Development Stage: Pre-Seed. Founders need to show investors:
- MVP (Minimum Viable Product) with positive customer reviews.
- Founder’s background is related to the food industry.
- A successful exit experience is a plus.
- TAM, SAM, SOM are large enough.
- TAM: Total Addressable Market
- SAM: Serviceable Available Market (The segment of customers the team targets)
- SOM: Serviceable Obtainable Market (Within that segment, how much is left after accounting for strong competitors?).
Highlights:
- Business model: Manufacturing and distributing frozen ramen noodles (B2B) & Retailing ramen noodle restaurants to end consumers (B2C)
- Selling Japanese quality with Vietnamese materials to reduce costs and lower product costs in the long term to sell to the mass market.
- Founders have studied and worked in Japan, so they understand the culture and lifestyle of enjoying Japanese cuisine.
Frozen Ramen Noodles (B2B):
- Fresh ramen noodles: Frozen, packaged, and distributed; the taste is close to that of handmade ramen served at restaurants.
- Storage and usage: Can be cooked by boiling or microwaving, with pre-packaged frozen broth; store refrigerated.
- Fresh (refrigerated) shelf life: 1 day, as fresh noodles are perishable and have a short shelf life.
- Frozen shelf life: 1-1.5 months.
- End-user price: 50,000 – 55,000 VND.
- COGS (Direct labor + Materials): 15% – 17%.
- Production: Outsourced to a factory.
- Sales: D2C (Direct-to-Consumer) online distribution.
- Factory CAPEX investment: 500 million VND (350 million VND for machinery, the rest for renovations).
- Production capacity: 300 servings/day, can be increased to 1,000 servings/day with additional investment.
Restaurant (B2C):
- Dual Function: Serves both as a restaurant and a production facility.
- Location: In an area with 5,000 potential customers within a 5km radius.
- Peak Hours: 4 hours during lunch and 4 hours during dinner daily.
- Initial Investment (CAPEX) per restaurant: 600-800 million VND.
- Size: 90 square meters, seating 45 people.
- COGS (Cost of Goods Sold): 28-30%.
- End-user Price: 89,000-109,000 VND.
- EBITDA: 25% (After deducting labor, fixed costs, and materials).
Balance sheet and PnL information:
- Equity: 3.6 billion VND
- Charter capital: 3.125 billion VND
- Monthly profit: 400 million VND, 25% of EBITDA.
Is this the PnL for the whole group or just for one restaurant? I guess it’s for one restaurant, as this cost structure is for a store-level (1 point of sale), not for a chain.
If you increase the chain from the 10th-15th store onwards, you will spend quite a lot, around 10-15% more on operational costs.
Valuation:
Founder valuation: 20 billion VND.
Basis: Projected revenue in 2024: 4 billion VND, EV/S = 5x.
So the founders are choosing an EV (Enterprise Value)/Revenue multiple of 5x.
Assuming a deal within 6 months, the investor can reconsider this valuation after due diligence. 2025: EBITDA x 350%. There’s no basis for this projection, investors will require financial projections from the founder team. A new ramen shop will open in October 2024.
At that point, EV/S will only be 3x. That means they expect revenue: 6.67 billion VND/year with an average of 557 million VND/month, which is an increase of 2.67 billion VND in revenue compared to the 4 billion for the new store, meaning the new store generates 890 million VND for the last 3 months of the year. Is this revenue feasible at the end of the 2024 fiscal year?
Negotiation Psychology:
- Founders’ Message Expectations for the future, not just past or present expectations.
The future is built upon the present and the past. When others lend you money at a bank interest rate, they’re already bearing the cost of using their capital.
Therefore, it’s necessary to be more assertive and flexible/because investors fully understand that they’ve already calculated the value of the founders and chosen a suitable number to continue negotiations in good faith. What’s clear is no longer an opportunity. There are things that are clear, but still require other know-how to take the business to a higher level. The opportunity cost can be calculated as 10 years if done independently. Therefore, this viewpoint is not convincing to investors, although investors positively acknowledge the information from the founder.
- Shark Bình’s message – Not only fair for the founder/but also fair for the shark This means that the founder needs to set a more reasonable valuation, as everything has a value, money, and equity.
Investment Structure from Sharks:
- Shark Thái: 2.5 billion VND – 35% equity, additional value: KOC, KOL (Marketing)
- Shark Minh found the restaurant model difficult, especially with the competition (noodles, pho, mien, congee), this viewpoint is not entirely reasonable in my opinion because bills for dishes from Northeast Asian countries (Japan, Korea, China) are always priced higher due to their perceived cultural value.
- Shark Bình: 2.5 billion VND – 25% equity (Backed by the case of Banh Mi Xin Chao).
- Shark Phi Vân: 2.5 billion VND – 35%, sign 1-2 international Master contracts (500k – 1 million USD).
Capital Usage Plan:
The founder proposes negotiating with a large Japanese food corporation.
Corporations, especially Japanese ones, prioritize profit and capital efficiency. They often prefer acquiring larger, more established companies.
The founder believes this opportunity is time-sensitive but acknowledges that similar opportunities might arise. Additionally, the unreliability of verbal agreements casts doubt on the credibility of this negotiation tactic.
If Vietnam lacks a substantial F&B business of this scale, a $1.5 million investment from a Japanese corporation might be considered a market test. To justify this investment without excessive dilution, specific revenue and EBITDA targets must be met.
Three potential scenarios are presented:
- 70 billion VND revenue with 10% EBITDA
- 50 billion VND revenue with 14% EBITDA
- 35 billion VND revenue with 20% EBITDA
With the easiest KPI of 35 billion VND, assuming 4 ideal stores generate 1.2 billion VND/month, the remaining revenue for the wholesale division must be 1.7 billion VND/month.
Given the expectation of using this round of funding: 1 billion VND for frozen noodles, 1.5 billion VND for scaling 2 restaurants. With an investment of 1 billion VND in wholesale, how long will it take to achieve a monthly revenue of 1.7 billion VND to be able to spend 1.5 million USD, and your dilution at this point will be around 36% for the next round = 1.5 million USD / (1.5 million USD + Pre-money valuation of around 2.755 million USD). To achieve this number, is the initial capital (money, experience, expertise, methods) sufficient to generate this revenue in a short period of time? Let’s discuss.
Personally, I think you should become a company that many investors want to own, instead of just this one Japanese investor. In the next funding round, we can target 1.5 million USD, with 500k USD to scale the restaurant to 9 branches and 1 million USD for frozen products. I estimate a 35-36% dilution based on the plan above.
Negotiation to finalize the deal:
Founder wants to partner with Shark Bình.Renegotiated terms: 2.5 billion VND for 13.5% equity.Founder commits to not receiving dividends for 3 years.
Shark Bình: Sharing in the profits and losses/doesn’t want to shift all the risk to the founders. This shows Shark Bình has ‘skin in the game’, which is a positive for the founders.
Closing the deal:
Inviting 2 Sharks: Shark Bình and Shark Vân. 2.5 billion VND for 25% (12.5% for each Shark), Post-Money: 10 billion VND.
If I were the founder, I would offer 25% for 3.3 billion VND, which means I’m suggesting a Post-Money valuation of around 13.33 billion VND at the end of the 2024 fiscal year.
Additional Values:
Shark Vân commits to: Selling Master Franchises to international markets once the startup has 3 branches.
The founder requires a written agreement regarding the values committed by the Sharks: International expansion and a D2C ecosystem (Tech + Fulfillment).
Overall Assessment of the Deal:
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This business model necessitates substantial investments in a central kitchen or large-scale manufacturing facility in the future, resulting in significant fixed costs. Consequently, the company will need to sell large quantities of products to reduce costs. This requires the establishment of a distribution network (wholesalers, distributors, retailers, etc.) or even export.
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Essentially, the founder is operating two, possibly even three, different business models at once, each requiring distinct organizational and operational capabilities: a) 100% online D2C, b) O2O (both online and offline), and c) distribution and export. This is creating significant complexity in the early stages when capital is limited, investments are spread thin, and it’s confusing for investors. Most investors prefer a more focused approach that aligns with the strengths of the Sharks and the founder.
This diversification can lead to increased costs, especially in sales and management. Separate accounting systems will be required, and eventually, the business units may need to be separated into distinct companies. However, this is only feasible when a core business unit has achieved sufficient scale.
It’s rare to see companies with such diverse business models achieve positive consolidated financial results, especially in the early stages.
With this approach, the 2.5 billion VND investment is insufficient to build a solid foundation for the future.
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With a selling price of 50-55k to the companies (B2B), it’s relatively reasonable, providing sufficient margin for intermediaries, assuming all costs have been accounted for. However, given the current size of the factory, future depreciation costs haven’t been fully calculated. Therefore, the projected cost structure could change significantly.
If you don’t act quickly, larger competitors with existing distribution networks will crush you with lower prices and larger production scales. But I haven’t seen the team demonstrate any expertise in distribution. Online sales alone won’t be enough, and without a specialized approach, it could lead to price erosion.
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If you’re outsourcing production to a factory, you need to exert stronger leadership, especially if you own a 36% to 51% stake in that factory. Relying solely on outsourcing might compromise quality consistency at scale. This is because the factory has its own profit and loss to manage while bearing the costs of production, and your retail company is just one of their customers.
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CAPEX of 500 million VND, including 150 million VND for repairs. I need more clarification on this. How old is this asset or fixed asset? How much depreciation has it already undergone, and why does it require such significant repairs? Moreover, the maintenance and repair costs amount to a staggering 30% of the asset’s value.
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For a restaurant model, selling directly to end consumers, we need to think beyond simply selling food. We should focus on selling: b) a lifestyle, c) the restaurant atmosphere, d) dining experiences, and e) food consumption habits associated with various occasions.
I haven’t seen the two of you clearly articulate the value of lifestyle and your ability to understand consumer behavior in this aspect. Even if it’s a casual style, the dining atmosphere should still reflect the concept of a Japanese restaurant.
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The COGS looks good, but I’m wondering if the output VAT has been included?
- As for the inputs, can the factory issue invoices to you, or are some suppliers small vendors or market vendors?
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Which indicators are relevant to show that when we reach full production, we can reduce the mass selling price? According to the founders’ definition in the Vietnamese market, what is the end-user price (Mass)?
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It was stated by the founders that EBITDA was 25% after deducting employees, fixed costs, and materials. This means the cost of goods sold hasn’t been fully accounted for.
COGS for a restaurant group should be higher than 28-30%.
Fixed costs and service staff at the point of sale are understood to be OPEX for the restaurant chain.
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When sales volume increases to maintain quality, you’ll need to invest in additional trucks (logistics) and other software, incurring operational costs. This is another argument suggesting that running two companies simultaneously is risky for investors.
Regarding technology, in the short term, there’s the challenge of timekeeping for a complex F&B model with high operational costs, numerous staff (multiple shifts, crews, varying income per shift), and sales accounting (revenue recognition).
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In essence, the deal is relatively new, with a small deal size and high opportunity cost. Investors are expected to… struggle to help founders, or in other words, investors are almost like later co-founders.