Venture capitalists' fast-food binge

After last week's story noting Philadelphia's 4-store Honeygrow chain has attracted $20 million in new investment-- more than the $16.9 million an investor just paid for 108-store SaladWorks, I asked venture capitalists and food analysts to explain the apparent price gap. Most agreed sexy new restaurant ideas are drawing more than their share of cash at the moment. Here's the memo one veteran food-industry watcher sent me, to be shared on condition I not name him. -- This item has been revised and updated. Joe D. --

1) All but the very largest restaurants trade on their potential growth: The concept trumps the reality. They are unique businesses, in that if a concept works in a few competitive markets, and management tells a good story, investors very quickly start penciling that out to the Top 100 metros in the US, multiply the profits per square foot and get to some pretty big numbers awfully quick.

The Honeygrow concept on its face seems super trendy/millennial/faddish, where Saladworks is kind of a reasonable place for old guys like us who want to save calories for beer and wine go to get a salad.

2) Management is everything in those businesses. Having been in a few, I don't imagine Saladworks [has been] super good...

3) Franchise vs company owned – company-owned stores [like Honeygrow are] worth a lot more, typically.

4) Venture capital is red hot right now – due to all of those tech and healthcare deals... So there's an especially large premium on potential vs. reality.

5) Locations don't always equate to value. Bad locations with bad leases are worth less than nothing. Conversely, the reality or perception that a concept has, or has access to, great locations, is critical. Either of these phenomenon are amplified by financing access. – [Separately,] Saladworks may have grown too fast and been overextended.

6) Connections matter in valuation – VC and PE are very clubby [and investments in indivudual companies can be part of larger strategies that aren't obvious to observers]...

[Separately, the analyst urged me to consider the history of Cosi, the coffee/sandwich chain that IPO'd in 2003, soared to the $40s by 2006, but was later eclipsed by rivals like Panera, and has lately traded around $2]:

The company had a lot of great city locations in very-hard-to-get-at urban markets, and popped when a well-regarded manager came [into the company] from Burger King... Cosi has 100 or so stores like Saladworks, [the stock market value] peaked in 2011 at $250 million or so... and still has an $80 million enterprise value.

They've burned about $38 million in cash the last 4 years, never turning a profit.

On the other end of the spectrum -- Shake Shack... has 63 locations and a tidy $2.5 billion market cap. People obviously love management and value the potential growth. More so now, than most times...