Restaurants'On'The'Run:'' A'Founder's'Journey''

For the exclusive use of M. Hayward, 2016.

michael Caito strode briskly down the hall of his Lake Forest, California office to his company's main conference room, eager to meet with his primary investor, Rowland Day, for a quarterly status update. In just eight years, Restaurants on the Run (ROTR) had grown into a mult-million dollar business. The company had been featured in a front-page story of the business section in the Los Angeles Timeshad and made Inc.Magazine's 1999 list of the 500 fastest- growing small companies in America.

Michael did not want to keep Day waiting; he was genuinely excited to talk with his investor and advisor about anticipated business growth during the "dot-com boom," the addition of new customer accounts and employees, and the integration of a few recently acquired companies. After giving Day a "bird's-eye view" of the status quo at ROTR, Michael lobbed in an additional question to Day: "So...how do you think I'm doing?"

Day candidly responded, "Michael, if you were the CEO of a publicly-traded company, I would fire you. If I were the majority shareholder, I'd can ya. If I was a venture capitalist, I'd fire you."

Michael quickly realized that Day's unanticipated comment was not a bad joke - in fact, the words stung as if a cold bucket of ice was thrown in his face. He sat at the table in shock as countless thoughts raced through his head. Day's remark seemed to have come without ill intention, but how was this opinion formed and what exactly drove Day to make such a bold statement? After all, most of Day's experience involved large, multi-national corporations - did he really understand what it took to grow a successful start-up? Was Day correct in his observation that perhaps Michael did not currently have the skills necessary as a CEO to take his company to the next level? Would heeding advice from an investor's perspective squash the creative spirit of ROTR, or did Day have a point? Michael was unsure of how to proceed both with this investor and with the company as a whole.

Getting'ROTR'Running'

AnEmergingIndustry

The Restaurant Delivery Services (RDS) industry was virtually nonexistent in the early 1990s. While restaurant chains offered delivery services directly to their consumers, there was no dominant industry player that offered an intermediated food delivery service from multiple restaurants to consumers, and especially not to corporations. Prior to the wide adoption of the Internet, emerging multi-restaurant delivery services advertised in newspapers, directories, and magazines such as Entrepreneur Magazine. While a handful of small start-ups attempted to launch food delivery services, their main focus was home-delivery. The industry was fragmented, but there were leading players included Takeout Taxi, based in Arlington, Virginia, and Waiters on Wheels, in San Francisco, California. The popularity of food delivery service was based on a mutually beneficial concept for both restaurants and end users: restaurants that partnered with a delivery service typically increased revenues without incurring additional costs or facing the hassle of establishing their own base of drivers and vehicles, and consumers benefitted from using a single source that offered a variety of cuisine and speedy delivery.

The#Food#Delivery#Founders#

Brothers Michael and Anthony Caito grew up with childhood friend Matthew Martha in Buffalo, New York. Raised by similar, blue-collar families, the boys learned to "value the principles of trust and integrity," which Michael attributed to forming "the founding principles of ROTR's customer- centric business." Each of the three former Buffalonians made his way west to Orange County, California by 1989 and all three eventually enrolled in California State University, Fullerton. To support themselves during their studies, the Caito brothers worked various roles in the service industry from waiter to manager, while Matthew immersed himself in the hospitality industry working at a hotel. The Caitos gained most of their industry and customer service expertise while working at the Laguna Niguel, California location of Pick Up Stix, a popular Chinese fast-casual restaurant chain. As Anthony recalled, "I had no interest in doing anything in the restaurant aside from waiting tables, but Mike, he had that spirit in him and that drive. Before you knew it, he was Assistant Manager, working right under the owner. He was one of the two people running the place."

After reading Entrepreneur Magazine's article "How to Start a Restaurant Delivery Company" in early 1993, Matthew proposed to Anthony that the trio should build a food delivery service. As Matthew recalled, "I thought, what a great idea - I have no real money. But, I do have a car. I can easily get a mobile phone and take orders and deliver them to office buildings." Matthew and Anthony ordered a start-up kit from Entrepreneur Magazine that assisted them in creating a revenue model and partnership plan with restaurants. The duo then developed a business plan and approached Michael with the idea. Michael's initial apprehension was curbed by Anthony and Matthew's enthusiasm and willingness to take a risk. Coincidentally, Michael, who had a habit of writing goals on Post-it Notes "to create visibility and accountability for himself," had a Post-it Note from December 1992 that read: "1993 - Find an Idea for a Business." The team decided to test their idea's profitability and calculated income projections using Lotus, one of the first spreadsheet- based computer programs. Although the start-up was projected to lose money in its first few years of operation, the Caitos and Matthew remained determined and launched Restaurants on the Run in July 1993.

To fund the capital investment needed to launch the business, each partner pitched in $2,000

Case Fellows Juliana Siward and Megan Strawther prepared this case under the supervision of Steven B. Mednick, Associate Professor of Clinical Entrepreneurship and Associate Director of Marshall's Center for Global Innovation. This case was developed from field research and published sources. Cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management.

Copyright 2015 Lloyd Greif Center for Entrepreneurial Studies, Marshall School of Business, University of Southern California. For information about Greif Center cases, please contact us at g..s@marshall.usc.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted or transmitted without the permission of The Lloyd Greif Center for Entrepreneurial Studies.

Restaurants on the Run: A Founder's Journey SCG-515

using individual credit cards. While most food delivery services at the time focused on home delivery, Restaurants on the Run decided to concentrate on delivering to corporations and small businesses.

"We had a little bit of a tweak and decided to go business-to-business," Michael recalled. "The only reason for this, which had nothing to do with the fact with that we were smart enough to know that was our angle, was just that we had to work at night as waiters to fund the business. We could only pursue this during daytime hours when businesses ordered lunch." In order to support the operational needs of the business, the owners soon dropped out of college, which gave them freedom during the day to take orders and make deliveries.

Unseasoned'Entrepreneurs'

Based out of a 123 square-foot office, the ROTR team boasted a meager infrastructure of three handheld radios, two landline phones, and a hand-written order-taking system. While ROTR did not have a written mission statement, operational plan, or defined roles, the three partners agreed early on to two principles for their nascent business: first, the importance of serving the customer; and secondly, maintaining a people-oriented culture, where emphasis is on the well-being of the employees. "We didn't have the time to create a real strategy or business development plan. We were really just flying by the seat of our pants, and we just started taking orders and making money," Michael reflected. "While we didn't have the know-how, we had the grit. We had the resilience. Nothing was going to stop us."

After the new business had only received one order in the first three days, which came from a friend's law office, the founders knew they had to take action. With group consensus, Anthony slashed delivery prices from $2.99 to $0.99 and sent out flyers to local businesses. The partners figured that they could make up revenues on volume instead of profit margin. Without an established reputation, the ROTR team relied primarily on word-of-mouth and personal connections within the service industry to generate its initial orders. After two weeks in business, the phones gradually began to ring. "That second Friday we got seven or eight orders and from that point on, we used our gratuities to pay for our drivers and friends because we got busy and couldn't handle the demand," Matthew recalled. "It's not like we were making money, but we had some early exciting success. People were actually ordering and we were busy. I never had the 'this thing's not going to work' mentality."

Early#Operations#

The start-up's founders quickly realized that they would need a few extra drivers to fulfill orders, especially during the peak lunchtime crunch in Orange County. Without a formal hiring process in place, they mainly tapped into their network of friends and family members to join the ROTR team. As Matthew put it, "If you could breathe, you were hired." The operators at ROTR's office took orders and dispatched drivers, who would then make their daily deliveries shuttling from restaurants to business offices all day. When a customer paid with a credit card, the drivers would collect and hold the credit card slips to later submit them to the office for processing, which often took two to four days after the delivery transaction. Michael noted, "We had a guy that would sit in the back with a yellow notepad and document what every driver owed for every shift. This resulted in a lot of 'he-said- she-said' for credit card collections, so we installed some safes at the restaurants for drivers to drop carbon slips and cash into daily."

Customer service was everyone's goal at ROTR, but Michael focused more on keeping operational resources in line with the increasing consumer demand. ROTR typically received funds within 24 to 48 hours after a cash, check, or credit card payment was made, but the restaurant fees were not paid for another two weeks. "Cash was coming in so quickly that we had to hide it in the ceiling!" Michael exclaimed, recalling the difficulty in managing a rapidly scaling business. "Instead of taking it to the bank, we would use some money to pay ourselves and our drivers - we even gave ourselves raises sometimes." Anthony recalled, "This gave us great leeway to have a solid lifestyle as partners." While the founding trio did not track the cash flow accrued by the two-week vendor payment system, they would sit down every Sunday night and document the ceiling-stored cash, reconciling the amount with their sales receipts. Michael commented, "In a fast-growing business, sometimes, you don't have time for the right checks and balances and you do what you can with limited resources." The founding partners believed their lean approach to administration helped them focus on more immediate goals of providing exceptional customer service and growing ROTR's customer base. However, the ROTR team did pay special attention to their sales tax liabilities. When the Caito brothers first started their business, their father, who had lacked entrepreneurial experience but was known to rely heavily on his street smarts, advised them to open a separate bank account for the sales tax collected. Heeding their father's advice, the brothers kept sales tax funds in a bank down the street instead of using the office storage above their heads.

While Michael focused on internal operations, Anthony and Matthew led business development and marketing efforts and were out in the field securing new partnerships with restaurants while maintaining existing relationships. At the time, the team sourced from six major restaurants in the Irvine, California area. While it was not as challenging to convince smaller, mom-and-pop restaurants to sign on with ROTR, larger chains and name brands were more difficult to persuade. However, the larger chains added value to ROTR by providing more credibility to their new delivery service. The team knew that getting a variety of popular restaurants to sign on, as vendors would be an integral step in the evolution of ROTR from vision to emerging business.

Anthony referred to the business as a sport: "It's like golf. Every time you make a nice shot, it just makes you want to do it more and play more. It was just like that every time we got an order. This business was ours; we just wanted to keep it going. We were out there hustling."

As order flow continued on a consistent basis over the next few years, each member of the ROTR team adapted his role to the needs of the operation. Matthew played the role of visionary, sketching out many strategic priorities, while Anthony took charge on the marketing and sales initiatives. This left Michael to focus on the administrative and behind-the-scenes work in the office. Formal titles, roles, and responsibilities did not yet exist. Michael noted, "There were no egos in the beginning. We just did what we had to and sort of fell into our roles by action instead of fit." Anthony and Matthew would frequently defer responsibility to Michael, who was oldest and possessed the most management experience. Matthew remembered, "We didn't care about titles and hierarchy; we were all heads- down, trying to grow the business. But, when it came time to making decisions, we knew Mike was going to work through it and drive the decision-making. He could be vocal and aggressive at times when we had to get things done, but he had a great positive attitude and a good ability to coordinate the office and business operations."

Warming#Up#

By late 1995, business was steady for ROTR and the founders had quit their night jobs to focus their full attention on taking their venture from a state of subsistence to success. The ROTR team decided to dedicate much of its focus to securing major restaurants in the Orange County region as clients. ROTR's management began to aggressively pursue a popular restaurant chain that would Restaurants on the Run: A Founder's Journey SCG-515

specifically cater to the consumer market: California Pizza Kitchen (CPK). The ROTR team believed CPK would be pivotal in multiplying ROTR's revenues.1

The Caitos and Matthew had repeatedly been unsuccessful attempting to grab the attention of CPK's upper management in order to discuss a partnership. But even after multiple rejections, Michael stayed persistent. Michael stated, "I believed the better restaurants you get, the better customers you get. The more restaurants you get, the more customers you get." After months of getting turned down, Michael recalled spontaneously placing a call to CPK's Irvine location and finally reaching its regional manager, who, to Michael's surprise, replied with "You know what? Good timing! Let's chat!" After this crucial conversation, Michael knew that ROTR had a chance to lock up an important partner for the business. He recalled, "This was really hitting the mother lode. If you had CPK, you'd get an automatic influx of business clients and revenue from them because CPK would start referring all their customers to you for delivery. CPK was a fast growing restaurant chain, and we knew if we had a partnership with them our business would really begin to grow."

With the addition of CPK to its portfolio, ROTR gained what the management team described as "instant credibility." Without its own system of drivers, CPK's home and business deliveries in Southern California started to be serviced almost exclusively by ROTR. These same customers acquired via CPK appreciated the quality of service ROTR provided and then, in turn, ordered from other restaurants in ROTR's portfolio on other occasions. "The co-branding with CPK and the humility to know we needed to get a large brand name are what made the difference," Michael said. "If we just had 20 restaurants that people never heard of, we'd continue to make nothing." Other larger, chain restaurants caught sight of CPK's affiliation with ROTR and began to sign up for ROTR's delivery service. As Anthony recalled, "CPK's credibility and trust in ROTR made it easier to find ways of getting to the right people at other brands. With CPK on the books, I could call and immediately speak to a General Manager or Area Director or Regional Manager." Though Michael attributed the partnership with CPK to a degree of luck and persistence, the deal ultimately set ROTR on course to become a $5 million annual business by 1999.

Risk:"That'sWhatWeDo"

While Anthony and Matthew focused on ROTR's internally generated growth by managing existing vendor relations and attracting new restaurants, Michael looked into the possibility growth through acquisition. In 1999, ROTR made its first acquisition - Dine and Dash, a San Diego food delivery service that soon accounted for 10% of ROTR's revenues. This transaction was followed by the 2001 acquisition of Galloping Gourmet in Laguna Beach, adding Laguna Beach, Dana Point, Laguna Niguel, and Newport Beach to ROTR's delivery area. "It was more of an emergent, opportunistic strategy than a deliberate strategy. It just kind of happened. We found the San Diego deal and knew we wanted to keep growing and then all of a sudden, we decided to grow through acquisition," Michael declared. As Anthony recalled, "Usually, we were diving into something and didn't do a lot of research. Sometimes, it could cost us money or it could be successful. That's what we do. We're entrepreneurs. We take risks. Sometimes they're more calculated, sometimes they're not." ROTR soon began focusing on the purchase of distressed food delivery companies to augment its geographical footprint.

During this time, Matthew took over the marketing technology role. He assessed their current system's capability and concluded that outsourcing the company's technology system was not a sustainable solution for ROTR in the long-term. So Matthew and the team invested in the coding software used in the contracted-out technology sector and hired a developer. Matthew explained,

1 According to the International Directory of Company Histories, at the beginning of 1995 CPK had opened 78 restaurants in 18 states with annual revenues exceeding $120 million.

"This really took us from being handcuffed to our technology source to being able to do whatever we wanted with our consumer data and get some competitive advantage over our competitors." He began to mine their corporate data, looking at data points such as size of their corporate customers, order sizes, transaction sizes and frequency, and lead generation at particular restaurants where ROTR menus were distributed. While companies in the RDS industry did not typically employ these types of business analytics at the time, Matthew encouraged their employees to study and measure the business against the data. Anthony, who also focused on sales and marketing, would then concentrate on larger corporate accounts such as Qualcommencouraging their loyal, existing customers to refer ROTR throughout the numerous departments housed at each location. Anthony's client retention and acquisition strategy was to deliver quality service for everyone, but to also generate new business by focusing on large revenue opportunities. He reasoned, "The onesie, twosie orders are great, but we want the consistent, multiple orders for 20-30 people at once."

Blurred Lines

Over time, the three founders assumed the roles that came naturally and best-fit their personalities. While they were preoccupied with growing the business, no founder bore the official title of "Chief Executive Officer." Michael did not think establishing titles was a priority; customer and business growth were his priorities, he stated. "ROTR was growing so fast and between the three of us, there was so much work that needed to get done. We didn't need to appoint a CEO yet. It was just a land grab early on," he remarked. The founding trio had the flexibility to assume roles as drivers, operations managers, sales agents, and leaders as the situation warranted in their eyes. When asked, "Who is your boss?" most ROTR employees would say that they had three bosses.

As the business grew, it became clearer that Matthew, Anthony, and Michael were gravitating toward roles in marketing, sales, and operations, respectively. Matthew dove into books about marketing and sales effectiveness, and was especially fascinated by examples of industry pioneers such as Hallmark's rewards programs or American Airlines' frequent flyer program. "I would learn what other people were doing successfully and mimic elements of what they were doing, and how they built customer loyalty around that," Matthew described, "I was always kind of driven on the 22 Immutable Laws of Marketing [a 1993 book by Al Ries and Jack Trout] and all that stuff." Anthony focused on sales and service by taking sales calls in the call center, eventually taking lead on managing relations with vendors as well as customers. As he recalled, "I just really enjoyed talking to them and visiting customers, and the freedom of sales... it was just a natural thing for me. I found my niche initially talking to people face-to-face and selling the business-it was just exciting. I had a passion for it." While Anthony and Matthew's roles had them out in the field, Michael focused on the day-to-day, moment-to-moment operations of ROTR and orchestrated the company from the inside out. While he laid the foundation for future roles, his attention was almost entirely absorbed in the operational business details.

ROTR was scaling in size and revenue, but there were no formal coaching systems in place, performance reviews or organizational charts. Still, employees valued Michael's leadership style and approach. As Matthew and Anthony described, Michael was an "outgoing, charismatic, and inspirational leader that always cheered people on." One of ROTR's first employees, a customer service representative who eventually became a Human Resources Director, described the way most employees would categorize the company's partners:

All three have the biggest hearts and are very people focused. Family values play a very strong role in the company and there is an environment of compassion and understanding. All of them have different strengths: Anthony is the sales guy, very high energy and light hearted; Matt has a strong business acumen, is more level-headed, focused and serious; and Michael is the most vocal and visible leader... he has heart and the ability to inspire. He has integrity and values people's success.

The work environment and culture had developed naturally at ROTR, shaped mainly by the personalities and working styles of its founders. In addition to the Caitos and Matthew, the ROTR Board of Directors included John Goreman, an executive at Taco Bell who had been advising the ROTR team since 1996. The board would meet sporadically, usually once per month, and though Goreman did not have any equity in the business, he received compensation for his board role and advice. Michael appreciated the role that Goreman played as an advisor and understood the importance of external industry expertise, which he sought as ROTR matured.

By 1999, the founding trio and Board of Directors agreed that after years without official titles, clearly established executive leadership positions needed to be assigned to the Caitos and Matthew. While Anthony assumed the role of Vice President of Sales and Matthew assumed the role of Vice President of Marketing, Michael was unanimously appointed the Chief Executive Officer.

Ramping'Up:'Scaling'ROTR'in'the'21st'century'

As ROTR entered the 21st century, its owners discovered a couple key business tactics they believed would help position their company for sustainable long-term growth. Among these tactics was a system of advanced data gathering and metrics. Michael was surprised to have found early tracking and testing data from the mid-90s, which he claimed was "like looking on the walls of an ancient cave and finding coded messages." He knew the team had the right idea to begin assigning metrics to their performance with customers, but the delivery business only seriously began using Management Action Programs, Inc.'s Vital Factors in 2000-2001 to propel the business forward, create accountability, and manage performance. As Michael noted, "We were already measuring the key things we needed in our business in '96 to '97, but it wasn't as formal or structured. I'm not sure how we knew it was necessary, but we knew we needed the data because that's how we would measure service. We were literally tracking service metrics on a daily basis." This data analysis provided ROTR with insights for factors such as on-time delivery rates, accuracy of orders, and overall customer satisfaction.

Another crucial decision that the ROTR team made was to find an investor. Although the ROTR team had lost some capital on a few technological investments in the '90s, they still grossed about $5 to $6 million in annual revenues. Yet the funds coming in were not enough to fund the ongoing operations or expansion. "We were at a point where we were running out of money. I don't know how we even knew that or kept track, but we needed the money," Michael remembered. As a leader at ROTR, he was so focused on minimizing taxes and running business operations that he did not take the time to foster business relationships with potential investors or make his business bankable. Michael's priorities were to grow the business and make sure it was healthy and functioning. He had not considered networking or raising debt financing or equity capital. The same morning that a story on ROTR's success was published on the front page of the Los Angeles Times, the founders met with their CPA who connected them to a successful corporate securities attorney and business investor, Rowland Day.

Rowland's Investment

Shortly after meeting with Day, the ROTR team received an investment of $250,000 in exchange for 6.5% of the company's equity and a seat on its Board of Directors. As Michael described the arrangement, "It was a handshake type of deal. No paperwork. No due diligence. And, he gave us a quarter of a million bucks." Without asking many questions or even visiting the ROTR office, it was apparent that Day had confidence in the ROTR team as well as substantial capital funds to invest in our business.

The Caitos, Matthew, and Day agreed to meet about every 90 days, but no formal board meetings took place. Michael approached Day a few months after the initial investment, perplexed by the agreement. "I thought we had agreed on a total of $500,000-$250,000 now and $250,000 at a later pointbut Rowland didn't remember those terms and I didn't have anything documented. So, I just dropped it," Michael stated. Beyond the $250,000 they received in funding, the ROTR team believed that Day added greater value through his connections to banks and other investors along with his business acumen and perspective.

By 2001, Day and the ROTR team were meeting less frequently than the agreed upon 90-day period, and Day felt the need to voice his concerns about the business to Michael. Aside from the lack of meeting on a frequent, scheduled basis, Day also sought greater transparency from the ROTR trio and a clear analysis of the financials. Day remarked:

They didn't really understand where their company was going. The lack of perfection was fine because we learn from our mistakes, but they always told me a very high-level story, so I would hear, 'We increased the top line and are working on the margins for our bottom line,' but that tells me nothing. Let's find out why. What took place? What happened? Micro, macro, whatever it is, there are reasons that things take place. If you don't know the reason right now, that's fine too, but if you roll up your sleeves and try to understand it, you'll figure it out.

Day admired Michael's ability to excel in customer service and client care, but felt that really understanding the drivers of the business, such as key market trends and indicators, was a skill that Michael needed to master. "Intuitively, Michael knew they were in a great niche and this was going to grow," Day stated. "But being in the right place at the right time can give you a false sense of security." After Day expressed his dissatisfaction with Michael's incomplete understanding and outlook for the company, he cautioned Michael that if he were the CEO of a publicly traded company, he would be fired. The message was loud and clear. Michael was perplexed as to how he should react and what approach he should take next in running his business.

Michael's#Moment#of#Truth#

The meeting with Day left Michael surprised and humbled, but more than any other emotion, he felt confused. ROTR's success story had been featured in a variety of media outlets; the business was growing rapidly and the company was an acknowledged national leader in a rapidly growing Internet market segment. But Day had a different viewpoint. "Rowland was now telling me that I was no good," Michael thought to himself in astonishment. At this stage, Michael knew his partners were looking to him for leadership and guidance, though he still was unsure of the basis of Rowland's observation. Given Rowland's experience with multi-national corporations, did he really understand what it was like to work with limited resources? Should he take Day's criticism seriously or search for another expert opinion? What was Michael doing that would upset shareholders or venture capitalists? Was there too much focus on the top line and not enough on the margins? Where had he fallen short?

While Michael struggled internally about the right step to take next, he knew a major change would likely be coming soon. He felt that he and his company were at the brink of success and major expansion. Was Day the right type of investor and advisor to help ROTR get to the next level, or should ROTR find other prominent backers by capitalizing on its rising prominence? Should Michael and the team consider dramatic changes to their business structure, or should they continue developing the culture that had led to their rapid expansion?

Use APA citations for your research from the case study, text book as well as additional sources:Possible

Questions for discussion:

• What is the difference between being a CEO and an entrepreneur?
  • What is the significance on designing a customer service strategy?
  • Why is it important to design a service culture?
• How important is it for an entrepreneur to align strategies with the interests of stakeholders and shareholders?
• What led toROTR'sgrowth and success?
• Where do they need to improve?
• Considering the following dilemmas please answer the following questions:
  • Were Roland Day's comments to MichaelCaitovalid?
  • Is Michael the right person to lead ROTR?
  • How seriously shouldnew venture leadership take outside interests into consideration without compromising the company culture and the product?