The Future of Restaurant-Tech: Inside EMERGING’s $100M Fund with Mathew Focht

0:00Hello, I'm your host, Mike Gelb, and this is ConsumerVC, where we discuss the intersection of venture capital and consumer innovation. If you're enjoying the show, please subscribe on YouTube or whichever platform that you're viewing this content. And if you want the full experience, subscribe to the newsletter at theconsumerbc.com, where I send a weekly email of all the fundraising and product expansion news that's happening in the consumer space. You'll also get new episodes straight to your inbox. All continent episodes are for informational and entertainment purposes only and is not investment advice.

0:37Our guest today is Matthew Fogged, who is the founding managing partner of Emerging. Emerging is a growth capital fund that's at the forefront of the technology-driven transformation in the restaurant and entertainment sector. Some of their investments include Batbox. Batbox is an entertainment concept that celebrates baseball by combining simulated gameplay with a high-energy sports bar. And they're also investors in F1 Arcade. F1 Arcade is a thrilling new simulation racing experience in the US, offering all the excitement, drama, and glamour of Formula One. We discuss how these sorts of deals, since this is really a first for ConsumerBC, the whole entertainment restaurant space and that combination.

1:23We discuss how these deals are constructed, how he thinks about what entertainment products work in restaurants and retail locations. Without further ado, here's Matthew.

1:38Matthew, thanks so much for joining me today. How are you? Doing well. Thanks, Mike. Good to be with you. Thanks so much for coming on. Talk to me about how Emerging came together and why 2023 was the right time period to actually launch the fund. The reason why we launched the fund is because of our operating companies. John Davey and I, we've been working together, partners for two two and a half decades. We co-founded a company called Consolidated Concepts, which is now part of Buyer's Edge Platform. And we've... Today, between Buyer's Edge Platform and the real estate company Emerging Concepts, which I founded in 2012, we are the largest food and beverage network in the US.

2:20We're working with one out of three restaurants across the US, which gives us a huge edge when it comes to introducing technology to the space, reducing cost of customer acquisition, and introducing some of the latest things and technology that we see adding value to the operators out there, the CEOs and founders, and truly early-stage entrepreneurs out there. We have ability to deploy that technology a lot more cost-effectively than is traditional because it's a very fragmented, tough space to get in front of the owners. So there's that component in technology. And then we have a real estate component as well that we're investing in tech-enabled concepts.

3:08And we have a company called Emerging Concepts that is building brand growth strategies using data science and really insights to how to build a concept brand in the US. So those two companies just has given us such an edge that at this point, we knew we had to launch it. We were taking minority investments. John and I personally were. And it just became a point that so many people asked us to join and be part of the investments with us that we need to step up and do this in a more significant fashion. So I understand with your history and experience founding, you know, consolidated concepts and as well as having access in this network to restaurants across the country and of course, different hospitality as well units.

4:02but and i understand from like a b2b perspective why it makes sense to invest as well in other technology that actually that actually can help um uh hospitality because as well as you have a distribution advantage um in in that you know a lot of these restaurants why does it also make sense though to also invest on the b2c side in in real estate concepts yeah yeah so with two things I mean, when we, with Emerging Concepts, which started in 2012, like I said, we started building a reputation of being a strategist or helping these concepts understand the prioritization of real estate across the country.

4:41It's a question. When you build a brand, you kind of don't know where you might be in one market, you might have one location, but where do you open the next market? Is it Miami? Is it LA? Is it Boston? Is it DC? And you have only limited assets. So, you know, limited capital. So you've got to be very conscious and prioritize that real estate with those limited resources. So ultimately, what emerging concepts does extremely well is using data-backed strategy and understanding where do you want to open your next unit. And then once we identify that data strategy, then our team goes behind that strategy and starts executing it, finding those sites, and then ultimately negotiating terms, LOIs, and leases.

5:26So what happens is we get the chance to interact with these best in class of concepts and understand the management teams, understand the cash on cash returns they're getting because these landlords are writing big checks to offset the risk because they see how much value these concepts are bringing to their projects. So we have this ability to look underneath the hood for sometimes well over a year or two before we put capital to work. So ultimately, when Putt Shack, for example, which is from the founders of Topgolf, they had a unit. We started working with them. They had one unit in the UK.

6:03They had one unit in London. They opened a couple other units. And then US expansion. This is from, like I said, the founders of Topgolf. And they partnered with a couple of other guys, Adam Breeden, who we work with quite a bit right now. And at that point, they're like, we want to expand across the US. So where do we expand? So our real estate company built that US strategy, almost three years of strategy in front of them. And then we got Atlanta open and we got Chicago open. And BlackRock at that point invested, gave them$130 million of debt with only two units open. And that comfort of lending that kind of money happened because there was a strategic plan that they could get behind and they could see it was a data-backed strategy.

6:53And also, it didn't hurt that Putt Shack is overperforming those first two units that opened in Boston. And Atlanta and Chicago were well overperforming the expectations. And they had a great management team as well. But that data strategy allowed them to access capital a little quicker than most because there was a real plan there. So in terms of part of your expertise that you can also guide emerging concepts or entertainment concepts, right, is from the real estate side and really kind of understanding where actually actually build out into and actually how to scale those concepts around the country or however it makes sense to actually scale.

7:39Exactly. And we get a chance to get to know the team and see that execution and all those return profiles that it's important to an investor before we put our capital work. So we're not venture capital. We don't make 50 bets to win two and nothing wrong with venture capital. I know you got a lot of venture capital guests and we're not private equity either, though. We're not taking majority buyout position. We're early stage growth equity. We come in, we're writing a check from usually$2 to$8 million. And sometimes we even start lower and we build that. We use options to come in based on our ability to de-risk and perform for them as a partner and leverage that position to get better terms later or build to invest later near the initial valuation based on our ability to help them grow and scale the company.

8:34which all takes advantage of our scalability as a partner. And we also get board positions when we're not usually the first or largest investor or maybe the second or even the third largest investor. We get board positions because our strategic position, we're boards of nine out of 14 investments now. And it's just because it's a position that we have because we see a lot. We've been in this space for two and a half decades building brands. So two to$8 million checks. What type of traction do you need to see from an entertainment concept in order for you all to be interested? How much data? How long have they been in business for?

9:16Well, minimum one unit, but we like to come in one to six units. They really haven't screwed things up, usually under one to six. There's a little bit of a sweet spot you want to find. They have great brand equity. They have a great team, management team that's highly profitable. Usually, the stuff we're investing in is 20 % EBITDA margins or greater, especially the experiential entertainment stuff that we're investing in. They have a gaming aspect, and all that gaming revenue or that piece of that business, like the putt shack, and we just made a new investment fund pool house, that revenue is going to fly all to the bottom line.

9:54So producing 20 % to even 35 % EBITDA margins in some situations. So they look more like software companies. In fact, then they do traditional food and beverage, which is around 10 % for restaurants. So the profitability, 2.5 times greater or more. And we like to see 20 % or more before we start really looking at them. And then we want to see white space analysis. What's the potential of the brand? And then it goes a little bit... Then we start peeling young and a little bit further back of looking at what's the frequency? What's the reach? How big is the trade area? How large a trade area are people willing to drive from?

10:32And are they willing to offer? Can they get a premium for this experience and this entertainment experience? And then you get a little bit further and you start looking at their execution on food and beverage and ops and such. But there's a lot of early stage components when it comes down to it. You're looking at about four main things. frequency reach, premium in check, and then ultimately, the proprietary moat, or is there a tech moat or protection around this brand? Is it going to be easily duplicated? We all love Dave's Hot Chicken. But Dave's Hot Chicken kills it. There's going to be another Dave's Hot Chicken next to him.

11:16Maybe not as good in the branding or marketing, but there'll be another chicken place right next to him. The stuff that we're investing in, there's a proprietary tech mode. You can't just open another one. And that's really important to us as well. We want to invest in companies that have technology incorporated in that you just can't rip them off. It differentiates them. What I find really interesting is the fund opened up in 2023, right? I think March 2023, is that right? Yeah. And you're just coming off the back of COVID. So, so I'd imagine that I would think that some of these entertainment concepts were able to quite drive the number of consumers or, or didn't have, didn't actually have like a long history just because they weren't actually able to service, um, uh, service folks during the COVID period.

12:06How did you kind of analyze businesses through this, through the spirit? I mean, I, I know it's still now because you're, because 2020 through is only a year ago, but how did you assess or approach COVID as a relation to these entertainment concepts? Well, I mean, we've been working with brands for, like I said, two and a half decades. I mean, it used to be improv comedy club and theaters. And then it evolved a little bit more sophisticated to experiential and immersive. You heard those words in 2016, it started getting popular. and way back it was bowling hours. It was lucky strikes and now what do you see is Bolero.

12:51And ultimately the entertainment concepts hold up really, really well. There was a report by Solomon Partners that said entertainment concepts are close as you get to recession proof in the consumer space. And a lot of that is because when When you think about it, like restaurants and entertainment and consumers, restaurants, yeah, they feel the pain. You stop spending money at restaurants when it downturn. If you look at 08 to 2012, in fact, Bolero was only down 4 % to 08 to 2010. Very small sudden, very subtle drop considering a recession. and and and the reason why they held up so strong is because people stopped taking those trips of maybe to overseas or down the caribbean and they stayed local and they still want to be entertained and those of those dollars are being held in those local markets where those entertainment venues were so we we saw in covid we saw the entertainment concepts coming out of the blocks even stronger they were the first to come out they were they came out ripping you know So if you look at Topic Golf and been around for 25 years, they were up literally over 30%, up to 50 % in some of their venues coming out of COVID.

14:18And you think about why that is. Well, it's perfect. You had your bays, you had privacy, and you had food and beverage, and you had a little bit of a social experience. And a lot of these concepts that we invest in, they offer that social, really competitive social experience or just a social experience in general. that you wanted to hang out. You wanted to be with your friends. And it's much more experiential than typical, like a Dayton Busters, you're playing a game by yourself and you may have one buddy or two people next to you. These are people up to 12 people per day or like Flight Club, the dark concept, or F1, you have four racers, you're racing against your buddy, four wide.

14:56They're all built on social competitive entertainment or experiential stuff that you're doing as a group. That makes a lot of sense. And certainly, I mean, I think about it as, you know the movies right during that that that going to the movies is also recession proof because maybe you're not spending uh spending money to you know go on a cruise or to travel but but it's still entertainment that you're actually going to and it's and it's a lot and it's a lot um uh and of course it's a lot um easier to get to um and also a lot cheaper but how how do you evaluate kind of entertainment concepts as well as you know because i know i know the fun was started in 2023, but coming out of COVID, I understand that entertainment concepts were ripping.

15:40When you analyze companies where literally it could be that for months, for those few months, it was zero, zero, zero in revenue or very small revenue. Did you have to put a pass on that because you knew... Because of the main event that was happening with COVID? How did you analyze that entire period all together? I see what you're saying. Yeah, I mean... I mean, it was actually good data, even on those downturn in the markets. And we made seven concept investments so far. And we have 14 total investments, half tech and half concepts. A lot of our stuff we invested in was just getting out of blocks during COVID.

16:23So we didn't have a lot. Unfortunately, we don't have a lot of data tracking pre-COVID that I can tell you that, okay, these held up so much better than others in the average. But as a company, as our operating companies, we saw the data. We're working with literally 250 ,000 restaurants. If they have a food and beverage component, we're seeing the data. And on the entertainment side, we're integrated to a lot of these sales systems. We're looking at their frequency and reach. and we're studying them, making sure the day parks are strong, helps us do better real estate selection. So not as a fund, but as an operating companies, we saw the data probably more than most of anybody in this space.

17:06But in the day, we always saw entertainment holding up better than most. And that gave us a conviction to come in this space. But so when you look at these concepts, they all got beat down on COVID. I mean, there is no exception. I mean, but when you look at the performance of these, it's the EBITDA margins, how quickly they came back. They performed better than casual dining. QSR did really well. Some of the better ones, the Chipotles, performed really well in these environments because they had a delivery business that picked up a lot of that steam. But ultimately, entertainment was a darling of the space.

17:49and i don't think you're gonna have a wild imagination why for entertainment comp uh concepts i'm just i'm just so curious because i think a lot of people have like definitions in terms of when when covet ended for example how long was it where entertainment concepts like months or even it was you know um uh months roughly that actually they wouldn't be able to there was no business there for like those those few months i mean it was actually quite quick or I mean, it happened overnight, but, but I can tell you every state reacted so differently. So we were tracking every, we're tracking every state and every, you know, and every major city even was even, even the states was different.

18:31So it was just, it was just a hodgepodge of, of, of reactions. And, and, you know, if you're in Texas, we're in Florida, you're like, well, nothing's done, not much changed. I mean, and, and, and, and, but you're in Illinois, like, you know, you, nobody's on the street. I mean, I remember coming to the office and looking down the street and I'm like, I'm the only one here, like in the city block, I think. So it just, it really just depended. It really just depended on the, you know, unfortunately, the politics became an important piece of the reaction. And then I don't think, I don't, I don't, I don't, I don't think, you know, the response out of COVID was even as consistent as the shutdown.

19:19So I think everybody is really geographically polarizing differences. When you evaluate entertainment consequences, when I always think about entertainment, I think, or just, you know, anything that new maybe comes up. is this something that's long lasting or is this something that that's not is something that's that's going to that really could actually uh uh serve you know generations of people or is it just something that maybe is more of like a flash in the pan or and just uh serve just you know um might be around for maybe five ten years and then maybe get um uh and then people might not view it the same way how do you evaluate entertainment concepts from like what you think is maybe like a fad and not long-lasting versus something that maybe is still great IP, or I guess actually if it's a fad, it probably isn't great IP, but in that it is technology, it is differentiated, but maybe you don't think it actually can reach widespread appeal versus something that actually is long-lasting?

20:21It's really a good question. We spent a lot of time on this, and in the day, you have to really dive deep into the concept and what value it's having for the market. And like those things I was talking about earlier, frequency and reach. There's nothing speaks better than frequency and reach. How often are you coming back? If you go to a... I don't know how many times you go to the museum. How many times you go to the art museum? How much is your frequency? how often are you going to the aquarium how often are you going to the but the if you go to a sporting event often are you going to that so everything is a function of frequency and reach and that it's there's really the variables and then there's spend there's dollars how much are you spending on that are you getting a premium that's what make up these concepts and and when you get a top golf doing like 1.5 and then you have loyalty members and some experiential concepts we have like two times a year.

21:24And that's considered a great experiential concept. You have twice a year. The average customer comes twice a year. Great concept. If you're at McDonald's, their top customers come like 50 times a year. So at the end of the day, what you really got to do, but they're not coming far. They're driving, what, two miles? Three miles at McDonald's? So ultimately, but in the Topgolf and these concepts of pot shack, they're coming 10, 15, 20, 30 miles away. So it's all that frequency reach. And you work in some of our really experiential stuff that's immersive. And there may be a little bit more on the stuff you're not going to have a higher frequency on.

22:08A little more artistic oriented versus data-driven or experiential that you're going to bring your friends consistently over and over. You can see every quarter or so. Those concepts, you've got to plan for it in the data. When we work on a real estate strategy, we need to be on urban cores with high tourism because we know we're going to burn out the local market. So you got to count on enough of that transient person coming in that they're going to visit with their cans every time they come once a year. What's that annual visitors? And is it convenient? And if you look at each of these markets and each of these major cities, it's very clear in the data what concepts can be performing and where those high transport...

22:58Whenever you get a lot of transfer, you're getting a lot of travel. And tourism dollars actually make a big impact on these concepts. So those are things we're just studying, but each concept has their own formula. And it doesn't matter. Success and burnout is not likely as long as you're delivering a good experience. And like a food, a restaurant that is just delivering... How many of these diners that we know have not delivered a great experience, but they deliver good value and good hospitality? And at the end of the day, if that's what you count on in a restaurant, they'll be around. And there's a lot of awesome restaurant groups like Lettuce Entertain You that is one of the best operators in the country, in my opinion, that knows how to deliver great product, consistency, and a good experience as well.

23:56but in their staff knows how to manage and take care of you and ultimately that serving staff with that just consistency of good quality food at a not an obnoxious price a pretty decent value they can appeal to mass market same thing every product every concept we work with has their niche but you can't if you just have if you have a substandard experience you're going to have low frequency you're going to go under one and then you're going to be burning out the market. Now, if that's your concept, that's the stuff we invest in. We stay away from that. But yeah. How else do you think about entertainment concepts?

24:31Do they have to be their entirely own standalone, their own facility? Or do you also sell into... Or can you also sell in some of the entertainment concepts into restaurants and bars, for example? Well, there's the FEC, family and entertainment center business. I just came from IAPA a couple weeks ago in Orlando. And that's what this whole conference does is they sell entertainment within entertainment boxes. There's a big business there. It's not what we focus in on. It's not the driver of our investments. However, some of the concepts that we invest in do offer ability to sell in other entertainment centers.

25:13There is a component like Batbox. It's like the top golf of baseball. We invest in that company this year. it is that you have a cage it's a modern version of a batting cage you can adjust the ball speed you can adjust you're getting a ball pitched to you it looks like a pitcher it's a digital beautiful screen the ball that's coming out looks like a pitcher throwing it at you and technology knows when you're ready because you're in the stance and recognizes that that ball is going to you know you're ready based on your feet your foot plate your feet placed in the box and then it pitches the ball to you from like 30 to up to equivalent to 90 miles per hour you can adjust it and nobody you know it goes at 90 but but you can do it and so ultimately the you're you're you've got this great experience that um that these these these batting cages essentially the technology that are in we're doing six to eight of these up to 10 of them in Dallas is the first one we're opening up and is the first location.

26:21Then we're going to be announcing some more. But the initial two are Monterey, Mexico. And the technology is from a South Korean company that we have North American exclusive on, a company called Strike Zone that produced the first golf simulator. It's a leader golf simulator company called Strike Zone. They have 40 ,000 simulators around the world. But anyways, Anyways, those boxes for the baseball simulators were at IAPA. They thought they were going to sell a million or$2. They ended up selling three, four times as much because these family entertainment centers want these standalone experiences as well.

27:02But we're very, very careful when we do sell those entertainment boxes or these simulators, where they go. because we don't want them to cannibalize the brand. If we do standalone flagship locations, we do not want an FTC or Family Entertainment Center around the corner. So they need to be completely different trade areas. And then we can find it as a copy. No, that makes a lot of sense. And I imagine that can be tricky at times, figuring out what actually makes sense, where it makes sense, whether you're actually selling into a restaurant or a different spot and making sure that that doesn't cannibalize your own standalone.

27:46When you invest in the company, when you're writing that$2 million to$8 million check and they currently have one to six units, what usually is the plan? I'd imagine this varies with all your companies, but when it comes to growth expansion and actually growing those units into more areas and kind of around the country, what usually is that pace that actually makes sense? I would say the pace makes sense as long as it's sustainable in sales and operations. In the beginning, you find these companies that go slow to go fast are much better positioned. Then a lot of times you see private equity or capital just gets infused and they just go nuts.

28:32They go hog wild. When you're investing, are these companies, do they tend to be EBITDA positive? Are they tend to be like cashflow positive or not? Yeah. All the companies that we invest in are extremely profitable at the unit level. And they're usually making money day one. They're profitable, high margin, day one. Nobody's writing a check to fund losses. However, you got corporate G &A, which is a general administrative, the team, the office, you got to start building infrastructure to support the growth of the company. So you got a president, you might have a CMO, you might have a COO, you might start layering up, you might have an inside architect, you got to start building infrastructure for growth and scale.

29:23So that GNA brings down obviously corporate EBITDA, you may not be profitable for two or three years. Because at the unit level, you're extremely profitable, but you're building this infrastructure up to help you scale. And so what you've got to do is you've got to balance that act. You've got to make sure your GNA is not too overwhelming, and it has to look good to your LPs, your investors. But at the same time, you've got to build a deep enough bench that you can support the growth and not put too much heavy pressure on the team or because you won't have sustainable comp increases or just be able to get the units open and perform at a consistent average unit volume and EBITDA margin.

30:11So there's a lot. It's an artwork. There's an art of building up your team in those early units so you can recruit and scale sustainably with usually going one to six we invest in, but we see a lot of guys who would say one to six, two or three, they go from, they open two units the next year and they open three to four units the next year. And then they, they get to like four to eight. That's what we see. Now, once you get beyond that, when you start opening one a month, these concepts that we work with, that's, that's a heavy load on the team. That's just a lot of pressure. Um, and some of the concepts we work with do it, but these are not QSR concepts.