hard-coding 15-minute template windows. 

David: You’ll know programming.

Nick: I grew up on an Apple II, it’s that level of programming. It’s just going right into machine code and boom here’s what we’re going to do. And the only thing was could it work? It wasn’t is it beautiful? Is it well designed? Is it whatever? Can it work at all for Canlis five days from now? And for Alinea 10 days for now? And then we will iterate. As long as it doesn't break for the consumer or the restaurant. An [...] break I mean it’s like [...] accounting. 

Ben: Like you’re taking payments.

Nick: Yeah. The money flows through, the order comes, and they have some way to see it. It’s not going to be elegant, it’s not going to be beautiful, you’re not going to break reporting, and all of that. Five, six days later, it was done. We took all this stuff that we did. I’m going to say that without exaggeration, we had 15-20 people working 20 hours a day. 

I have to tell you, for a terrible reason (let me be very clear) I do not wish a pandemic on anyone. But there is an incredible amount of clarity that you have in running a company when you know what you need to build, you really know your timeline, and you know it’s existential. The people who say, I don’t think that can be done. You just go, great, go work on the thing that we’re not going to ever put out anymore because the world changed and you haven’t figured it out yet. 

I was in my house growing a beard eating pizza like a 20-year-old again. When we launched that thing, it was the most excitement I had had since 2010 when I launched Next. Then we went, what do we charge for it? We literally were like, we should charge 6%, 7%, 8%, or whatever, but actually metering that gross merchandising volume is actually a very sophisticated program.

Ben: Technically hard. 

Nick: Yeah. It’s a very sophisticated program because there’s a lot of safeguards in it because you get into the whole payment flow and all that.

Ben: Right. And refunds, keeping the right ledger, and truing everything up. That’s a hard problem.

Nick: It’s a hard problem. What we did was, we had these events products where people are just doing events for wineries or something like that. They could do 0% per month and 3% of GMV because they practically begged us for that, even though that wasn’t really our model. We had this thing sitting on the shelf and we said, okay, we’ll just essentially charge that way because we have that module sitting in our toolbox. 

That was the extent of the thought on the pricing. Now, if you look at our advertising for Tock To Go, you will see that we charge a 3% flat rate for restaurants, which is 10x cheaper than our competitors. 

Ben: Our competitors being if you used Uber Eats, DoorDash.

Nick: DoorDash, Uber Eats, Grubhub, or any of those stuff.

Ben: Which, of course, we should say isn’t apples to apples because that comes with the delivery network and that comes with them bringing the demand. 

Nick: That’s the network thing. Is that true?

David: That’s what they would say. 

Nick: That’s what they would say. Are they bringing the demand? When every restaurant in the world becomes a carryout restaurant at once, you suddenly go, hey, we’re going to charge you a flat 3%. You can meter your kitchen so that you can say I’ll for 40 of these meals for every 15-minute window. You can do pick up so you don’t have to pay for delivery. 

Everywhere, except for New York, pick up works fine because we have cars. If you’re in Los Angeles, if you’re in Chicago, if you’re in Cleveland, you have a car, you don’t mind driving. It’s actually safe too because you’re in your hermetically sealed car environment, you can pop the trunk, and people can put the food in it. That’s what we started doing in Alinea. 

We started at 500 meals a night. We got to 1250 meals a night. Easter, we did 3000 meals between brunch and dinner. It was a record revenue day.

Ben: Including when you would operate at a restaurant normally?

Nick: Yes, by far. It’s not even close. It also made people feel good getting back to that emotional connection. You’re in the middle of a pandemic and you can pick up a real delicious meal for $35 from a restaurant that’s doing high quality. 

What I noticed and what I started seeing was that elevated carryout is a thing. It’s a thing born of something terrible, but it’s not going to go away, I don’t think. Because instead of shitty packaging and some wings, which by the way, I love, I don’t necessarily want to feed that to my kids or my family on a Saturday night. But if I’m busy and I know I can get a really high-quality restaurant, sit down quality meal, but do it at home, and all you got to do is drive there. They have two-way text messaging built-in and they just pop it in my trunk. 

We were putting hundreds and hundreds of cars through Alinea in a three-hour window without any problem. So many, in fact, that the city of Chicago created a little lane for us in front of Alinea during the height of the pandemic. 

I would tell you that when we built this, it felt good as well because we went from being a company doing something really interesting in the hospitality space that most of our employees love, to doing something truly essential to them. It went from being normal work to important work in a way that we were saving jobs in restaurants and building a bridge to the future of the restaurants. 

We did that very, very quickly. What happened was our gross merchandise volume went from $1 million a day for prepayments and what not. That represents one in every eight transactions because a bunch of them are free reservations and all that. All the free reservations go to zero. Your million dollars in GMV goes to zero. Every restaurant is like, well, I’m not open, so I’m not going to pay your SaaS fees. 

Our revenue went from really good to zero. And then six days later, it started building back up because we started doing this first $100,000 a day, then $500,000 in carryout, and then $1 million a day. 

Ben: This is the 3% of GMV of carryout that you’re charging. 

Nick: Yeah. You do $1 million a day, that’s $30,000 a day. You’re at $900,000 a month in revenue just from that. Instead of having to convince restaurants suddenly that Tock was better than OpenTable, OpenTable said, “Yeah. We’re just going to link out to Grubhub and DoorDash. We have no product for this.” Resy said, “Yeah, we’re just going to link out to Grubhub and DoorDash.” 

All these restaurants called us and said, “I was on DoorDash and on Cinco de Mayo I got 750 orders in an hour. I had to spend all night telling 650 of those people that we couldn’t make the food for them.” It was a mess. People are showing up to pick it up or get the delivery, but the delivery people are showing up and there is no food to be delivered. There are 50 delivery guys from DoorDash—this is a true story—at a Mexican restaurant in Chicago.

David: This stuff happens all the time.

Nick: The next day, guess where they are? They’re on Tock the next day.

Ben: I want to pause to make sure I fully understand this. There are two components here. One is that there is no metering in DoorDash.

Nick: There’s no sense of inventory control.

Ben: Right. With Tock, the ticketing thing where you’re like, the kitchen can’t make any more than that and we know exactly when the kitchen can make how much. That’s been baked in for a while so it makes it perfect. But the other side of this is if the solution for OpenTable and Resy is, hey, go check out these aggregators. That solves a different problem for the restaurant. 

That solves this problem of yeah, we don’t know how to get our own customers, we don’t know how to deliver the food on our own—assuming we are delivering it at all. It doesn’t let the restaurant use any of the assets. It charges them for stuff they may not need. 

Nick: Yeah. If you are on OpenTable, you shut down, and then someone goes to the OpenTable page—because they didn’t want to pull the pages down because then OpenTable doesn’t exist. They just said, hey, it’s a really tough time for restaurants right now. And then they just literally put click here to order carryout. And then it will take you to whoever they were using for carryout. 

I will say that OpenTable reached out to Tock and said, “Hey, what you built is really cool. Maybe we can do something together.” I didn’t see that email for a week—true story—because I was so buried. I like Steve Hafner. Steve Hafner is the CEO of OpenTable. I should say that we’ve got a frenemy relationship. I think OpenTable is a total steaming pile of shit, but I like Steve Hafner. He inherited a steamy pile of shit. And he knows all this. I’ve said this to him. This is not a secret. 

He emailed me, but it was seven days later. Normally, if you email me, I email you back in 30 minutes or I’m dead, sleeping, or something. I didn’t email him back for a week. By that point, I was just embarrassed that I hadn’t emailed. He probably thought I was just not paying attention or something, but I was just fried. But OpenTable even reached out. They had no plan. Resy had no plan for ages. 

What did we do? We signed up 2000+ OpenTable and Resy clients in the past 12 weeks. What happens is when they see that the marketplace was bullshit and people still found their restaurant—and by the way, oh, look at this other stuff on the back—

David: This is the front door issue you were talking about earlier.

Nick: And look at all the other stuff. When we go back to patios, we immediately started building Tock 20. We went, what are they going to need when they reopen? As soon as Tock To Go was an iterative improvement, build new features, and make it beautiful. We started polishing the little gemstone we found. I went, okay, I’m done with that. Those guys are great at that. We have awesome people. 

When we reopen, what do we need? We’re going to reopen outside, clearly. We need to improve our table configurator. We’re going to need to do that, we’re going to need to have contactless payment. We’re going to need to do that. There are all these other things that are going to have to happen 6-8 weeks from now. Let’s take the same core crazy group that we had and go, okay, we’re going to build Tock 20. What is it? It’s what you need now in 2020 to get reopened. 

We wanted to be able to convert all those people because I knew what was going to happen. I knew that people were going to go, hey, this works great for carryout, but OpenTable is our front door once we go back to normal. By the way, we’ll be back to normal in eight weeks. Thanks for your help and all that. We’ll look at you again in the future. But I don’t want to retrain my staff in the middle of a pandemic, and we just got our patio opening. It’s really only 30 covers a night. We’re just going to go back to OpenTable.

I could say like, okay, well, how are you going to configure that? You have to call OpenTable and reconfigure your layout? By the way, you’re going to have to be 7 ft apart, but if things get better, you're going to only have 3 ft apart. You’re going to have to call them again, but we built this cool little shiny toy where you can play it like a video game, and move your tables around. You could double click on it and hide the table so it’s not in your inventory yet and all these things.

We did that in the intervening six weeks and built out a whole host of features there, launched out as Tock 20, and converted massive restaurant groups off of OpenTable that a year ago I had talked to and they said basically, we’re too scared. As soon as they had that conversation, I said, “Yup, I knew that you might want to do that, but here, you need to see this first.” And then they went, “When did you have that?” And it’s like, Yeah, we built that in the last six weeks.” And they’re like, “Oh, we’ve been asking for our OpenTable app for three years.” And then because we are a club based system, we have 350 API endpoints.

David: Because OpenTable’s on-prem, right? You put a computer in your restaurant.

Ben: Wait, still?

Nick: They have an iPad based thing called Guest Center. That is the one that they try to sell to everyone now. When you go and you see one of those old screens there—the old touch screens— that pings a server every 30 minutes. I don’t know exactly how many of those installs are there, but I know that they mandated that everyone needs to move off of the ERB, the Electronic Reservation Book that was built in 1998. 

They need to move off of that into the Guest Center, which was built seven years ago for iPad. There are some restaurant groups that are just like, we don’t want to switch because we don’t want to retrain everybody. We built all of that and we converted restaurant groups around the country to Tock. Even some of the investors, board members, ambassadors to our competitors. 

David: I can imagine who you're talking about, but we won’t say who.

Nick: I don't want to use names.

Ben: Dislocation is a business term for the tragedy that's happening in the world. But to make it a stampable, repeatable thing, there's a dislocation in the world. You guys were proactive about it and going heads down for a week and creating something that worked enough to solve this new problem in the world at scale. Then it was all about like, okay when the dislocation ends or when we get relocated in some new configuration of society, how can I manage to keep all the benefits that have accrued to me so far?

Nick: We're in that now and then still some people—when Los Angeles reopened—we went from having maybe 50 restaurants in Los Angeles to having 300 or 400 in eight weeks. Still, some of them said, we're going to reopen our indoors now, so we're going to put that on OpenTable. Because it’s already sitting there. We already know what we're doing. OpenTable is going to waive our fees for the rest of the year, which then they have to sign a contract that has huge breakup fees through 2021. There's a lot of fine print there.

We basically said, oh, okay. You shouldn't do that because of Tock 20 and all of these things and all that. And some of them did it anyway. What happened, unfortunately, three days ago, California got locked down again. What did all those people do? They said, oh, right. We need to go back to Tock.

Now we have a backlog of people whips on back to the product, unfortunately. I say unfortunately because I do not want California to close down. I do not want Houston to close down. But let me say that all of these things accrue to Tock, not because we built it in the last 12 weeks, but because six years ago when we started rebuilding the thing that I started building in 2010 where we started from scratch, we made the difficult decision to build the actual product more slowly. 

I have so many VCs saying, “You're building a Ferrari for something that no one wants to drive.” I said, “No, I'm building the inevitable outcome for the restaurant industry.” Will there be checks dropped on the table in 2030? And then you write down with a pen, the tip. I think we could probably all agree that sounds incredibly stupid.

Ben: Hopefully, we're not still on a tipping system then too.

Nick: Right, exactly all those things. I would say, I'm building the inevitable outcome of things. And whether we win or not, I don't know. I would have thought that OpenTable would have started building this stuff, but at every single turn, they haven't. And no one else is doing it.

I can name reservation systems around the world you've never heard off, Quandoo, Bookatable. There are all these reservation systems. Everyone is just copying the OpenTable thing. Hiring a bunch of programmers in Ukraine and saying copy this and then selling it for $49 a month to restaurants in New Zealand. The restaurants in New Zealand go like, I guess there's nothing better out there. I'll use this.

David: I'm so glad you took this here because—before we wrap up—I want to ask you about your journey through all of these. You've raised money for Tock along the way—both recently since post-COVID and pre-COVID. But I know, having been one of the VCs that talked to you early on, your vision and what you've been doing doesn't fit the traditional go go VC Model. How has this journey been for you?

Nick: A little interesting, a little frustrating, and a little bit of all that stuff. I do think that the vast majority of the people I've spoken to about—I'm an investor in companies as well. I'm a seed-stage investor in companies. I'm often on the other side of the table where I look at something and go, this does not have a snowball’s chance in hell of happening. Of course, I never say that, which is also one of the faults of the VC world. No one ever says, we think this is a dumbass idea. You should run the other way.

David: Nobody is ever just blunt.

Nick: You need to do something really crazy for them to just say this is a terrible idea. I actually think a little bit more of that might be good, but whatever. When I started raising money, the first round we did, I had already put a lot of my own time, effort, and money into what would become Tock for my own restaurant groups. At some point, we had 17 restaurants using this homebrew software, and it became a job just to maintain all of that.

In the back of my mind, I kept going like, OpenTable is going to see this and do it. I don't want to compete against a booking.com. And also, I have successful restaurants. I still trade. A startup is a lot of work.

Ben: When you say you still trade, you started your career as a derivatives trader, right?

Nick: Derivatives trader, yeah. I traded Tesla options yesterday in the midst of managing my restaurants because all of the Wall Street boys and girls on Reddit are buying 3500 calls at 290 [...]. While I don’t like selling—

David: We got to do another episode with you on just Tesla options.

Nick: I don't like selling lottery tickets to people, but if they're going to pay $1 million to make $50,000, [...]. 

Ben: Listeners, you should know Nick took the very classic philosophy major gone derivatives trader gone restaurant owner—and a very very accomplished award-winning at that—gone VC-backed company founder path. It's basically the traditional path.

Nick: And I'm 52 years old. I started Tock six years ago, so I was 46. This is my criteria for doing something. If you wake up every day and it's nagging at you going like, you got to do this. You will regret not doing this if you don't do it. Eventually, Tock got to that to me because I kept going, why is no one doing this? This is the inevitable outcome of the industry.

Even when I would talk to restaurant owners, they wouldn't get it. I looked at that as an asset, not a liability. It's like the old Steve Jobs thing. You don't do a focus group to build the iPhone. You go, what is the inevitable outcome of a computer in your pocket? Similarly, I was like, what is the inevitable outcome that I want for my restaurant? And that was what I started building.

When I started Tock in 2014, we raised $2 million from people that I could pick up a phone and say, hey, I'm finally doing that thing. Are you in or out? I understood as well that it was built within the auspices of Next restaurants, so we had investors in that. Again, many of the same people who've known me for 30 years. And I said, “Those investors should get something from Tock.” Because we don't want five years down the road, if we sell this thing or if it becomes this huge, for them to go, hey, wait. You started this within Next so the IP would be modeled.

Ben: When you say within Next, is it because you were using Next's profits to fund it or was it just like too much of your time?

Nick: All of that and also, it was built on the platform of Next because Next was a very successful restaurant and this was the way to book it. It was on the Next website. There were real IP issues there. 

Those investors, I said, hey, you're going to get x percent of Tock just for having invested in the restaurant. If you want to invest in this company, here's what we're doing. We're raising $2 million. I got some great industry people, and I got some great tech people. At the time, Dick Costolo was CEO of Twitter. I called him up and said, “Hey, man. I don't know if you invest in things, but I need your money.” He said, “I'd love to give you a small amount of money and be involved in a small way.”

Ben: Did you know Dick from the FeedBurner days in Chicago?

Nick: I did. I knew Dick from the FeedBurner days. That's one of the ones that I turned down because I looked at it and I was like, I don't understand what this does. That was a huge mistake because FeedBurner got sold to Google just about two years later. My typical investment is $250,000-$500,000 on something. Had I done that, I would have probably made 20x in two years. I didn't do it. But I stayed friends with all the folks there.

I called Kimbal Musk because I knew him from the work he was doing with the city of Chicago to do rooftop gardens on Chicago public schools. He was really passionate about that. And of course, I knew his background. Whereas I was helping him with some awareness on that through the Alinea group. I was like, “Hey, you own a bunch of restaurants too. You're a software guy. And you got a nice last name. Put in some money here.”

That was the level of my initial fundraising. It's people that I knew and trusted, and I wanted their opinions too. 

David: This fundraising was to build a product and build a business. You knew what you were going to do. That is not how a lot of venture-backed financing happens.

Nick: But at that point, I genuinely had the delusion that if you build it, they will come. The Crossing the Chasm thing, which I never read before any of this stuff. I had 200 or 300 customers that we're begging to use this thing that I couldn't give to them. I just assumed that there were 20,000 more behind it. Once we built out a cool thing, it would be good to go. That was very wrong. You need to sell. You need to educate. You need to sell. But I didn't know that at that time.

I was like, we're going to raise $2 million. If we need more, we can just go back to the same people. We're not going to do any of that. I had VCs that I knew in Chicago saying, “Hey, wait. You started Tock and you didn't call me?” I’m like, “Yeah, man. We're good. We'll be profitable in six months. I've not run a profitable business that has burned. I just don't believe in that. I was like, scrappy lean. We're going to make money. I know it's a weird concept, but that's what we're going to do.

Over the first two years, I grew definitely frustrated because we did get that first couple of hundred people and we got the early adapters. And then all of the sudden people are like, yeah, but you don't have this or you don't have that. I started looking at our future build requirements and I went, oh my god, this is a huge project. The niche that we built only works for a couple of hundred restaurants.

Ben: To be clear, it's super high-end restaurants, right? It's other restaurants that-

Nick: At that time. I knew that was true. 500 restaurants do not make a product. You could make a profit. By the way, I could have built that, made it profitable, and made a nice little niche thing that made a few million bucks a year, nothing wrong with that. I really wanted to improve and change the industry. At that point we went out a couple of years later, two years later, to raise $7.5 million.

The very first meeting I had was with Origin Ventures because they had come to me before, and I had a term sheet three hours later.

David: It's awesome. Chicago guys.

Nick: An insane valuation, but that was only for $3 million of the $7.5 million. 

Ben: Wait. Why did they give you an insane valuation? Just because you're Nick or was there something competitive?

Nick: Because I asked for it. No, I just asked for it.

David: You get the shareholders, you ask for it, right?

Nick: Right. I asked for it. They said, “That's insane. You could have $400,000 or $500,000 a year in revenue,” and I said, “Don't invest. I really don't give a [...].” It was very much like Silicon Valley. But the thing was, our burn then wasn't much. I could actually self-fund it. It was like, if you want to dive in, I don't really want to sell. I want to sell 10% of the company. That's all I want to sell.

David: Negotiation 101. Always have a good [...].

Nick: Right, yeah. But then the other $4.5 million proved brutally difficult to get because of the insane valuation and all that stuff. Nonetheless, we got it. I think people were like, you don't want to do a down round later and bubble. Actually, if I do the math, the only problem with a down round—assuming you actually get back over the initial valuation—is I guess it's an ego thing. You can do the math and say where those things break down.

Ben: The options are underwater. That sort of thing.

Nick: Yeah, all those things. But as long as you go back the other way—

Ben: Right, your ownership—at the end of the day—may actually be better for doing a crazy valuation than a down round.

David: Square did a down round in their IPO and look at them now.

Nick: Right. I guess I just didn't buy into a lot of the advice I was being given. After that first round, we were able to raise $10 million two years later. Last year, we had about 300%+ growth by every metric that you could give, like the number of restaurants, GMV process, number of reservations, and number of consumers. It was up way more than 300%—500% or 600% 

David: This is even pre-COVID.

Nick: Yeah, pre-COVID. At the beginning of this year, I went, this is the year where we get to $1 billion of GMV processing. We’re going to get to 5000, 6000, 7000 restaurants on the platform. We'll have a 20% market share. It's a very very viable company. And we had built this Tock time product that we're going to charge consumers for the digital concierge. Every single person I previewed that for, every VC I previewed that for—

Ben: This is January or February, you're thinking this?

Nick: January or February. Every single VC I previewed Tock Time for, they basically went, oh, [...]. You just built Spotify for restaurants

David: Oh this is the big TAM.

Nick: There were some people that wanted to put in $20 million, $30 million, $40 million, and a couple of hundred million dollar valuation. and there was reason to want to do that at that time. When March hit, I wanted to do a much smaller round because I thought I didn't need $20 million to get that out of the door and to build it. I was like, let's just do $10 million per round. I was talking to Valor. Valor put in a small amount last round, and they were early investors in Tesla, SpaceX.

David: This is Valor Equity Partners. Also in Chicago, right?

Nick: Also in Chicago. Antonio Gracias, Jon Shulkin, both great people. Very different kinds of VCs in the sense that some of the companies that they invest in are almost like PE, depending on which fund they are in. Valor Siren Ventures got money-

Ben: Oh, the Starbucks or Howard Schultz thing.

Nick: Yeah. That's right. That's run by Valor. It's a Howard Schultz thing. It’s obviously in the food space and whatnot. We were negotiating our valuation. They wanted (obviously), a lower valuation. I wanted a higher valuation and more money. I won't say it's contentious, but Jon is a smart guy. He's a good poker player and I just kept on, “Dude, you should know me well enough that I'm willing to walk.”

He was just like, “Okay, then you walk.” It's a little bit contentious. We were so close yet neither one of us would give that one inch. He would come up with creative solutions that I would like that I would go—

Ben: You didn't see the air quotes that Nick [...].

Nick: Yeah. What happened after COVID—two weeks into this whole thing and we just launched Tock To Go—the groups that I was talking to that I thought might still be coming around, both coasts major VC folks, household name kind of folks, called in and said, “Yeah, hospitality industry, not looking so good.”

David: Let's stay in touch.

Nick: Let's stay in touch. We'll see how it goes kind of thing. That's what I expected and then John called me and I smelled like a monkey in a zoo. I haven't showered in three days. I was fried. I was walking around my house and I was like, oh [...], here comes another one of his calls. I should have caved. I had that second of doubt no matter what, which everybody has. Had I caved in February, we’d have the money. We wouldn’t need to lay people off and blah-blah-blah.

He said, “Hey, man. We invested in Tesla in 2008 when no one thought it would happen when they couldn't get funding. And we invest in people and ideas.” When the shit hits the fan, you very quickly learn who dives in the trenches and digs their way out. What you guys have done in the last 10 days, I was just negotiating two weeks ago. Let's do it. Your terms turn, not mine. I went like, yes.

David: How did you feel when you got that call?

Nick: You know how I felt? I will tell you exactly how I felt. We were fine. We were going to be fine either way. What I felt was this is the person I wanted to partner with. Because the folks that just looked at the surface of things and went, the hospitality industry is [...]. Let's not look at what they did or what the opportunity is here. Let's just bail and wait for six months and see how it turns out. Those are the folks that weren’t going to be helpful anyway. And I use that helpful word very purposefully.

Ben: Nick, you're like way in on meme culture. 

Nick: Yeah. My kids would disagree.

David: Are you [...] the VCs congratulating themselves, Twitter account. Is that it? We're unveiling your identity.

Nick: Yeah, I've seen it. It's not me. That call from John just told me what kind of people they were and the opportunities I saw and what no. Literally, three weeks later, we were oversubscribed by $4 million or so. We went to our existing investors and said, hey, here's what we built. This is what we're doing. This is what the growth rate looks like. We replaced all of our revenue in 3 1/2 weeks.

Ben: What did you end up raising there? 

Nick: We raised $10 million exactly. We capped it at $10 million. I didn't want to sell more than that because I didn’t want to sell more than that of the company. It's very interesting that—again, this is really important. It’s not because of COVID. It's because we did beforehand. It's because of the inevitable outcomes. 

The same thing would have happened in a third party delivery space in the future. People would realize that 20% or 30% is stupid. It's amazing to me that all this consolidation is happening in that space right now. By the way, we have delivery right now. You know why? We negotiated with DoorDash and said, “We'll charge consumers directly. In New York City, you can't charge more than $5.75. And in the rest of the country, you can charge more than $7 flat.

If the order is $200 from a high-end restaurant, they're going to pay $40 for the delivery and the consumer is happy to pay $5.75 because that's what a cab would cost to bring it over. Fine, I’ve got no problem with it. Charge the consumer $5. They could go pick it up or for $5.75 in New York City, they can click this button and get it delivered to them. By the way, deliveries are the worst experience.

David: Yeah. We always do pick up because the food is better.

Nick: The food is better. My whole thing has always been, these are inevitable outcomes. You either want to hitch yourself to this ride. This ride could be two years. It could be ten. It could exist after me and we could go broke. I don't know. That I still don't know. 

I do know that what we built now has delivery, pick up, ordinary reservations, events, and contactless ordering and payment all built into one platform. Unmetered through the same inventory control. All with Google Analytics, Instagram, Facebook Pixel ID, and social media built-in together. 

You can look at all that information on one cloud-based platform and use it from anywhere. That's Shopify for restaurants. That's going back to your original tweet. And why all these people who were replying to your tweet, I was like, no, no, no, no. Those don't do all those [...]. Not every restaurant needs all of that. But if it costs a couple of hundred bucks, why wouldn't you do it so you can future proof yourself.

Ben: That's the ultimate title for this episode—future-proofing your restaurant. And that is a great place to leave it.

Nick: Thanks to you both very much. We could talk for hours about this. Obviously, I love it. Just the VC part of it, the fundraising part of it, and all that, there's so much stuff. 

David: We got to have you back on to discuss Tesla options trading. I'm sure that will get a lot of [...].

Nick: It's a really really really short conversation and that is really stupid [...]. Don't buy Tesla options. Even if you belong to Tesla, don’t buy options.

Ben: Hot take, you heard it here first or last. Nick, where can listeners find you on Twitter?

Nick: I'm @nickkokonas on Twitter, @nkokonas on Instagram, and Google is your friend. My email address at Tock is nick@tockhq.com. I always give that out. I do actually look at it myself. I don’t have anyone looking at it, and I do reply to folks.

Ben: Awesome. Thanks for joining us.

Nick: Thanks, very much. Great to see you too. 

David: Thanks, Nick. 

Ben: Cheers. 


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