Nick Kokonas & Maximizing Your Upside

Alinea (Chicago)

I listened to a Tim Ferriss Podcast the other day where he featured an interesting individual by the name of Nick Kokonas. Nick has a philosophy degree and is the founder of a derivatives trading firm, Tock (a ticketing system for restaurants) and the co-owner of a few unconventional and spectacular restaurants (Alinea, Next, and the Aviary).

He’s also published a few books along the way as well.

We’ll get started by understanding his background and then quickly jumping into the key lessons.

A Brief Story of Kokonas.

We roll back time to the pre 2000’s.

We see a young Nick Kokonas graduating from college and finding that he has a few choices to make. He thinks about law school and realizes that’s not for him.

One day he’s going for a walk and stumbles upon a friend from college.

This old acquaintance from college was not the studious type, he “didn’t try as hard in school”. Nick found out that this friend just purchased a whole block and was a real estate investor and landlord. He was surprised, he wondered how he got to where he was and Nick realized that this was because he was a very successful trader at the Chicago Mercantile Exchange.

Nick then faked his resume and got a job as a clerk at the Chicago Merc and went on to find a mentor. He worked with this mentor for a year, learned a lot, left and started his own firm. He hired people who he classified as “corporate refugees”, people who preferred independence over working for someone else and did that for ten years.

*Screening for people who preferred independence over working for someone else would have been interesting. That would mean that these individuals are self motivated, hard-working, very smart and/or coachable. The assumption would have been that these individuals have specific goals in mind and they see that this is a vehicle to get to their goals.

Another underlying aspect is that they will learn quickly and do what it takes to get where they want to be.

Working with Nick would have been more about having a vehicle to work with someone as opposed to work for, it wouldn’t be about flexibility because options trading would have been very intense and time consuming. They would have had to be dedicated to learning and growing at a rapid pace.

To Nick, trading options was about taking “hundreds of decisions per day and pretending like it’s a big decision tree. Any decision, if you’re really good has a 48% chance of being wrong. So, you have to be really good at quickly making decisions and being comfortable knowing that you will be wrong while understanding that overall you will be more right than you are wrong.”

A corollary to the above is that he doesn’t look at things as success or failure, instead he looks at situations by asking if his pattern of decisions were correct. He looks at the basics and figures out why he made decisions in the way he did and refined them if they weren’t up to par and didn’t yield the right results.

Understand parallels, logic, and always ask why.

If you understand the basics of why a thing works, then you can more quickly know where to add significant value, if you are only looking at it from a superficial lens, you will find less opportunities because you don’t know what to look for.

Most things have similar basics and logic, if you understand that, you can find the parallels between different sectors and industries.

To minimize risk, study as much as you can about the situation or field you are entering, know where you will be able to provide and extract value and then proceed from there.

Everything begins with asking about the why.

It’s All About Asymmetric Risk Taking and Information

“A good friend told me that he looked at his business risks this way…. if you feel fine when you go to sleep and wake up, you are not taking enough risk. If you are throwing up consistently, you are taking too much risk. A nice, even nausea most of the time is just right. Generally speaking, this risk feels just about right.” -Nick Kokonas

Nick Kokonas looks for places that has opaque information that should be obvious and extracts value from that space. He went into this line of thinking through a series of steps such as studying philosophy and trading options.

He saw that publishing was opaque and he went into the business. Everyone told him that publishing wouldn’t make a lot of money but he went into it and found out that there’s money to be made.

Kokonas and The Restaurant Industry

Next (Chicago, IL)

He saw that people would say don’t run a restaurant, stating that there’s no money in it while opening up three or four more. He wondered why they would go on to open three or four more restaurants if they didn’t see any money in restaurant industry. He then went into the restaurant industry, starting with business plan for Alinea and then adding a couple more restaurants to his portfolio.

Nick did his due diligence for the restaurant with Chef Achatz, he trusted in Chef Achatz and his past work at Trio and other places (Chef Grant Achatz was involved in the industry since he was a teenager) to be able to know that he would able to provide a compelling experience through and through. For them to succeed, Nick had to run through the numbers with Chef Achatz and understand why restaurants did things the way they did.

They were also involved in the restaurant community, Nick participated on restaurant forums such as Egullet, and went to various premium restaurants across the world to be able to compare and contrast quality.

“Meeting with Grant the person, not “Chef Grant”, let me know that he was savvy about the business side of restaurants — he was involved far more than a typical chef. In fact, he was pragmatic and willing to listen to business considerations. I would not have begun this project with him, or allowed it to go this far, if I did not consider this a solid investment money wise. In addition, there is no way that I would pitch this to investors if I did not feel confident myself. I am solidly in the same position that they are. Though the other investors very much believe in Grant’s vision and enjoy his cuisine, ultimately they would not have invested if they did not believe in the business plan.” — Nick Kokonas

Now, all this is great but I was wondering where really was the asymmetric risk taking in this first deal? How did they figure out the marketing and other key aspects of awareness that would lead to the minimization of risk?

Simple.

As noted above, they did their due diligence and both of them had successes in their respective fields.

Taken from that lens it would seem that Alinea was minimal risk. But why?

Chef Achatz was working at Trio, a renowned restaurant in Chicago at the time. He had already demonstrated his expertise and had strong potential. Betting on Alinea was saying that Chef Achatz could replicate his experience at Trio and do an even better job because he was in control of it from the ground up. This meant that the product (Chef Achatz cuisine creations) was great.

The client list was already present, the customer base of Trio and other similar restaurants in the Chicago area. The assumption being that Chef Achatz was a brand, where he went (within reason) loyal clients would follow.

Trio (the prior restaurant Chef Achatz worked at) was a successful business, it was favored by clients and esteemed experts, and it made financial and culinary sense. Move that expertise over to Alinea, dive a little deeper in the set up and growth should up and toward the right.

Nick and Chef Achatz calculated their risk correctly, they did find an asymmetric risk opportunity, they were able to find 3x+ more upside than their downside.

The vast majority of people are not 100% committed to whatever they are doing. Be all in with the very few things you do and capture the most value.