I just saw the re-runs of Rocco DeSpirito’s estaurant start-up in NYC. According to what I read, the restaurant went under, costing the investors about $3.75 million!
Given the extremely high failure rate of nre restaurants (supposedly as high as 80%), why do those rich investors seem to want to play this game? It is like a crapshoot-you risk a lot for a fairly small return. Take “Rocco’s”-you have a very tempermental, headstrong young man…who claims to be an expert at this business. You give him big bucks-and he selects a locations (because it reminds him of his grandmother’s house!). Then, you spend a fortune renovating the place-hiring staff, buying equipment, training, etc. Finally, comes opening day…and the usual disasters happen. You inadvertently piss off a few restarant critics…and your business takes a dive.
Personally, I’d rather invest in the stock market…less headaches. Which leads to my point: Are investors in these ventures either:
(1) Extremely wealthy, who think the loss of $4 million is just loose pocket change?, or
(2) Mafia drug runners, who need a place to launder their cash?
AS I see it, staring a restaurant is not for the faint-hearted! Of course, you could always go witha chain franchise…I don’t think a McDonald’s “restaurant” has ever gone under. :eek:
Just my WAG, but I’d say the answer to your question is “trophy investment,” like buying a professional sports team but on a smaller scale.
When reading this post, keep in mind that I have no personal experience with restaurants and my thoughts are based on what other people have told me.
It’s my understanding that it is very difficult to make any money owning a restaurant. The profit margins are pretty slim, and the money is made on alcohol. If the restaurant becomes a hot, fashionable place to be, then there might be a period of time where the place is raking it in, but it’s hard to make it last.
I also believe that restaurants are started for tax purposes. This is why a good amount of athletes or celebrities will start up their own restaurants.
In the book Kitchen Confidential, the author discusses this very thing at length. Basically, you get some rich banker or lawyer who maybe had a dream to own his own restuarant and whose friends think he’s so great at hosting parties that they tell him he should. Maybe it’s some bored guy with family money who feels that he is not “shitting it away fast enough” (to quote the author) on other investments. Usually they have some dream of their friends and wellwishers stopping buy while they glad-hand celebrities and VIPs.
So they go into the restaurant biz thinking that it can’t be harder than whatever it is they do for a living. Generally, between getting ripped off by their suppliers, employees stealing from the kitchen, bartenders giving out free drinks to their pals, comping freeloading friends, spending too much on decor and just general mismanagement, most of those places just go under withing 6 months.
Same reason the those people put money in a Broadway show. 
mssmith has most of it, I think. The one additional thing, particularly for non-operating partners, is the possibility of discovering a hot new chef. If you can do that, a) you might actually make some money off the deal and b) much more importantly, you’re an instant player. Important people want to meet you, models want to date you, investors want in on your next deal. Played right, you can make a lot more money from the association than from the actual investment.
But yeah, actually succeeding at catching an up-and-comer is vanishingly rare.
Just a side note – Union Pacific, Rocco DiSpirito’s other restaurant, was already a substantial success before before the “Rocco’s” debacle. He wasn’t just some schlub off the street with a chef’s knife and empty claims of restaurant expertise.
this guy was considerd a “hot new chef”-yet he never seemed to spend more than a token amount of time in the kitchen. Most of the time he was schmoozing the clients…what did that make him?
Anyway, the failure of his restaurant, wasit due to:
-bad locaton?
-poor staff training?
-lousy food?
-too much money spent up front?
The impression I get is that the “high rollers” who put up the money for restaurants want to see profits right away-I would imagine that a new reatuarant might take years to become profitable.
Finally, Rocco’ssweet old mother-I’m sure the woman meant well, but who (even in NYC) wants to pay $35.00 for spaghetti and meatballs? This is comething you make at home!