Panera Founder Ron Shaich

29:08And we created a kind of environment that welcomed you and invited you. I used to call it visual candy. Wherever you sat, you saw something. And we softened the environment. We made it comfortable. We made it a place you wanted to be. And we put that into place in our stores. Very quickly, our volumes popped from$1 ,250 ,000 up to$1 ,750 ,000. And we began to understand that we were actually playing in another business, a gathering place business, offering an opportunity for a place people could go to. to touch base, to see each other, to connect, soccer moms, Bible groups, pharma reps, folks doing interviews, people doing their taxes.

29:50And we created these environments. And again, this is the manifestation of this understanding that people wanted to feel special in a world in which they didn't. And Panera became the poster child for that. And we built that out. And that led to third learning and transformation. By 98, 99, I was feeling some real frustration. I was running a big public company. We had four divisions at that time, Aubampagne, Aubampagne Manufacturing, Aubampagne International, and this fourth division, St. Louis Bread Company that we had renamed Panera. That's a whole other story why we did it, but it was renamed Panera Bread.

30:31And I'm on a beach down in the Caribbean with a friend, and I'm lamenting this friend. You know, everybody's fighting. Everybody's angry at me. The guys at Aubameyang are angry at me. Why am I trying to take their capital and shift it to this growth thing, Panera? The guys in international didn't want to call home. The guys in manufacture were trying to figure out why they were in a retail company. At any rate, we had professional managers and everyone. And I set this for me. You know, the real shame here, this thing, Panera, even though it's the third biggest of our company, it's not the largest.

31:06It's not the name on the door. the name of the door was Obompen. That was the public company. I said, this thing has the potential to be a nationally dominant company. For every thousand people who say it, one ever makes it. And it was pretty clear that we had that opportunity. And I said, you know what? We're going to screw it up. We're not going to give it to capital. We're not going to give it to human resources to get it where it needs to go. And my friend looked at me and said, Ron, what would you do. If the name of the company was Panera, Panera owned everything else. How would that change the way you thought?

31:38And I looked at my friend and I said, wow, I'd never thought of it that way. If I had any guts, if it was really Panera, I would monetize every other asset, take the financial capital. And I'd also take the human capital, the best people. And I'd go down there and I'd make this happen. Because the greatest gem in this company was that division and the greatest risk to its possibility, its potential, was that we didn't give it what it needed to actually grow and become what it could be. And I thought about it. I'm this kind of guy. If I say I'm going to do it, I often go do it. I want to live with myself.

32:15And I went off and came back two months later and went to my board with a proposal to sell every other business and bet the whole thing on this Panera Bread division. I didn't control the company at that point. and that was definitely a very tough situation. But ultimately, they gave me the room to do it. I did it. It led to the worst year and a half of my life. I sold every other division. These aren't just businesses. These were, you know, Old Bone Pen was my first child. My kids know that, you know. I mean, it was a part of me. These were people I had sweated with and bled with and I loved.

32:50The good news is most of them ultimately came back to work for us when their non-competes were over. But we sold the, you know, Aubamepens in Aubamepens International. We sold the manufacturing business. And by 99, I ended up with Panera Bread and a whole bunch of cash and a business that had extraordinary potential. And then I went to work to help make that happen. And we took it from, what, a couple of hundred stores up to 2 ,000 restaurants. We're very close to it by the end of that decade. And that led again to the next transformation because they come in waves. And by 2008, 2009, I personally was feeling that I wanted transformation.

33:39I wanted to understand if I could take these powerful lessons I learned about long-term thinking and actually apply them in a broader civic society. I had been involved with the Obama campaign, and there had been some discussion of joining the administration, and I was unable to give my commitment to Panera. And I decided I wanted to go do this in some way. And I also had a desire to test out an idea I had been working on, which was something called Panera Cares, cafes of shared responsibility where there would be no set prices. It was a test of humanity. People come in and it's another whole story, but I wanted to test out these cafes of shared responsibility.

34:25And so in 2008, 2009, I stepped down as CEO. I tried to take that opportunity as jumping off a high dive board to actually learn what it felt to go in the water. And I spent about a year, a year and a half creating Panera Cares, doing a bunch of political things. I was one of the eight or nine people that co-founded a group called No Labels here in the United States, which is meant to reduce the hyper-partisanship in D.C., the polarization and focus us on long-term thinking. Again, it's about seeing opportunity. I had the chance to return from the West Coast. I was still the executive chairman of Panera and the largest shareholder.

35:10And I did a lot of the M &A work and some of the consumer work. And I came back from a trip after a weekend and I essentially decided I wanted to write a manifesto for how I would compete with Panera if I weren't part of Panera. I would say how I would screw with Panera, but how would you take it on? How would you best it? And I essentially at that time called for complete digital access, which didn't exist in the restaurant industry. We can talk more about that. I called for something called loyalty, which again didn't exist. It's become prevalent in the industry. It had actually been developed in the UK with a company called Tesco and came through Kroger in the United States where your best customers were treated differently.

35:57I called for clean food, a different approach to eating and how you might eat. And I essentially called for Omnichannel. And I handed in this vision for a radical transformation of Panera to Bill Morton, who had become the CEO. And Bill was my very dear friend, 20-year colleague, and looked at me and said, wow. He said, I don't have anybody to work on this. Would you go work on it? And I said, yeah, I'll have some fun with it. And$25 million later in another year, the executive chairman is working 80 hours a week on this vision for how to have integrated technology change the guest experience, change the whole deal.

36:39I was loving it. I had none of the ceremonial duties of being a CEO. I didn't have to tell people what I just did. I don't have to tell them what I was going to do. I just was dealing with the product. And Bill came to me and said he personally had a problem. He couldn't travel. Something had happened in his family. and he said maybe we should make you CEO again and I should step down and we debated it because it wasn't what I wanted necessarily but it seemed to be necessary at a certain point and maybe nine months or a year later we we executed that we just swapped positions he became executive vice chairman and I became a CEO again and I put this in place and again it all sounds lovely but it led to the worst three years I can ever imagine.

37:25I had activist investors attack me. I spent$150 million on technology. I used to refer to technology as social security of Panera. It was only a matter of time until it was 100 % of our revenue. We were really investing in it. And you didn't know where it would end. And we ended up having to transform everything. We transformed not just technology, but we transformed how we dealt with the guests, what our concept essence was. We transformed much of the senior management team. This company had grown in its needs and its requirements. Ultimately, this became one of the largest transformations in the industry, and it took on a life of its own.

38:09And again, straight up, I could see the opportunity for a better Panera that was not competing the way it had competed for the prior 20 years, but was competing against what the possibility was of what the consumer wanted. And then came the hard work of actually putting that into existence. And by 2017, it was working. Our EBITDA was up 35%. Our comp store sales were pushing double digits. And we had a European money manager, JB, who came along and fell in love with Panera. And they wanted to buy it. And though I was never selling it, it wasn't my intention. You know, when somebody falls in love, who is it for me to deny them what they wanted if they were willing to pay for it?

38:56And they paid for it. And what at that time was the largest or second largest U.S. restaurant deal ever done,$7.8 billion at among the highest multiples. And, you know, again, it seemed like an opportunity to harvest everything that we had worked on for a lot of people that had believed in us. and we took that opportunity. You know, people talk a lot about product market fit, sales tactics, or pricing strategy. The truth is success in selling often comes down to something much simpler, the system behind the sale. That's why I use and love ShopPay because nobody does selling better than Shopify.

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40:14Sign up for your$1 per month trial period at shopify.com slash knowledge project, all lowercase. Go to shopify.com slash knowledge project. Upgrade your selling today. Shopify.com slash knowledge project. And then what are the major clicks to get us to Kava now? You know, it's interesting. So I left Panera. I had always had interest in a number of other little businesses. and I was doing, after I left, I was doing a lot of speaking on the pervasive short-termism in the U.S. capital markets and how not just our body politic, but our capital markets and how that was essentially making us less competitive.

40:58It was not helping our GDP growth. If we're not thinking long-term, we're not going to have innovation. If all we want is to pop the stock, It's short-term cost-cutting that drives it. One of my associates, a guy named Keith Pascoe, oh, he had worked with me at Panera. He said, why don't you take your own money and put your money where your mouth is? And I ultimately took roughly$200 million of my own money, no LPs, no external folks, just my own money and a bit of money from some of my partners, some of the people that chose to join us and took some of the people I had worked with and decided to go do it.

41:37and essentially I created a investment vehicle because it's not a firm. It's called Act 3. You can figure out where that comes from, Obonpan, Panera, and now Act 3 Holdings. And within eight weeks of leaving Panera had gotten involved in our first real deal, which was Cava. I had been an investor in Cava when it was two restaurants, just a little something. And after I left Panera, They asked me if I joined their board. Another company called Zoe's had asked me if I joined their board. They were a public company, you know, and it was very clear to me. Again, I could see and taste that opportunity.

42:19Mediterranean had power. It was the number one diet in America. It was bold flavors. It was different but accessible. And you could tell this was a powerful channel with lots of winds at its back, the channel. And I began to say, who has the potential to dominate? Is it Zoe's or Kava? And again, these folks at Zoe's were five times the size of Kava. But Kava was doing higher volumes and was a better concept. I started to think to myself, you know what? What I should do is buy the Zoe's. And it was a$300 or$400 million public company at that point from a billion dollars. You know, instead of figuring out for them, buy it and then merge it in with Kava.

43:00And the one problem is I had to tell that to Kava, who wanted me to join their board. And I wrote the news to Brett Schulman, who is this wonderful CEO down at Kava. And Brett said, wow, okay, that's an interesting idea. And he said, before you join the board, maybe you want to tell them about this. And I went and basically pitched their board on this idea. And in their wisdom, I must be straight, they understood it. And they understood the power of building a dominant brand in the Mediterranean category. And it helped that I agreed to essentially finance a large part of the acquisition and to help lead it.

43:40But what it amounted to was instead of me buying Zoe's, we decided to have Kava buy Zoe's. And then we would help them make that transformation. And here was the bet, that by buying a company five times larger, we could apply our discipline, our skills, our culinary skills to end up with the dominant player in this category. And the thesis, step back, but the thesis behind Act 3 is we bet on categories that have tailwinds, and then we endeavor to build the dominant player in that category. My industry is an industry of winner-take-all. Think McDonald's and Burger King. Think Panera and Corner Bakery, Chipotle and Qdoba.

44:26All of the value creation tends to happen for those that are building something of large scale. And if you have that dominant position and you're a better competitive alternative, you win. And so we saw that opportunity in Cava. And that's what led us to make that acquisition. And at that point, GABA went almost overnight. So it took us six months to do the deal. But from 50 restaurants to 300, and it led to a very, very tough 2019 because the company wasn't prepared or ready for it. And one of the things about Act 3 Holdings, we're able, I have seven or eight partners. Not one of them is a financial guy.

45:09There's only one financial guy in the mix who was actually the activist who attacked me. I couldn't tell anybody at the time that I actually thought he was smart and liked him. But in any rate, I did. And he joined us as our CFO. And, you know, I have one partner that has been with me for 20 odd years who does all our deepest research and strategic thinking. He was the guy who was really helped me develop fast, casual and that ideology. I used to say from his brain to my lips, I'd speak it. But he was the guy who really pushed me hard on thinking he's with us. I have another partner who's opened 5 ,000 retail locations.

45:50I have another partner who came up through Darden, was the president of Dairy Queen, the president of Brugger's Bagels, was my COO, is a guy who really understands discipline scaling and how you build these companies. We took out a number of people from Panera's technology function. The number three guy who built all that technology joined us and he brought a team with him. We have the capability of really doing technology. I have another partner who's a serial entrepreneur, great at food, great at design, great with ideas. We get into a smaller business. I mean, he's superb in helping bring it all together.

46:32So the model for us in Act 3 was, one, to bet on a category and then have the ability to go in and help them build the dominant player in that category. And so at Kava, we were able that first year to really provide a lot of technology skills that were needed, help out in many ways as there wasn't an effective CFO until we brought that in and to actually help in multiple different ways to help that business grow. And it was a very tough year. I can remember Brett, our CEO, we used to go to breakfast every other week, walking back from breakfast in downtown D.C. and he looked at me wistfully and said, Ron, I just wish we still had just our 50 stories, not these 300 that we bought.

47:21And I looked at him and I go, Brett, you know, we don't have that choice anymore. What we need to build is load bearing people and organization around you that can take on this opportunity. But if we can pull this off, Katie barred the door, we're going to build an amazing company in a powerful category. And ultimately, Kava has been probably the single best IPO in the last half decade in the restaurant industry. How many restaurants are you up to now? About 400. But more importantly, I mean, it's perceived as a brand who's filling out a category Mediterranean and dominating in that. And, you know, given its market cap, market valuation, which has gyrated between 7 billion and 15 billion up and down.

48:08You know, the market perceives this as something very real with the potential to fulfill its destiny is the next Chipotle. And that's what they're paying for, that potential. Let's go back to the Aubameyang IPO just for a second because I remember you talking about how it changed everything for you. And you didn't anticipate having all these new constituents or people breathing down your neck. and the short-termism that sort of comes with some partners, I guess, some capital partners. I'd say it differently. I did a book called Know What Matters, and I did a chapter on the IPO. I'll warn you, Shane, I've counseled dozens of people on going public, who are going public.

48:53And I typically start by telling people, 90 % of the entrepreneurs that go public live to regret it because it's a very different enterprise. Now, for me, it was phenomenal. I've done it multiple times. And, you know, it's created great blessings in my life in many ways. But there are also difficulties that go with it. And I can remember the day we went public. My partner at that time, Lou King, was on cloud nine. And I had him stop the car we were in, the limousine. And I got out and I walked through Central Park here in New York. And I started thinking to myself, just the sense of responsibility I felt to all of these folks that were investing tens, hundreds of millions of dollars in this company.

49:42And the reality is, when you're running an enterprise, you have a responsibility. The people that believe in you and you want to deliver. I want to deliver for the people who are buying the stock, not the ones that are shorting the stock. There were any number of those investors. They all came from very different places. Some were with us in building something for the long term. Others were trading the stock for the short term. And you had all of these pressures, and it all played out in a very public way. You had very limited ability to protect whatever was going on in your company and develop it.

50:16And you needed to be ready for a prime time. And so I'll tell you a story. When we decided to take Kafa public, I think people would consider it a very successful IPO. Today, three and a half times from the IPO price. But consider very successful, what did we do? We helped Brett and the team get ready for an IPO. For a year and a half before we went public, we did quarterly earnings calls in the company, simulated with our investors. You know, they had to do press releases. They had to take questions. We worked with great diligence in getting their narrative down so that when they went out, they knew what they were selling and they were selling to the street the possibility of participating in the growth of what would be the dominant player in Mediterranean.

51:05I think we really prepared this company. When we actually went to market, we didn't let the investment bankers control the distribution. We did. We brought in cornerstone investors like T. Rowe, who I had a longstanding relationship with and had helped make billions of dollars for them. We brought in Capri, the capital group, which, again, I had been part of helping make billions of dollars for them. We brought them in as early investors. We limited the distribution. None of us were selling stock on the IPO. This wasn't an opportunity for any of the existing investors or the largest ones like me to get money out.

51:44It was an opportunity to support and fuel the company. And essentially, we only allowed the investment banker 9 % of the shares in distribution, which essentially went to their clients and the hedge funds. We protected 91 % of that distribution so that it ended up in the right hands. And I think that we serve that company very well in taking a long-term view of the IPO. To me, an IPO is a little like a wedding celebration. It's the beginning of the marriage. It's not the end. And, you know, having been married, I would say to you, you want to really contemplate that on your wedding day. What is it you're going to have to do to have a successful wedding?

52:30that celebration will fall by the wayside if you don't. Do you think about control differently now with all your experiences? I'd answer it differently. You asked me if I think about control. Look, one of the lessons I've learned is to believe in yourself. When I was growing up and coming of age professionally, if you're smart, you're always going to say, that guy's leaning on me about this or that. What am I not getting? What should I do? And one of the lessons I learned as I look back is to trust myself, that I actually know what I'm doing and I have to believe in it. And I have to have the faith to get through the long march.

53:06I have to have the faith to go through the pain of transformation. One of the really interesting retrospective lessons for me is to actually trust myself. And that has led to a decision that generally when we like to be in a control situation in a company. By that I mean that we're willing to bet our own money. We're willing to bet on ourselves, myself and the Act III partners. But we don't want to be at the effect of somebody else who has a different idea. And straight up, when you have investment partners, the best way I can express it to you, it's a little like having a baby with someone. You take their money, you know, they have legitimate rights.

53:55And if you're the kind of person I am, you want to listen and you want to be responsive. And so I like generally being in a control position because it allows us to take a long-term approach to do the things that don't drive profitability in the short term, but actually build a far better company. You know, there's one principle here that we haven't talked about. And then I want to talk about Act 3 with you. Everything I believe in about business starts with three words, better competitive alternative. The world doesn't need another business. It certainly doesn't need another restaurant. The whole objective of everything we do is to build something that for some target customer, this is the best alternative they can find.

54:43And what I mean by that, It sounds like fancy MBA talk. It isn't. All it means is that your target consumer is going to walk past all of your competitors, all the people doing something similar to you, and choose to come to you because you do it better than anybody else. If you're able to do that, you can win. And so I tell it by way of a story. I was in Vegas speaking, I don't know, a couple of years ago. And I walked through the casino at 1130. and I see folks dumping chips into these slot machines. And I think to myself, Ron, the only way I'd ever be in a casino at 11 p.m. is if I owned the casino and had the house vig.

55:25It's the same exact thing for me when I think about business. If I don't have a better competitive alternative, if I don't have the house vig, this is an ugly business and I don't want to be in it. What I've come to know, and what I'm trying to make sure your listeners hear loud and clear, is that what matters more than anything else is genuinely having a concept, a vehicle, a business that in whatever your mini market is, the physical one mile or the nation, if it's real estate, whatever it might be, that you're the best alternative. When you have that, then you have the possibility of growing and building something to skip.

56:03Is that what you were trying to do with the concept essence document is like hash that out? Totally. Consum essence was what we started every business and every business we're in today. And we should talk about the multiple businesses we're in today. Every business that we're in starts with a consum essence document. What is a consum essence document? It's essentially a script for regional theater. Think of it this way. If you're in a multi-unit business, I'm running thousands of regional theater shows that are performing 18 hours a day. And so what is that script? What is the aesthetic of the environment?

56:44What is the food and the food attitude? What is the humanity? What are the people like? How do you experience it from a consumer's perspective when you walk in? And we try to really go deep and use words that mean something in writing that script or that vision for how we're going to compete. And that becomes an organizing tool. I mean, just imagine, at Panera, we had 125 ,000 people. How do you get them all aligned with what we're trying to create if you can't put it into words? But you obsessed over this. You spent nine months working on this document before you started. And you were obsessed about all the details.

57:22And walk me through that a little bit because a lot of other people, there's sort of wisdom, which is like go fast and fail fast. And this is sort of the opposite of that. You took your time. You were methodical. You were in the weeds. You were watching people. But, you know, go fast and fail makes sense in technology where it's very much there's no fixed cost and you can repair completely. I'm in a business. I call it fashion with fixed assets. You know, you build a restaurant, you're going to spend a million, a million and a half, two million dollars, maybe more. You don't want to mess it up because fixing it is really difficult.

58:01So you want to get very clear what you're doing. What do you do first, second, third? And make sure you get it in the right order. So I am much more concerned about getting it right in a really serious way and understanding and then taking the right steps from that than I am about getting out there and getting market share first. Because the cost of failure is so high. Because the cost of failure is extraordinary. And oftentimes, once you bounce, you can't come back. And remember, we're talking about fixed assets. We're talking about, you know, building restaurants. If I don't understand what I'm doing, I'm going to build it wrong.

58:43I'm going to fail. How often do restaurants turn around once they start losing sales? Rarely. It's really hard because organizations by their nature don't like to change. In fact, I'll share with you something I've written about. I call it the life cycle of a business. It starts with discovery and ends with delivery. And think of it this way. When a business starts out, it's so hard to get off the ground and win. So hard. probabilities are very low. You have no capital, no scale, no competitive advantage. You have the highest cost you're ever going to have. And it requires something that really is powerful to break through with the consumer to deal with all those forces working against you.

59:32But some people do. And people discover a better way to approach the customer, that touch the customer, a better experience and they get off the ground and they start to scale and it works and it's doing well and it's getting bigger. Along comes outside capital and outside capital says, you know, we can help you grow even further. And pretty soon you have a board meeting of people saying, you know, this business is doing great, but, but, but you know what? It could do even better if we bring in some of these, I'll call them delivery people. Delivery people are, you know, financial planning and purchasing and a range of different disciplines.

1:00:10And the truth of the matter is, you bring in the delivery people, it makes the place better. The margins get better. The business gets more disciplined. It gets tightened. But here's what begins to happen. And not over six months, but over years and half a decade, the delivery people and the discovery people find they're talking different languages. The language of discovery is the language of poetry. It's the language of imagine if, if only we could do this. The language of discovery, of delivery, is the language of prove it to me. Show me the numbers. Let me see the spreadsheet. I don't believe you.

1:00:48And quite frankly, these forces challenge each other. But the language of delivery, because it does add value, starts to push out discovery. Because discovery doesn't have oxygen if you got delivery pushing down on it. And over time, what happens in so many food companies is that discovery is pushed out by delivery. Delivery gets stronger and stronger and stronger, and it becomes the dominant force in the company. And then these companies wake up after 15 or 20 years. They're billion-dollar companies, And they're really powerful about delivering what was wanted and needed by the consumer five years ago, 10 years ago, and 20, and really terrible about discovering what's going to be needed and wanted for tomorrow.

1:01:39And so one of the things that I've always focused on is actually protecting discovery. And in fact, as the CEO viewing my role as discoverer in chief, innovator in chief, because that will, by the very nature of centrifugal force and size and scale, you will end up decapitating discovery in these companies. space one of the things that i see and anecdotally of course i'm not in this space at all is there's a almost a trend when you have a concept that's sort of working and then you add on to it and you keep adding and adding and i always think well the back-end operations get a lot more complicated the purchasing gets complicated the inventory management gets more complicated and then you look at something like in and out which has basically a very simple menu privately held privately held, incredibly successful.

1:02:33How do you think through that? What's your reaction to that? Well, my reaction to it is I know the polls. I've been there. The world, look it, the world pays, the marketplace pays for something that's getting bigger, larger, better. So how do you do that? You add things, you improve things, you make it better. We all want that. I mean, we're susceptible a little susceptible to that by human nature. And the unfortunate truth is oftentimes, many times, it doesn't make it better. It actually just makes it worse, more complicated. And so my view is we don't want to do, we don't want to be everything for everybody.

1:03:16We want to be something special for somebody. And that's the essence of what we mean when we say being a better competitive alternative to actually standing for something and being something better. How important is marketing now in terms of getting traffic in? There's this concept of viral marketing for restaurants and people trying to break through. I can see the eye roll. Yeah. Marketing is the wrong phrase in my book. I think the right phrase is amplification. By amplification, I mean if I've got something that actually touches people, then I've got to let them know it's available. but the idea that I'm going to somehow come up with something cute or better tactic or better technique that may work in the, in the very short term, but it doesn't sustain a business.

1:04:04And when you're building fixed assets as we are. You want something that sustains and lasts for years and decades. You want something that built a competitive moat and is a better competitive alternative. So to me, marketing is never the end. To be cuter or better is never the end. The end is to actually sustain, is to build a better business that's sustaining and powerful in its own right. And then figure out how to make sure its target customers actually know about it. And it's on their short list. Do you look at other restaurants and think that, oh, I would do this differently? And they have a good concept, but they haven't quite nailed it.

1:04:50And maybe you can give me an example and walk through one, like True Food Kitchen or something. Well, first, I have a rule. I will not talk about competitors because that always gets me in trouble. But I would say this to you, doing this as long as I've done it. You know, I've done this now over half a century. and I've been in this industry. And the collective leadership of Act 3 Holdings, my group, we've probably got 200 or 300 years of history. There isn't a day that goes by that we don't have on our private chat some interesting commentary on what folks are doing. You can see these patterns over and over and over again.

1:05:36What are the key metrics you look at, Without mentioning any sort of particular competitor, if it's a public company, what would be the two or three variables and the financial statements you look at? And if it's a private company, how do you? First, the financial statements are a byproduct. They're not the end. So I'm often not looking at the financial statements as a leading indicator. I'm looking at the financial statements as the trailing indicator. What we always start with at Act 3 is, does that category, does it have tailwinds? Does it have power? Is this a category that's getting strong?

1:06:18Look at Mediterranean. It's the number one diet in America. Every time you go to the doctor or you read an article, they're giving you a commercial for our diet. It's bold flavors. It's ambitious flavors. And yet it feels safe. It's food that you can eat. lamb and chicken. It's craveable wellness. It's healthy. And yet it's also tasty. That's a category that's got power. We have another business in plant forward. We call it positive eating. 3 % of Americans are vegetarian, but 40 % are eating more plant forward. They want that in their diets. Somebody's going to win in that category. We intend to be those people.

1:07:04You can think about bakery cafes. I was part of building bakery cafes in America between Old Bon Pen, Panera. These were the dominant brands. Well, I can tell you the future is in upscale bakery cafes where you have real chefs, where you have food that's worth going out of your way for. Because it's part of the experience. Part of the experience. And how important is that experience? It's everything. You don't just come for food. you come for the totality of that experience, the people that serve you, the environments that you're in, how you feel when you're there. But at any rate, so I just want to continue with this.

1:07:42We're in immersive entertainment, powerful category. We're in healthy eating in Europe, another powerful category. So first at Act 3, we bet on the category. And I'm trying to take a a forward look and say, what's going to be the categories that are going to be dominant in five or 10 years? I don't want to be fighting against headwinds. I want to be sailing with tailwinds. That's number one. Number two, I only want to invest and I only want to play in that nexus of building the dominant player in that category. Because the rewards fall to those that are the dominant players in these categories, our goal is to build it.

1:08:25And the truth is we have a playbook. We know how to do it. Between me and my partners, we have built dozens of companies, any number of successful ones, and we know what works. And the mantra here at Act Three is simply this. It's tougher to build a nationally dominant company than it is to climb Mount Everest. Nobody goes up Mount Everest without a guide because the risk of falling off the side is huge. Death. Our challenge is why go up and try to build a nationally dominant company without somebody who's been there before, has done that route three, four, five times. And we basically practice what we call Sherpa management.

1:09:07When we're in the boardroom, we don't have financial people. We're not ever worrying about the liquidity event. We're in the business of building companies, not selling them. And we're not looking at the balance sheet. We're not looking at the numbers so much as really trying to help that management team know what's going to hit them and how to protect them. I would say, for example, we at Act 3 believe that financing, which is at the core of so many companies, should not be seen as a life cycle event. You know, so many companies are raising money in an annual or more frequent basis as if, You know, it should be done every birthday.

1:09:48Our view is running a company is hard enough work without having to continually be out there selling. And so when we invest in a company, we're going to put an investment in it. And then we're going to agree and take a right of first refusal on all follow-on rounds of capital at a pre-agree to multiple. So we're all in alignment. It's an easy thing. And the truth is we have yet to ever turn down a follow-on round of capital up to an IPO. And for our companies, they've never ever worried about capital. They call, pick up the phone, and we get there because we're of them and we're with them. And we recognize that capital raising is not something they should be doing, but rather they should be worrying about building a better competitive alternative.

1:10:35Similar kind of thing with the many skills that my partners bring to it, whether it be strategy, whether it be real estate, whether it be technology, our guys are available to the companies we invest in. Again, we don't push it, but on a cost plus basis. And we want to protect our management team to focus on building a better company and not have to worry about scaling up so many of these different functions. Well, let's talk about building a company. One of the phrases that you use over and over again is means and byproduct. How does that factor into building the company? Well, I think it starts with life.

1:11:13So, so much of what I've learned about building companies starts with life, Shane. I think in much of our society, much of our lives, we've confused byproducts with ends and means. I have a friend who's a type one diabetic. His goal in life is to stay alive as long as you and me. But that is not something he can control. It's a byproduct. What is it a byproduct of? Of a simple end, keeping his blood sugar between 80 and 180. When he does that, the byproduct is life. What's his means? Diet, exercise, and insulin control. It's literally the same thing in business. Do I want value creation? You better bet on it.

1:11:54But the way I get value creation is by creating a better competitive alternative, a place that people want to come visit you in, that they're willing to walk past your competitors to come to you. What's the means? It's everything I do every day in a business. It's how I spend my time. It's focusing on the aesthetics, the operations, the structures, the processes, the way in which we engage with our team members, the way in which we engage with our customers. That's the doing of the doing that drives the end, a better alternative that actually creates the wherewithal to have the byproduct. Only thing I can tell you is those companies, those CEOs, those leaders that focus on the byproduct, the outcome, never get there.

1:12:42It's rare because they actually miss the mark on what creates it. You know, it's like saying, I want to be happy. You can't create happiness. You can create the conditions in your life that leads to a feeling of happiness. And if I were talking to my kids, I'd be telling them, do the things that lead to your own self respect. Do the things that you will respect. And if you in fact do that as your end, your byproduct will be that happiness. Go deeper or spend a couple of clicks maybe on sort of how businesses go backwards when they try to get the outcome instead of the inputs, if you will. It's the means versus the byproduct.

1:13:20So when you focus on driving the bottom line, And you misunderstand that the most important thing is to drive the customer experience and the reason they want to come in. I give you an example. I was involved with a company that remained nameless. They had a little E. coli scare. Their immediate reaction was to cut labor. I looked at them. I said, you're nuts. If you do that, you're going to destroy what you've been working on for years, which is telling your people that what matters most is running great stores. In fact, when you run any enterprise, what you do is much more important than what you say.

1:14:00And so when you focus on very short-term metrics, even though it seems like a desirable thing, it actually costs you far more in the long term. How do you develop the long-term thinking that you've brought to all these different concepts from Aubin-Pin to Panera to Cava? It just makes sense to me. I mean, it just seems logical, right? Like if I want to start, I'm figuring out where I'm trying to be in five years and 10 years. And what's it going to take me to get there? And that's what we mean by future back thinking. And what seems stupid to me is to do what's short-term expedient and long-term stupid.

1:14:37I have an expression. I'm long-term greedy, not short-term stupid. And I really want to build something of value. But the way you do that, whether you're talking about a business or a relationship or your own life, is to focus on those things that have meaning and self-respect and those things that, when you get down and get to the other side of it, will have touched other people and, most importantly, touch yourself. Spend a few clicks on that. Is there an example that comes to mind in the short-termism versus long-termism? I love the idea of being long-term greedy. I've publicly spoken to this.

1:15:14You can look at the difference between the way Cavo went public and Sweetgreen went public. These were two companies that emerged out of the DC market about the same time.

1:15:46find on. One was out there with a ton of press and a ton of built-up expectations. That was Sweet Green. Cava was slower, more disciplined. You know, I think Sweet Green went in one direction with its real estate. Cava stayed much more disciplined as it went forward. Ultimately, They both went public. I think that in the Sweetgreen IPO, we see a case where a number of the investors sold fairly quickly. It was a different headset. Let's get this thing off the ground. You saw a lot of very instant gratification for some of the folks involved in the IPO. I think you see in Kava a very different approach.

1:16:39We took a slower approach to that IPO, a much more disciplined approach to it. And I think we were much more disciplined in the consistency of the brand and the brand integrity. Consumersence, as we call it. I think that you see the byproduct of it. But today, I would gather that Kava is going to mark a cap five times what Sweet Greens is worth, something in that order, four or five times. Depends on, you know, but it's stayed in that range. And I think that that value creation is a byproduct of the very real decisions we made in Kava about staying disciplined, staying focused on concept essence, building something that really delivered for our team members first, for our guests second.

1:17:32And by doing that, that our investors would end up doing well and always taking the long-term approach. One thing that I don't think gets enough attention, and this is something I think you're open to talking about, is the difficulties of running a business, the costs of running a business, the family costs, the social costs. Talk to me about that with Aubameyang in particular and Panera. And when you're doing anything that takes powerful commitment, that commitment owns you. You don't own it. I've never owned a business. The business is on me. It's with me in the shower. It's with me on vacation.

1:18:15It's there with me. And in fact, some of my best work is done when I'm on vacation. I'm not actually thinking about it in a conscious sense. And I have the ability to extract and understand. But, but listen, doing anything in the world, whether it's working out every morning, whether it's being in a relationship, requires commitment. And it requires a commitment to the long term and it requires responsibility. I would simply say, I've been committed to these businesses. I've been committed to the people that have believed in me. I've been committed to my team members, to my investors, and I want to give them something worthy.

1:18:53I want to, I want to build something of quality. And there's a very real personal price. I've been married twice. It's not something I'm proud of. I feel like it's a failure. Is that a failure because I was committed to my business? I don't know. But I sometimes, I think about that. The biggest fallacy of life is that you can have everything. And that all there are are choices. And that you want to make your choices with a clear head and your open eyes. as to what you value, what you respect. And then you want to build your life around that. Just as I try to build a business around what it is we try to, a consuvescence in what we expect, I try to build my life around what is it I'm going to respect.

1:19:41And that's why I really try to think through on a regular basis what is it I need to do for my own self-respect in the context of my relationship with my body, my relationship with my family and my spouse, my friends, my relationship with my work, and what does it mean to do that well, and ultimately a relationship with my own spirituality and my own personal integrity. You take all of that and you try to put that together and you try to build a life understanding. There is no balance. You can't have it all. You've got to, you make choices and there are trade-offs and you try to do that as well as you can.

1:20:27I just encourage your listeners to be clear what it is that they want and what it is that they're going to respect. What you don't want to do is wake up one day and say, I wish I had and miss it. How important do you think that focus was in your success? Yes. I'm pretty focused. And, you know, I work hard. I always have. I love it. I enjoy it. I love when we figure things out. I like to think that I protected the people around me. But I like to think I'm willing to pay the price. And by that I mean I'm willing to do what it takes to do the hard work. Most people aren't willing to pay that price and they don't understand you're not going to get the byproduct if you don't build something that's a better alternative.

1:21:14And that's hard work. And I would share with you this too. I'll share with you two things. One, I often say to entrepreneurs, I said it yesterday, I was at a Tony Robbins event. And I said to the folks, I said, listen, if you don't enjoy the people in your business, the people in your life, if you don't enjoy the doing of the doing, you're never going to get there. If you're doing this to make money, you're never going to make money. If you're doing this for the glory of it all, you're never going to get it. If you don't love the doing of it, you're going to fail. And for me, it was never about the end.

1:21:56It was about the doing. I love the figuring it out. I love the people that I work with to this day. I'm not doing Act 3 because it's going to change my life or my kids' lives in any way. I'm doing it because I actually love the process of having challenges and figuring it out. So I would say to you, and I say to people all the time, don't do it for the outcomes. Do it because you actually love it. We should talk about another concept about entrepreneurship. I think it's often misunderstood. Here's what entrepreneurs do. This is what my business life's been about. Entrepreneurs see a better opportunity.

1:22:37And they're not risk takers. They're actually risk avoiders. They see that opportunity, an opportunity to serve somebody, to make a difference, to do a job better for somebody. And in the context of that, they're risk avoidant. They don't want to take risks. that get in the way of their getting there. And for me, when I can see a better way to do something, when I can see a way to make a difference in somebody's life, be it a guest or even a team member, I want to do that with all the energy I can. And I want to protect it. And that, to me, is what an entrepreneur is. It's somebody who sees opportunity and then seizes that opportunity.

1:23:17I'll share with you something else that I think is important. You have to be both strategic and detailed. So I can operate out of what are we trying to accomplish in five years level? But again, I can then get down into a discussion on is that floor material working in a way that it's bouncing sound around and the sound is the wrong thing for the experience we imagine. It's the totality of both sides of it. In these complex businesses, that's essential. Some people want to just be strategic. Others can't get out of the detail. It's the ability for both. You get a strategy from the detail. And frankly, no strategy is worth anything if it can't be executed.

1:24:00I find that fascinating, in particular, the detail. There's such an aversion from a lot of people to get in the weeds of things, to understand things deeply. and so they're often reading information that's filtered or synthesized. Or wrong. And it could be completely wrong and they'd have no idea. Somebody told me this and I don't know if it's true or not and it's somewhat provocative, but they said you can't rely on somebody who doesn't know to filter information for somebody who does know. They used more provocative terms than that. I think there's some truth to that. I think that, yeah. So the ability to go between these levels from high, you know, 30 ,000 feet to the one inch level.

1:24:42And anything in between is the sign of somebody who's really involved in the details, getting firsthand information. But I think that's what creates the pattern recognition that you can see when you spot these transformations that we've talked about from Aubin Pan to Panera to, you know, Panera Act 2. And I think like if you're not in the weeds on that stuff and you're not in the details, you'll never be able to spot that. Totally true. I think that you can't have an effective strategy if it's not informed by an understanding of what actually is going to touch your customer and how it's going to get executed.

1:25:19On the other hand, the most powerful strategy in the world means nothing if it can't be executed. And so the ability to understand how you're doing on both levels simultaneously has been an essential characteristic that served me particularly well in my career. Some people would call it obsessive. how would you respond to that? It's thoughtful as opposed to simply obsessive. Being obsessive isn't enough unless you're right. You know, being right isn't enough unless you can get it done. And I guess what I'm trying to argue for is not micromanaging, not getting into the detail, because that's the only place you know how to operate, but being able to use the detail to extract and learn.

1:26:07Like, I'll tell you a story, Shane. I go to visit restaurants we own all the time. I'm not going to check out the people who work there. They all think I am. But I'm not going to catch somebody doing something wrong. I'm actually going to check out myself and our senior management and how are we doing in projecting a vision of how we compete and then delivering that down through an organization and a group of people to actually get it done. That's a great way to look at it. I want to come to Act 3 for a second here and let's spend a few clicks on what you're doing, what you're trying to do and why you're doing it.

1:26:43What we're trying to do is build the next generation of great companies. And we're doing that based on an understanding that building better competitive alternatives is everything. And we want to enable and help companies become the best competitive alternative in categories that have extraordinary power. We have a couple of principles. Number one, we believe in founder-friendly capital. So when we go in, we hope it's the last investment capital that gets taken before an IPO. Generally, we will come in as common stock, not preferred, same place as the management team. And we will typically take a right of first refusal on all follow-on rounds of capital, have never turned it down, and essentially have enabled our founding teams to feel confident that they have unlimited capital behind.

1:27:38Secondly, we practice what we call Sherpa management, not venture capital. When we're in the boardroom, we're not looking at the next liquidity event. When we're in the boardroom, we're actually in there helping solve real problems. Typically, and most often we're saying You need to put more overhead here, not there. What comes first, second, and third? And each of my partners are serious C-suite operations folks that have experience. And our 25 people, we have only one that's really financially driven or thinks financially. That was the activist of us. That was the activist. What's his name? Noah Elbogan.

1:28:19Yeah, I had 300 people chanting, you know, F-U Noah. and later I ended up respecting the guy, but I couldn't tell anybody. I liked him. I made an investment in a hedge fund he had and ultimately asked him to join me in this endeavor. But he says he's now a reformed activist. We don't practice activism. We help people. And then obviously third, we only at Act 3 invest where we have competitive advantage. What does that mean? We invest where we know something And we know how to build dominant players in very specific categories. We're now, Act 3, as you know, is the largest independent investor in Kavai service, the German there.

1:29:05We're also in a company called Tate, which is in Boston and D.C. and now the New York market. It's 50 restaurants doing about$5 million a unit,$250 million. It's a powerful cafe. It's got a bakery there. It's got artisan third wave coffee. And it also has authority with real chefs. It's a fascinating concept because it brings the attitude and voice of the Levant, the Middle East, the founder, a woman named Zeridore, Israeli, powerful, powerful chef. And our baked goods are really third wave. They're differentiated. They're worth actually eating. Why New York? Isn't that like, I don't know. I don't know the restaurant space, but isn't that the most competitive market in the - The single most competitive market.

1:29:54We're not yet in, we'll be in New York next year. We're in Ridgewood, New Jersey. We're in, we're going to Scarsdale, Garden City, Summit, Milburn. because we started in Boston. We built out substantially in Boston. We went to D.C., did great in D.C. New York is in the middle of it. You're absolutely right. New York City is about as competitive a market as ever, but this is a concept that's good enough to really compete. Is New York a good barometer then, like if it works in New York? No, it's the funniest thing. People come from Europe all the time. They all go to New York. It's the worst market because the rest of the country, it's not representative.

1:30:33I'll tell you a quick story and we'll go back to the Act III thing. One of the first discussions I remember having with Brett Shulman, our CEO down at Cava, I said to him, Brett, right? You, you know, you and the sweet green guys, you all went out, you know, you started in DC and then you went out to LA as your second market. I said, here's the deal. I said, what really matters is not how you do in LA, in Malibu, in West Hollywood. What matters is how you do in Fredericksburg, Virginia. You make it in Fredericksburg, Virginia, you do two to three million a unit. I'll show you a thousand locations in America.

1:31:08That's the key. And I will tell you that if you're building a business of mass scale, it isn't New York City that matters. It isn't L.A. that matters. It's everything in between. And can you offer people something of quality and substance? It's a different environment to compete in. New York City costs are three to four times higher. So if you're really good, you can make it, but it's very difficult. Why did Au Bon Pen not work? You mentioned that earlier when you went west. It didn't work out there. It didn't work in the malls. It didn't work in suburbia. So it worked like downtown LA? If there was a downtown LA, I mean, back then, there is today.

1:31:52It worked in a major office building in downtown LA. Because it was about high-density, urban, quick. Yes. Where people pay a premium for quality and quickness. Yeah. It worked in Eaton Center in, you know, in Toronto kind of thing. Right. Okay. So come back to the act three. So act three. So, you know, we start with Tate. You know, it's got authority in bakery. It's got authority in third wave coffee. It's got chefs in every store. It's got real food. We're doing breakfast. We're doing lunch. We're doing gathering place. It's rooted in this powerful aesthetic. They're beautiful. They're a mix of antiques.

1:32:29That's twice you've mentioned the experience of having a chef in the actual unit as a differentiator. Talk to me a little bit more about that as a concept or how it creates the experience. And then we've got to get back to Act 3. But yes, every one of these businesses are defined by their structure. Structure matters. For example, I can't tell you how many conversations over the years I had with Howard Schultz about Starbucks and their desire to do better food. But they could never. Why couldn't they? Because they have a frozen food system. They manufacture in one place, they freeze it, they ship it into the store, and they defrost it.

1:33:09They spent$100 million on an acquisition, boulangerie, great little bakery. Could they bring it to Starbucks? No, because the system defines what they're capable of doing. Similarly, at Panera, we were an assembly business. We started as a sandwich place. We put together sandwiches. We didn't have real culinary skills in the stores. Our ability was simply to assemble. So we were limited. We took on Tate, and I originally bought Tate for Panera. I saw it as a better version of Panera in certain neighborhoods. I then converted one of our stores in Harford Square, actually. We popped the sales volume by more than twofold.

1:33:51Yeah, exactly. and, you know, maturely changed the EBITDA. It left me in a place where I said, wow, this is powerful. And when I sold Panera, I negotiated the right to take Panera's interest in Tate. At that time, it was a dozen stores or whatever, to take that interest with me as part of my package. And I ultimately did take Tate with me. That's how it became part of Act 3. Similarly, another business, Life Alive. Again, plan forward, positive eating. Um, I, I love this business. We've been in it eight years. I can tell you that plan forward is a, is a tailwind that is powerful. Somebody is going to win in it.

1:34:32We've now produced stores in Boston and DC producing very high volumes, uh, surprisingly high volumes for positive eating for this kind of food, uh, and, and, uh, and a really powerful team and concept. And we have a a ton of excitement in that. We have another company called Level 99. This is a guy who I was introduced to, had an idea. He'd come out of MIT and had been involved in the entertainment business for many, many years, engineer. And he had a vision for taking a space, 40 ,000 square feet, all kinds of different things. We said to him, let's drop a farm-to-table restaurant in the middle of it, a brewery.

1:35:18We opened the first one in Natick, Massachusetts at the Natick Mall. I have never been involved in a business as powerful as this. Blew me away. We've since opened in Providence, Rhode Island. We're opening in Tyson's Corner in D.C. in four weeks. We're opening in Disney World down in Orlando in the coming year. It's going to be at location close to you anytime soon, sometime soon. But this is another one of these powerful businesses. Last year, we made an investment in a business in Barcelona, Spain called Honest Greens. Again, very high volumes. It's basically chefs in every restaurant, real vegetables, greens, salmon, chicken, put together in a way that lots of the young Spaniards have found exciting.

1:36:14That business is now 30-odd restaurants in Spain and Portugal on its way to the UK and France next year. Again, we think that there's a powerful opportunity to bring some of these disciplines to Europe, but to do it right. We also have another business that we're involved in with Act 3, came out, began in COVID, but we have lots of connections with institutional capital. And the capital has asked us to get involved in companies. And typically we can't, with public companies, we can't take a carry, you know, get paid. So we do a deal with the company with the support of their investors to take a percentage of the company in warrants.

1:36:58So we have an interest with a company called BJ's down on the West Coast where we provide some strategic guidance. We have another involvement with a company called Park Technology, which is trying to really be the source for unified commerce in restaurants. These are all strong public companies where we've been able to help them. And in the case of BJ's, the stock has more than doubled since we got involved in the case of PAR. It's held very strongly. And so, again, what we really are in the business of doing is doing what we love to do, help figuring out where the future is going to be, making sure we arrive at that future before the rest of the world gets there, figuring out what those categories are, and then helping wonderful management teams build the dominant player in those categories.

1:37:51and you know it started as a 200 million dollar investment is now a nearly you know it's a two billion dollar portfolio and um it's delivered 55 returns and and mostly we're just having fun i mean we are not yeah we work hard but but it isn't like running a company the guys that are running the companies are doing the heavy lifting and we're there trying to make people think i love that. Shane, we talked about something before. I just want to mention, I sit on any number of boards. I lead the boards of most of these companies. I was on the board at Whole Foods when we sold it to Amazon. To me, one of the things that people misunderstand about boards, the job of a board is not to run a company.

1:38:37Our job in Act 3 is not to run it. It's actually to ask good questions that make the people that are running it think. And that's where the power comes. It's in the quality of the question and the quality of how it helps impact other people's brains that actually matters. The discipline is not in micromanagement. The details is not in micromanagement. The detail is in actually helping drive a powerful and profound understanding that allows you to do a better job. I think that is an incredibly profound misunderstanding about boards and the value that people bring, especially when you're on the board with a founder who's the CEO instead of professional.

1:39:17Yeah, we can take Kava. I think, you know, if Brett Shulman, who is the CEO, we're here, he would say our relationship has evolved and grown over the six, seven years we've known each other. I think there were times along the way, you know, that were really hard. I think he's come to know we are really on his side. We're really with him. And I think he would say the most powerful thing we brought to him. And our relationship changed for the better when basically my role has been to challenge his thinking and let him deal with the implications of it as opposed to be directive. Yeah. And, you know, he's growing immensely.

1:40:00He started as my student and, you know, I learn from him all the time watching him do it. But we share the same value system. We share a common thought process about what's going to work. And so the way you get there is through taking the time to think about things in a deep way. And again, it goes to my book, Know What Matters. Knowing what matters. I think that the board in CAVA, which I chair, would say we understand our role, which is certainly to ensure financial integrity, to ensure risk assessment and to fill that. But most importantly, we don't help that company flying in on some basis and telling them what to do.

1:40:47We help them by bringing to bear our experiences and helping make them think in such a way that they have a better sense of what's going to hit them in the future. And they're prepared to handle that today. This has been an incredible conversation. We always end with the same question, which is what is success for you? Self-respect. Ironically, to me, success is looking at myself and knowing I have built the best life that I know how to build, whether it be my role as a father, my relationship with my kids, my role as a spouse in relationships, whether it be the kind of boss I've been and the difference I've made in the lives of people.

1:41:31very important to me the lives I've touched all over this country and many parts of this world guests who've come up to me and said thank you you know for what you did I love being in your places you know and knowing I was the best version of myself I could be you know I'll say something to your people always say to me what's your legacy or somebody said to me yesterday at this Tony Robbins event. You know, what do you want your legacy to be? And I think about it and I realize there is no legacy. You know, things go on, they change. I don't think 50 years from now, people will be talking about me.

1:42:13I think what my legacy is, frankly, what matters most is my kids and the things I show them that live on in their lives and in their hearts and in their souls and in their kids. And those are the kinds of things that matter. And as I look back at this, my 71 years on this earth, I just feel so blessed to have had the chance to do work that I've loved, to love, to touch people. And I hope in some small way I've done this in a way that is worthy of all those blessings. I love that answer. Thank you so much for the time today. Good. This was fun.