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Nick Kokonas Interviewed by Connie Loizos | Upfront Summit 2020

Nick Kokonas
CEO at Tock
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Upfront Summit 2020
January 30 2020, Pasadena, CA, United States
Upfront Summit 2020
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Nick Kokonas Interviewed by Connie Loizos | Upfront Summit 2020
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About the talk

Topic: Business

Nick Kokonas (CEO, Tock) talks with Connie Loizos (StrictlyVC) about building and scaling software for traditional markets. Topics include:

- How restaurants are operating with opaque information and how he's capitalizing on that need

- The process and decisions behind building software from scratch

- The opportunities in dynamic pricing and the psychology of pre-paying for experiences

- The emotional resonance of restaurants and why you won't see a lot of Tock branding in the user experience

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I'm so happy to be here with you and invited me to interview you. 00:00 First you are the co-owner of one of Chicago's hottest restaurants alinea, which is not the sort of award-winning but I think considered one of the 00:10 best restaurants in the world consistently consistently bite people in the know you own a number of other restaurants Sinclair Supper Club Aviary next 00:18 which is also his award-winning but in addition to that you have a software company started in 2014 and talk and my understanding is 00:28

basically you've enabled restaurants to sort of deal more directly with their patrons. They're offering directly. They consider 00:38 customized offering which is really nice. So I got to start one thing that I thought was her funny is your Greek American a 00:48 lot of us are there restaurants run in our blood like my grandparents had restaurants. I know your father had a diner in Chicago 00:55 before you were born into restaurants right away. Usual where I started derivatives trading firm right out of college 01:05

because I was a philosophy major that's really important. Then did that for 11 years. I felt that to about a hundred and 40s 01:15 and we're doing about 4% daily. Find me DMX in ETFs in 99 2000-2001. And then I'm at Grant Achatz 01:24 Chef who if you want to learn more about him Netflix Chef's Table season 2 Spinning places. He had tongue cancer 01:34 and a very incredible outcome of me still 10 years cancer-free, but I met him when he was very young and use the same kind of person that I would want 01:44

to hire in my training firm and it was more just like Josh pop no style backing a great person. I knew nothing about the restaurant business, 01:52 but I did know that in Chicago if you turned 40 and you don't own a restaurant to give you a hot dog joint on the west side for free. That's true. 02:02 And so I didn't want to do that. So I had to build alinea 02:12 if you want to do something on your own look me up. 02:16 In 2005. This is little bit free blogging in Pre foodie a little bit. You could be surprised going into restaurant. And what 02:27

Grant was doing was what I think we all try to do any time we build anything he was doing to me up in emotionally resonant with consumers. So you 02:37 would go in there and you have this incredible experience in every day from the timer babies. We kind of do this like we people shoving food into her 02:45 mouth and all of a sudden that was broken apart by Design experience a type of food things that you didn't even know by looking at them what 02:53 they were but then when you tasted them they were comfortable and delicious and I felt like I knew how to build businesses. I start investing in the 03:03

internet in 1996 and I just sent you one day like if you ever want to do something more than this, let me know 03:11 and he said well what kind of restaurant you want to build I said, how should I know? I've never felt the restaurant before but I want to make it 03:21 great. And so I knew nothing about it a year to the day later of that conversation. We opened alinea and I remember on the first day. I thought I 03:26 was done. It was kind of like a Film Production or you you produce the film and then people can watch it. But of course with the restaurant you're 03:36

making art everyday that people consume it's one of the only art forms are forms of entertainment that the consumable it's more like a theater and so 03:43 I I remember he just grabbed me by the tie I don't wear one often, but I didn't opening night and he grabbed me and then just said he'll go over table 03:52 for tea and make sure that they're doing it the right way. So 16 years later. I have six restaurant and about 300 Floyd's between Chicago and New York 04:01 and what I learned when I actually started running the restaurant when when Frank gets sick was that no one else knew anything about running 04:11

restaurant either. It's one of those areas where tradition exceeds expertise and the software for it was built in a way that 04:20 look like 1998 Chevelle 2005 an Open Table Sales North come literally with a briefcase in and the Erv 04:29 and say Play this bad boy. I can leave it here for you today. And that's kind of what they still do and I came from a trading organization and company 04:39 that was built for real scale. So we could process hundreds of thousands of transactions even back in 1999 before trading for the high-frequency 04:48

trading what not. We can process hundreds of thousands of transactions a day without a problem. I couldn't even know who my customers were in 2010 04:58 that was held from me. And so whenever I see opaque information as an arbitrageur, I want to run to that opaqueness and opacity tell you and that's 05:06 what I did and we started so that was kissing a restaurant reservation software. Like why do we need another one of these there's so many of them 05:15 you're saying that OpenTable kept all the customer information. And so that was restored to starting point. This is a 05:24

need you wanted to start a better connect with Track of his conversations. We were doing 05:34 a spreadsheet with if you dine with us or if any of you have done with us, I could look up every single thing that you eat and what you like what you 05:44 didn't like what you left on the table. But your wife or spouse likes to drink and we're doing that in a very wrote way and we couldn't share that 05:52 information with our other restaurants. If we open the second restaurant, you've been doing restaurant 20 times. I couldn't they were siloed on 06:01

purpose because of the business model of of of of Open Table on booking.com. So when I started it I started building it for myself. I remember 06:09 Danny Meyer told me you'll never sell ticket to a restaurant. I thought it was 20 years ago. It won't work. We process about 2 million dollars a day 06:19 now in prepaid tickets, but the time I built myself by myself with one programmer a very rudimentary system and we still 06:26 $562,000 a ticket to the first day. Cuz reservations that you make in the world of any of it anything there's free 06:35

reservations like ordinary reservation. There's times where you have to make it put a deposit down on something and there's times that you prepay 06:45 something if you think about it, if you're coming to the Rose Bowl and you can buy tickets to the Rose Bowl NCAA game and suddenly your dog get sick 06:51 and you got to go to the vet. You do not call the Rose Bowl and say I'm really sorry. I can't make it tonight. Give me my money back. They play the 07:00 game without you with restaurants where demand exceeds Supply by two or three two one. There's an opportunity to charge like a movie or 07:07

concert or anything else. It's a form of entertainment and that's what was going through my head because we were running 8% no-show rate. We had 07:17 $600,000 of Labor answering a phone everyday disappointing people telling people know so they would call and say I want some on a Saturday. So we 07:25 start tracking with everything that they wanted what they request request word 85% request in the same. And yet it's like walking into a sweater 07:34 store something and you have no sweaters and you have to go. Do you have a black card again? Nope, try again, you know, it's like the information 07:44

still like that with most systems. And so I didn't really realize how big of a problem it was. I just knew that I need to sell my own problem. And now 07:51 we've got a hundred and forty. He's building all sorts of different iterations of dynamic and variable pricing for X lot of businesses. So you're 08:00 Dentistry cost left on Tuesday flat-out it will in the future. We all know I think everyone here looks at things like that and goes well in 10 years 08:08 for sure pricing will be differentiated in real time and yet in restaurants is 4% of GDP sit down restaurants at 4% of GDP. 08:17

And all you do now is play. Google is building a thing to call the restaurant. I don't want to have a robocall that is not tied to my 08:26 inventory terrible customer experience. I fought like heck to get them to stop doing that with my restaurant and yet I want to integrate with them in 08:36 a way that's positively consumer fingerspelling experiences that are certain dynamically price based on when the person is going to come in Saturday 08:44 night Tuesday night. It's just like good seats and bad seats. I'm sure the seats on the fifty-yard line cost more than those 08:53

nose bleeds for my restaurants for a Linea were sold out every night 360 nights here 09:03 for our bar the Aviary be charged a $5 deposit the loss of version. I don't care what your socioeconomic status is. 09:12 If you put $5 down as a commitment, you will be way more likely about five times more likely to show up. It's it's it's richer Taylor that 09:22 behavior. Thomas thought I was doing this I wrote a paper about it and called me up one day and he was like I want to write about this because you put 09:32

all your data out if what I've been trying to prove and he's a good friend. He's on our board now and those are the kinds of questions that we ask as 09:39 we're trying to build these things out who is acquired last year acquired by and said that 09:48 no shows a gun to like 5% credit card, which is very different thing because it feels like a penalty afterwards if you don't show up it is a slight. 09:58 Difference from like a build-it thing, but the outcome is very very very different when people prepay. It runs like a .38 percent no-show 10:08

rate .38% is indistinguishable when people put down even a $5 deposit is 3% when you take a credit card, but don't charge them until 10:18 afterwards about 9% but they don't charge back. So he tried to charge a $75 penalty to go to a restaurant San Francisco people 10:28 complain about it. It feels like it's healthier. They want to gift certificate was just simply lose their economic loss out about the case. There's so 10:38 much psychology that goes into this stuff. So I mean you and I were even talking about tipping 10:46

a 30 minute thing in and of itself. I can't even begin to go into tipping other than we eliminated tipping 10 years ago. Successfully. The fair 10:54 labor standards Act is completely broken for restaurant over $35 check average. I'm in in in New York there is case law that prevents it from being 11:04 easy to do but as minimum wage goes to $15 an hour and States like California and and Washington State and whatnot. You'll see tipping 11:13 going away more and more and more and that's a good thing for the employees. It's better people understand sexy great for the employees have a 401k 11:23

Healthcare all of that and be treated like the professionals that like if I want to hire you we can come to an arrangement salary and bonus and that's 11:30 perfectly legal cuz you are a professional but that's a whole different ball of Wax. Ecology from what I can 11:39 get away with it something they 11:48 feel like the service is going to be substandard. I also wonder if selling tickets to a restaurant is also only or two other verticals are getting 11:58 another vertical to the only sort of applicable to paint above a certain song. Absolutely true. But let's say you have a 12:07

great mom and pop restaurant. And then normally they just are free reservations. And you go in all of a sudden what happens is on Mother's Day 12:17 Valentine's Day New Year's Eve all of that. They actually cancel ticket and they do already they use Eventbrite for it. Now. If you want to really 12:25 make a platform in a Commerce platform for restaurants, you have to have the CRM that we talked about you have to have the ability to have those three 12:33 kinds of reservation and special events built in and it's taken us like five years to build that all out and getting to the to the title of the talk. 12:43

You know, there's a choice that you make when you first start building company Bubble Witch thing, you're going to scale like resy gave away their 12:52 product for free or very very very cheaply to restaurants in Los Angeles and New York Reserve did the same thing and I was sitting Chicago going. I'm 13:00 in Chicago. I like to make money everything I ever do makes money. Let's charge people to provide a real r a y but then what'll happen is we will get 13:09 the scale if the French Laundry signs up and use our product because it's great and it's at that level and high-end will get a quarter-million new 13:17

users the year for free instead of trying to pay $27 to download my app with the coupon and that's what's happened. We've gotten to 11 million users. 13:25 We had about a quarter million a month and we are in a really fortunate position that you get that that engineering saying it's either great faster 13:34 cheap pick two. We kind of just picked great early on and didn't really worry about scale because If 13:44 you go from one to two, you're not logarithmic use that a client. You can't know for 4 A. Of time if your Capital your Capital efficient, whether or 13:54

not you can scale what I heard from a lot of investors early on was spend $29 to get a consumer Network and I thought we could build that 14:03 Network without finding anything and that's what we've done. So, how are you? I mean, I'm sure a lot of it is word-of-mouth in terms of garnering 14:13 where customers ripping and replacing a system that's been around for 20 or 30 years. 14:22 You have some convincing to do and that the crossing the chasm thing is real like the first, you know, a couple years we would a Danielle 15-20 14:31

restaurants a month and they would be we had to learn really quickly there. Either really great high high demand or they are failing willing to try 14:41 anything. So you had to really learn to pick your the right customer when you were early in the process. Now it's happening is that we built out of 14:49 system that is cloud-based for the only independent system left and we built it for Enterprise. So we have 400 API endpoint we can integrate with 14:58 Salesforce, but we can also do specialty Integrations with with no vailresorts as a client of ours now, so All of that now is going 15:07

laterally were getting the halo effect. We spend very very very little on marketing to two businesses. We spend an awful lot of money now 15:17 and we're building out that consumer Network and we're about to announce in a week that the largest bank in America. We will be there dining program. 15:26 But the cool part about that news is that every single one of those people in the largest Rewards program in the country is going to get stock 15:34 account. So that's how I get 30 million us households at once and 15:42

can we talk about the bank Lisa? Can I already did you can figure it out? 15:46 But don't get mad at me or friend E8 here right like this, but it is a sort of it doesn't serve reflect. What happened to 15:56 resi which was Phi Phi American Express last year until American Express Now is offering resy as a way to sort of 16:06 Create a path for their customers are Platinum customer service reservations. 16:15 We're building out several initiatives with them and on our 16:20 own for Consumer products there as differentiated for the consumer. I'll say is like one of the things that were working on his instead of a wait list 16:30

or wishlist wishes are more hopeful it's it's a digital concierge that it's completely silly to have somebody in Toronto. If you call a credit card 16:39 company won't name the name and you call credit card company and you say I am a XYZ card holder. Can I get a restaurant reservation at alinea? There 16:48 is a company in Toronto that has a white board of been there and seen it with my phone number on it and they can try to call me. That is not scalable. 16:56 It's not going to work. And so what we're doing is we're building a trading firm. We know exactly when restaurants put reservations up 17:04

whether they're on our platform or not. We can instantaneously in milliseconds grabbing hold the table for 24 hours email you the customers and 17:14 provide a whole bunch of different sales ad on its really like we solve a million dirty money. For the Bookstore Restaurant on check out like the exit 17:23 path is through the gift shop now, but no way that's on your phone when you're in pajamas at 2 in the morning. So I got the new one of the ways. Are 17:31 you using the data that you're collecting from? Your customers important 17:39

is that we want to know your preference is dietary preferences restrictions your your your spouse's 17:46 birthday. All those things. Those are for better Hospitality. Now what the next step is that we want you to give us that information. We already know 17:56 your dining history. Why is there no platform like Spotify or Netflix for restaurants that anticipates your need knows what you enjoy 18:04 and suggest little nudges to you going. Hey, your anniversary is coming up in a little while. Maybe you should book this. Now. 18:14

We've got these great five choices that are in your thanks. Let that mass personalization for the consumers is coming. That's something that we're 18:23 building and you have to get to a point where you have enough of that data to To do it well enough that it's meaningful but 18:31 there were there now and that sort of rotation or is it sort of 18:41 like either we don't know yet, you know restaurants are incredibly myopic in the sense that I don't care how good you are 18:51

they are concerned that when I turn on booking for March. I hope we have customers. It's a really weird business that way and will we're going to be 19:00 able to do is that because of of some of the data people indicating interest before the reservations are available. We get to show the restaurant on 19:10 elasticity of their demand before they actually put those bookings on that's incredibly powerful because now for the first time they can know they 19:18 can project out months into the future what their demand will look like And you're working with restaurants and also wineries. I'm just wondering what 19:28

the vision is if they're if you're going to be getting into sort of other verticals our hospitality is kind of hospitality. It's a huge 19:36 or in 30 countries organically already. And so it's a huge huge huge space. But you know, it's if if I was 19:46 if I was left to my own devices and didn't have people managing me, I'd already have Dennis using it. So, you know, there's Spas dentist 19:57 University of exactly what I used to do is a traitor. It's just in a different Marketplace the thing that people don't 20:07

understand or don't think about is that if there are people know showing a restaurant reservation that means food is going to waste so my margins 20:16 increase from 10 to 20% across, you know, 70 million-dollar year Revenue stream, that's a massive difference for me, but it's the 20:26 reason I'm making more money is because there's less food way that's better for the environment is better for your staff. It's it has so many Touches 20:36 our lives in so many different ways and it's an emotionally resonant product just like grants food is emotionally resonant. Eating out is one of those 20:44

things we do for entertainment at the only thing where you actually put something in your mouth or almost the only thing and that's really personal, 20:54 you know, and so that's what we always consider as we're building our software is Riley's going how can we make that as emotionally resonant on the 21:02 consumer side, but also for our our clients who are the restaurants what can we do for them to get them to run their businesses better and easier and 21:12 faster but keep their own identity. So we you will not see a lot of talk branding around what you see is the restaurants image 21:21

and 21:30 buy as a restaurant to where I think it's impacting sort of like Like there's this 21:41 again. It's it's about a moute like if I want to eat fast on a Tuesday night so much to build a better if there's no storefront and I can get it 21:51 delivered from a delivery service and it's great food. Awesome. I don't think us sitting down together having a glass of wine and chatting. I think 21:59 that's actually on the upswing because we're so we're so removed from each other and every other aspect of Our Lives that dining is so culturally 22:08

significant Italy or Japan why the first things you think about is the food of that country and its really ingrained in us and as humans, you know 22:17 that it's more important than ever and it's sort of more kind of treasure I think than ever by people because there are fewer points of contact 22:26 in San Francisco. I don't know if you're aware, but there was sort of a kerfuffle maybe more than that this 22:35 past weekend. Some fine dining establishments realized is that Yelp and GrubHub his mother know where Services 22:45

were selling food from the restaurant food fried made. There's a sales tactic going on with a 22:55 lot of different companies now, not just the delivery services, but even Yelp or Facebook or whatnot where they are creating. Template business pages 23:05 and then sending you orders that say anything we had people 23:15 where we do not do any carryout saying Hey, where's my carryout? It's been like an hour. Oddly. Matt. Matt 23:25 Maloney is on our board. Who's the CEO of GrubHub a really? Well. I called him up directly then says that's really uncool. Yeah. It's 23:34

a terrible practice. I know pimp who wrote the the Twitter feed that kind of went viral on she's great. I don't think that's good practice for any 23:44 kind of business. It's certainly something that one of our competitors did my restaurant has an Open Table page. Why 23:54 bother trying to suck say this restaurants on OpenTable, but these five others are blood siphon off the business and that's how they get paid so we 24:04 can set up our our business that way we don't we don't. Make money that 24:14

way, 24:18 not happen that said, you know, I do get if you get the temptation to do those things. I just think that's a short-term solution to a long-term 24:27 problem. So unfortunately, we're almost out of time but I did want to ask you since I do have investors in the audience and probably Foodies like 17 24:36 million so far does credit card company that we are forbidden from an email yet. Are you looking for more funding or 24:44 are you a week with the launches of these two products that we have that we 24:54

could grow more quickly or the only independent left? So we have entertained some some offers to accelerate things. I'm I'm a former Trader. So it's 25:04 always something between 0 and a lot and we will we will see how it goes and I'm always going to have a conversation. 25:13 I know. 25:21

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