Are Vanity Investors the Real Reason So Many NYC Restaurant Go Out of Business?

By Mike Pomranz |

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If you asked me why I think so many New York City restaurants can’t stay in business, my guess – as someone whose restaurant experience was working as a busboy just long enough to realize I needed to find a different job – would be supply and demand. Yes, NYC has a lot of people, but not nearly enough to support the tens of thousands of restaurants in the city, especially a city where residents can be notoriously fickle.

Gary Sernovitz agrees with me, but with an important caveat that I had never considered. In a recently published piece in the New Yorker, the writer and private-equity firm managing director suggests part of the problem is that restaurants are too easy to open in New York. It’s a double-take-worthy theory, but once you give it that second look, it might hold some water.

Sernovitz admits that he, as many people flush with cash from working in finance are tempted to do, invested in a restaurant despite the fact that, as he openly admits, he knew nothing “about how the restaurant business in New York City works.” He humbly decided that the problem is investors like him. “I’ve come to conclude that the restaurants New York needs are doomed, financially, to fail,” he writes. “That’s because amateur capital backed by magical thinking and a desire for fun distorts the economics for everyone.”

Related: IS NEW YORK'S WATER REALLY THE SECRET TO THE BEST BAGELS AND PIZZA?

That factor, more than the city’s notoriously high rents or even the generally tight margins and rough economics of the restaurant biz, constitutes a unique problem for New York, according to Sernovitz. “If restaurants had to be good business ideas, and attract sophisticated investors who mercilessly demanded a profit, there would be fewer restaurants,” he explains. Of course, there’s an unfortunate side to that world as well, as he states. “They would be less cool. The food would be less good.”

True, this concept primarily speaks to a certain kind of restaurant: those that need or want vanity investors. Sernovitz admits that other business models like chains or spots backed by a celebrity chef are slightly more immune to this problem. Still, Sernovitz’s theory has definitely given me food for thought – along with some new knowledge about NYC’s restaurant business. Hey, maybe it’s even enough knowledge that if I ever become flush with cash, I now finally know enough to invest in a restaurant!

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