My biggest mistake: Tim McDonald, co-founder of Fonda

Six years after launching their first restaurant, Fonda Mexican co-founders Tim McDonald and David Youl found themselves in a tricky situation. The Melbourne-founded business had just opened its eighth restaurant, and first interstate, in Bondi, Sydney. Until that point Fonda had only experienced rapid growth — now it was starting to plateau.

The mistake

“It wasn’t an overnight thing,” Tim McDonald said.

“It was a slow burn, boil the frog type of issue that we. But it took us 18 months to realise why our growth had stopped.”

That plateau, McDonald says, was the result of the business failing to realise it had hit the limit of its “startup mode”. The mistake was not transforming quickly enough from a nimble, entrepreneurial startup, into a more structured, disciplined business.

“We were as big as we could be in the manner in which we were running the business. We had hit our limit as far as our systems and processes,” McDonald said.

“Anyone can go out there and sign leases. To scale successfully and scale profitability, it requires a more rigid, organised backbone and architecture of the business than we previously had.”

The context

McDonald, a lawyer, and Youl, a firefighter, launched Fonda in 2011, after struggling to find Mexican food that met their expectations in Melbourne. The first restaurant opened on Swan Street in Richmond, and today it has nine restaurants across Victoria and New South Wales.

McDonald served as Fonda’s CEO for the first six years.

The impact

Fonda’s founding team realised they had a problem on their hands when the business KPIs started to flatline after launching its eighth restaurant and first in NSW.

“We’d hit a ceiling when Bondi opened,” McDonald said.

“It wasn’t profitable, there were a lot of operational headaches. A lot of staff turnover and inconsistency in the product.

“We had negative sales growth. Profit wasn’t growing. Customer satisfaction was going down. Staff retention was going down.

“It didn’t suggest the business was imploding, you just look at any of those KPIs that I just mentioned and they flatlined after being really positive and having an upwards trajectory for five or six years.

“But you can also feel it, when you’re in a small business. Particularly founders. We were pretty real about where it was going.

“A parent usually knows if their child is sick and is more in tune with their child’s health than a qualified doctor. It’s very similar with business. While yes you can look at your KPIs. Your gut feel will often tell you how things are growing. It was pretty clear to us we’d hit that ceiling.”

The fix

While Fonda’s co-founders understood a change was required and the businesses would benefit from more structure, they weren’t exactly sure where to start.

“Moving from that fast growing small startup, to more of a structured management team, that’s a difficult transition, because the business has never done it before,” McDonald said.

McDonald decided to step down as CEO and the business embarked on a range of projects — a new point-of-sale system, a new inventory management solution, different accountants. All moves which were designed to place the business in a better position to scale.

“I’d like to say as founders we have a level of self-awareness and our egos in check. We were commercial enough and aware enough that we knew the first thing that needed to happen was a change of leadership,” McDonald said.

“Knowing what my strengths and weaknesses are, it was time for a less entrepreneurial leader of the business, and a more management, process equipped leader.”

The lesson

One of the biggest takeaways from this process is the importance of having a chairman. McDonald says as Fonda sought out new leaders to guide it down the path to becoming a more structured, disciplined business, it wasn’t easy.

“That’s hard to find,” he said.

“It’s very difficult to work for and report into the founders of a business, particularly when a founder has been running it. We had some great people leading the business for various points in time, but neither of these people worked out over the long term.”

So two years after diagnosing the problem, Fonda appointed a chairman to help find and hold accountable an appropriate leader.

“I probably would have appointed a chairman earlier on in hindsight that’s been a really positive thing,” McDonald said.

“We really needed a chairman before we found a CEO. It helps people clearly delineate shareholder, from founder, from CEO, from director. If a chairman is playing that truly independent conductor role, they can really help clearly delineate the different hats that people wear, and I see a lot of issues arise from confusion among owners, founders, management when they’re wearing those multiple hats.”