This is the second in the series of posts that outlines what companies I’ve invested in, and why I picked them. My goal is to reach 100 early stage investments by January 1, 2018.
Why I Invested, #2: [redacted] Restaurant Group
Product: One restaurant, now closed
Year Invested: 2010
Amount Invested: between 25-99k
Role: Investor & Advisor
Result: Total loss
Commentary: This will be the only company I ever write about where I don’t use the actual name of the company and link to all the public records. Not because I am trying to hide my mistakes; I’m about to admit to a slew of stupid decisions on my part that led to a terrible investment and a total loss of my capital.
I am keeping the identity of this company secret for the same reason it was such a terrible idea to invest in: It was started by one of my best friends. A guy I wrote about many many times in my books, for the purposes of this post, I’ll give him a new nickname, “Frank.” I don’t want to call him out in public, because it wasn’t a big company and it wouldn’t accomplish anything positive. I will write very honestly about what happened, but I can do that without being specific about the people and places involved.
Frank and I have been friends a long, long time. We were like brothers. We’d drink, act like idiots and pick up girls together more times than I can count. We’ve helped each other, fought for each other, had each others backs in all sorts of incredible and random situations. I trusted Frank even more than I trusted my own family.
Frank has been in the restaurant business his whole life, very similar to me. When he had the opportunity to open a new place, one that would be his, I jumped at the chance to help him. I know the restaurant world really well, and the hardest parts are things both Frank and I were good at: conceiving of a great concept, getting the right location, and executing on it. For this place, the concept and location were both perfect, and I’d seen Frank execute in restaurants for a decade. The place was going to crush, and we had visions of it being the launching pad for a national chain of places. It was a perfect investment for me. With his expertise and hard work, and my advice and money, it couldn’t fail.
The restaurant ended up completely failing. Closed within a year. Not because of the concept, or the location, or the business plan or the execution or anything like that. It could have worked. In fact, for almost the whole time it was open, it WAS working. It did great business.
The problem was Frank.
The reality was that everything about this company–except for the parts I mentioned above–was totally fucked from the start, and it was completely obvious to everyone except me.
Why did I not see it? Was I too inexperienced? Did I not know the market as well as I thought?
No. The problem was not my intelligence or experience or ability to analyze this market. The problem was that Frank was my friend, and because I was so close to him, because I was so emotionally invested in him as my friend, I refused to see all the OTHER problems that Frank had.
Problem 1: Frank took on awful investment partners. I was a minority investor, only putting up the seed capital. He then raised several million from bigger investors. These people were the worst kind of restaurant investors. They’d made their money elsewhere, were investing in restaurants for ego reasons, and wanted control and power in the restaurant. And worst of all, they were toxic, terrible people to be around.
Problem 2: Because Frank was so excited to start the restaurant and get it up and running, he took investment terms from these people that allowed them to take control of the restaurant from him.
It turned out precisely how it was destined to: Frank opened the place, it did amazing, and they fired him so they could make it theirs and take the glory.
By itself this is bad enough, but at least they’d have to pay him (and me). The worst part is that they didn’t know one thing about running a restaurant. That is a business that looks very easy, but is actually extremely difficult. Predictably again, they made a bunch of stupid, nonsensical changes that destroyed the place, and it closed only three months later.
There are a ton more details, but it’s all just ridiculous drama. There were so many chances for me to see this coming, and avoid it. And even chances for me to convince Frank to take the buyout they offered him before they destroyed the place, so he and I could get our money back. I didn’t. I could have asked to see the contracts and done more due diligence here. I didn’t. I didn’t do anything I should have.
I trusted Frank and relied on Frank’s representations about the contracts and these people. I let Franks excitement for this place become my excitement, and I didn’t spend any time thinking about all the problems that these awful people could cause. And then once these problems started to really show themselves, I believed Franks bullshit rationalizations and let his emotional issues override logic and good business sense, and what could have been salvaged became a total, complete loss.
I know that a lot of people swear by the “Never mix money and friendship” advice, and I think thats good advice for most things. But I know that a ton of people do really well investing in the companies that their friends start. I don’t think there is a hard and fast rule here about friendship. I think the rule comes from something else:
Never put money in anything you can’t objectively evaluate. If you can objectively evaluate your friends businesses, great. If you can’t, don’t. I couldn’t. I thought I could, but I was wrong.
Here’s the thing: He didn’t betray me. He didn’t steal my money or defraud me in any way. He opened the restaurant, and for a while, it was doing great. If he had just taken my money and fucked me, I would write it off to me being totally wrong about someone, and that would be it.
I didn’t get tricked by someone trying to trick me; I got tricked by someone who was fooling themselves.
I let myself get caught up in the belief of someone else, a belief that was driven by emotional issues and not dispassionate, objective analysis. I let someone’s emotional issues override my own judgement. This happened because Frank was my friend, because I couldn’t be honest about who my friend was and what he was doing, because our friendship colored the information coming in and how I assessed. I saw the world the way he wanted it to be, not the way it was.
This seems like its better, right? I can say, “Oh well, not my fault, I meant the best.” It’s seems easier to deal with emotionally, but actually, in terms of investing, it’s a much worse mistake.
It’s worse because getting tricked just means you need to get better at spotting the signs of fraud. I am already really good at that. It’s really hard to trick me intentionally, and even if I wasn’t, you can learn those skills relatively easily.
But the fact that he fooled me because he was fooling himself means that, at some level, I substituted his judgement for my own, which is the worst investing mistake you can make. I let him convince me that his course of action was right, when all I had to do was objectively look at it to see that it was wrong. I didn’t do that though. I let my emotions control my investing decisions, which is a perfect way to make terrible investing decisions. I accepted his frame and his analysis of the situation.
Losing the money wasn’t the hardest part. It wasn’t even that much money, really. The hardest part was the realization that I lost my money because I didn’t do my own thinking, and for me especially, that is humbling and embarrassing.
Lessons I Learned:
-Always see things and people for who they are, NOT who you want them to be.
-Always do your own thinking, and never substitute someone else’s judgment for you own. Listen to other people yes, but always make your own judgments based on your own analysis.
-Never invest in anything you can’t objectively evaluate. If you care too much about someone to be honest with yourself about them–or to be honest with them–keep your money out of the relationship (or just give it to them, don’t invest it).
-NOTE: I don’t put the other lessons in here, like don’t money from toxic people, because I already knew that. I just ignored what I knew, which is the lesson for me.