You’re seated in a buzzy new restaurant, grateful to have a table. There’s a 90-minute wait at the door, and the bar is struggling to keep up with patrons packed three deep. All the talismans of contemporary dining are present, from ice shaped to suit your cocktail’s specific characteristics to $14 heads of roasted cauliflower with Indian spices to pickled onion garnishing every dish. You can barely hear your server as you ask about gluten content.

Your dining companion mentions this place is the “next Young Joni” and you can’t disagree. The $1.5 million buildout looks like less of a gamble with every platter of burrata that passes by. Chef Matt is expediting on the line. A few more nights like this, and he’s going to be a very rich man, you think.

Think again.

More likely, in three years, Chef Matt will find himself with little to show for the experience other than media links and pay stubs revealing a lower take-home than his top bartender. He’s sweating this evening on the line—not just from the heat, but because he only owns 5 percent of the restaurant, and even if it lasts a decade, all it will get him is another opportunity to earn a five-figure salary and 5 percent of meager profits.

Chefs may be the faces of Twin Cities restaurants, but only in the rarest of cases do they own the places where they work. That privilege is reserved for a small group of moneyed individuals able to front six or even seven figures to take a vanilla shell to high style, or even just renovate a hovel. They are the often secretive and almost always anonymous force that drives a trade even they regard as a bad investment. They do it for all sorts of reasons, but making a lot of money is rarely on the list.

The chef only brings knives

In most businesses, the person with the concept, who’s also the CEO/COO, is the big dog. But that’s not how the restaurant business works. It’s hard to say why, other than that the business is extremely capital intensive, and with capital comes control. Most chefs never accumulate enough capital to have control beyond the food on the plate.

“Another chef in town approached me; he wanted an investor,” says Jon Salveson, a Piper Jaffray investment banker who was part of the investor consortium that bankrolled chef Gavin Kaysen’s return to the Twin Cities (Spoon & Stable, Demi, Bellecour). “But he had lots of investors and a large equity partner. I said I’d be his sole investor or nothing, because [he had given so much equity away that] he’d be in a position where he’d have to open another restaurant just to make ends meet.”

Chefs would have more influence if they could borrow from banks to open restaurants, but in general, they can’t. “Twenty years ago you could get bank money, but now it’s considered a high-risk loan by banking regulators,” says local restaurateur and investor Bob Kinsella. “[Banks] want every dollar collateralized. They will only loan on land or a building.”

“So we all go to private investors,” says Patti Soskin, a veteran local restaurateur who operates Yum! in St. Louis Park and Minnetonka. (Her initial investor was Bob Pohlad.) “They all do it for different reasons, but you have to keep them happy.”

The best investor is someone who loves your food, of course. “The archetype is wealthy men who are fans of your work,” says Russell Klein, co-founder and chef of Meritage in St. Paul, who does not use investors.

Their motivations are generally not financial. “People get their wealth, they get a little bored, and they dabble,” says Jim Wolford, founder of Atomic Data in Minneapolis and now majority partner of Bark and the Bite barbecue in St. Paul.

It’s also a ticket into a desirable world. “If you’re older, there are a lot of young people in the business, and it’s fun to be around them, get involved in their problems,” says Kinsella. “It’s extremely social. Restaurant employees are typically interesting people.

“There’s also an ego element,” he continues. “‘This is my place.’ They get to hang out and use their gift cards.”

Here are a few of their stories:

Diversified

Ali Alizadeh / Hemisphere Cos.
Hemisphere is an investment company that “incubates, owns, operates, and makes investments in promising private business in a wide variety of industries,” says principal Ali Alizadeh.

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“[We’re] not private equity, not pure operators, but active investors and strategists. We know what’s happening on a daily basis and help with things we are good at.”

Hemisphere earns more in other niches, but Alizadeh has a soft spot for restaurants. “The fast pace is exciting,” he explains. “Food is primal. It attracts people. [There are] infinite permutations of what you can do with it. Everybody likes to feed someone. It requires such a disciplined symphony, and when you find that groove, it’s almost mystical.”

Strategically, he tries to remain cognizant of Hemisphere’s core competencies. “Our strategy is to invest in [a concept] that transcends time. We also know the downtown [Minneapolis] market really well.” (Hemisphere operates Mission, Good to Go, and Atlas Grill downtown, as well as the Tavern restaurants in suburban locations.)

He also distills his focus to something that effective restaurant investors of all stripes echo: “We’re in the people business. We genuinely care about our people and customers. We have to because we may not make a whole lot of money in this business.”

Hobbyist

Jim Wolford / Bark and the Bite
Wolford grew up working in restaurants. It put him through high school and college. Though now firmly situated in the world of tech, he was a home barbecue maven—“I would make half a pig, fill the freezer.” He began to host monthly barbecues for clients of Atomic Data. A staffer from Texas persuaded him to buy a barbecue trailer.

Bark and the Bite founding chef Noah Miller approached Wolford about an investment in his food truck. “What made me interested in these guys was a wave that I call expensive food,” says Wolford. “Restaurants aren’t accessible anymore. Our average ticket is $20-$22; that’s accessible.” Wolford started out as minority capital, but he has gradually invested more as the truck added a brick-and-mortar presence.

“Noah is creative. [Business manager] Mark [Myers] is an operator. I didn’t want to be a passive investor or run the place,” Wolford explains. He started with 40 percent but is now majority owner; “I’m involved weekly,” he says. He describes his total investment as a bit below $400,000.

An October fire at the bar Bark was using as its brick-and-mortar base cost 75 percent of revenue, says Wolford, and the partners were at a crossroads. “Do we bottle sauces? Do we get our own space? We decided we wanted a space that was already built out with a bar. I preached patience.” When Heirloom in Merriam Park closed, an opportunity presented itself.

Wolford sees his role as providing a foundation for the operators. “There’s a stability that can be brought by the money side,” he says. “That’s what I do.”

Benefactor

Jon Salveson / Soigné Holdings
Like many successful investment bankers, Piper Jaffray’s Jon Salveson is regularly pitched restaurant deals, and, he says, “I was dedicated to the idea of not investing in restaurants.”

But he ended up in New York City with a consortium of colleagues to meet Twin Cities-bred Gavin Kaysen at Café Boulud, where Kaysen had made a national mark as a chef. Kaysen supervised their meal and then came out and sat with them, says Salveson. “He talked about coming to Minneapolis to do his own thing.”

One of the first people Kaysen pitched was UnitedHealth Group CEO Stephen Hemsley. “Steve offered him all the capital, but Gavin didn’t want a [sole] investor,” says Tanya Spaulding, principal at Shea Architects, which has designed Kaysen’s local projects. “It’s a problem for a chef when an investor could misconstrue they are the operating partner too.”

Instead, Hemsley, his son Matt (also at Piper Jaffray), and several others built a consortium of five investors and five global chefs (including Minnesota’s Andrew Zimmern) who would also invest, though on a more modest level. (Salveson says all investments were six figures.) This was not a typical restaurant deal where the investors reap dividends while the chef slowly burns out. Instead, the plan was that “once investors were paid back, we re-split the baby,” says Salveson. “Gavin is now majority owner.”

Unlike most restaurant deals, “our intent was never to maximize return. We would have put up a cement-floored brewery if we wanted to maximize return. This was designed to put Gavin in a position to do what he wanted to do, so he could find a way to owning a majority over time. He’s a special guy. There are only three to four people in the U.S. who can do what he does.”

Many Hats

Bob Kinsella / HRM Mgmt. Co.
HRM Management Co. operates suburban restaurants Wooley’s, Tamarack Tap, and Barley & Vine. Partner Bob Kinsella is also an investor in Jester Concepts’ PS Steak and holds restaurant management contracts for local owners in Jordan and Chaska. Kinsella understands the business from the rare perspective of an owner, an operator, and a passive investor, as well as an urban, suburban, and exurban restaurateur.

He says it is rarely difficult to find investors for projects. “Usually by word of mouth you can get six to 15 people to a business opportunity meeting. Someone always has an uncle, cousin, somebody in the business who is interested.” His tendency is to overcommunicate with investors. “Every week I email a quick financial summary to [them], but that’s more than is typical, from what I understand.”

Kinsella’s goal is to stay diversified and distribute risk. He says he’d rather have 20 percent of a bunch of restaurants than all of one. The return is typically better as well. “If you build multiple units, you can develop an income stream,” he says. “It’s really hard with one restaurant.”

Creative

John Gross / Kado No Mise, Martina, Colita
Like many investors, John Gross worked in restaurants in his teens. His background is niche adaptive reuse real estate development and design. He entered the restaurant game when he renovated 4312 Upton in Linden Hills for chef Erik Harcey and his real estate partner Tony Johannes, and thus became a passive investor in Upton 43, a temple of Nordic cuisine that did not survive its second birthday.

But Gross liked what he saw of the business and decided to become a more active partner with two distinctive and talented chefs working in buildings he owns: Martina’s Daniel del Prado and Kado’s Shigeyuki Furukawa. “There’s an incredibly strong artistic vision that has a commercial expression, and you build a business around that,” Gross says. “It’s a passionate enterprise that, when done well, serves people and brings joy. The payoff is immediate.”

He also realized that pairing his real estate background with hospitality economics could pay dividends. That’s because restaurants have few fixed or marketable assets, and when they close, the principals are often left with nothing but a lease obligation.

“You [install] $1 million to $2 million in equipment and fixtures, and it stays with the building and landlord,” Gross marvels. “But if you control the real estate, you can sell the business and keep the building. Or if the restaurant fails, you can lease or sell the building to recoup your losses.”

Empire Builder

Steele Smiley / Crisp & Green
Steele Smiley was a fitness entrepreneur (Steele Fitness) turned fitness executive who saw an opening in healthy eating. “I had never invested [in restaurants]. I was solicited all the time—once a quarter, probably,” he says. “I just believed the risk/reward didn’t work for me [as an investor] because the margins weren’t high enough.”

So instead he helped birth franchise-based quick-serve salad concept Crisp & Green with local restaurant developer Ryan Burnet. “I seeded a concept I would own or buy. I knew I was always going to operate it,” Smiley says. During the interregnum when he was phasing out of fitness management, he studied the food business.

“I had a learning curve, so this way de-risked it for me. I also overcapitalized the business, which makes it less complicated.”

Smiley has learned that not all businesses have equal degrees of difficulty. “[Food] is really challenging,” he explains. “It’s largely operator driven, and attention to detail is at a premium. The health and wellness business is not nearly as sophisticated.”

Uninvested

Russell Klein / Meritage
Longtime St. Paul chef and restaurateur Russell Klein has a rule: “I insisted on the absolute freedom of not having investors. I had heard enough horror stories. You worry about the overbearing person who thinks they know more than you because they host the best dinner parties.”

So he opened Meritage in St. Paul and later Brasserie Zentral in Minneapolis with personal debt (though Zentral’s landlord paid for the space’s buildout). “When Zentral failed,” he recalls, “I owned the failure. Zentral left me with substantial debt. I paid vendors; I’m still paying my bank.”

Klein’s mantra is “Less than 51 percent and it’s a job.” Yet he has seen both sides of it, success and failure, and recognizes how encumbering personal guarantees are. An investor’s influence might have kept Meritage from becoming the exacting favorite it is, but it also might have saved Klein from an expensive mistake, or years of obligations, at Zentral.

“Next time ’round,” he’s decided, “I’m open to an investor.”

Hard Financial Truths

One of the common restaurant investor mantras is that it’s a terrible business (that they just happen to love). Here are some reasons they cite:

It’s marginal: Restaurants are a lot of effort for relatively low return. “It’s a business of pennies,” says Alizadeh (Hemisphere Cos.).

“The margins are terrible relative to the risk,” says Gross (Kado No Mise, Martina, Colita). “Comical, really.”

How rugged are they? “My pro formas are best case [7-10% profit margin], most likely [3-6%], and worse,” says Kinsella (HRM Management). “I always know it’s going to be a fight.”

Even at the price-insensitive high end, “15-20 percent is a best-case scenario,” says Salveson (Soigné Holdings).

And so complex: who get into restaurants after time in other industries note the astonishing complexity of the business and the array of daily problems restaurants face. “They are possibly the most complex and engaged businesses out there,” says Gross. “They’re an amazing circus. Real estate development is comparatively simple.”

Part of the challenge is the sheer variety of external factors that buffet restaurants. “You continually think you’re getting there,” says Alizadeh, “but then weather, commodity prices, wages get in the way.” Wage inflation is especially a concern in the core Twin Cities, heading toward $15 minimum wage. “Capital will move where the return is higher,” says Alizadeh. “We [opened in] Fargo and our numbers are a lot better.”

Yet there is an alternate take: “Consumer and employee expectations are higher in our niche [wellness]. [At Crisp & Green] a $15 wage is baked in. We want to provide opportunity for lifetime employment,” says Smiley. “You can’t pay nothing and expect performance.”

You have to like people: The common wisdom is this is a market where hospitality and only hospitality wins. The Soup Nazi would never make it in Minnesota.

“If you can’t be genuine with service you can’t succeed here,” says Alizadeh. “Authenticity beats sophistication in [MSP]. People view the experience holistically, not as a bunch of components.”

Many chefs lack key skill sets: Most chefs have a creative orientation. They are creators. This has its limitations. “[When] chefs try to run the business you don’t really have left and right brain sides covered,” says Wolford (Bark and the Bite). “You need a business mind in your team.”

“Being an artist just doesn’t cut it” at this level, says Salveson, “when you think about the skills you need to master and constituencies you need to serve.”

Leases can be deadly: Recipes are not monetizable assets, and used kitchen equipment is only worth so much. So when restaurants fail, they mostly are left with obligations. Landlords often encourage restaurateurs to overinvest in fixed costs and sign leases they can’t afford. “Landlords need to see a few restaurants fail before they come to understand [what] a restaurant can and can’t handle,” says Kinsella. “I like percentage rent, because the landlord becomes your partner. I’d walk away from a deal that involves a landlord who doesn’t understand the business.”

Land is still relatively cheap in the Twin Cities, which can work to restaurants’ advantage. “That’s why Minneapolis is a fantastic place to have a restaurant,” says Salveson. “Real estate costs are killing restaurants in San Francisco and New York City. Even the best there only see single-digit operating returns.”

The restaurant business is challenging, but it seasons people like a cast-iron skillet. “I’ve found that people good at this business are good at any business,” says Alizadeh. It’s a mentality. Proficient restaurateurs are nimble, can manage people, and can deal with an array of unexpected challenges. They’ve inevitably been a part of failed enterprises and see what it takes to bounce back. Because even the best business plans can be wrong.

“We put together pro formas at one, three, five, and 10 years, but we tell them it’s a guess,” says Spaulding. “We also tell chefs you can’t plan on two-and-a-half covers on a weeknight in Minneapolis. But you’d be amazed at how many business plans rely on it.”

Adam Platt is TCB’s executive editor.