And they say there isn't a bubble. This is a company operating in an already crowded space (aren't there like 50 companies doing local food delivery now?), with no proof of customer base, doing something that is literally more work than walking down to the supermarket and picking up a pack of precooked chicken, collecting millions.
Perhaps calling is a 'rich person's bubble' would be a better way of phrasing it. I don't think Munchery has a chance in hell of ever going public and getting retail investors snared.
I think the more interesting aspect of this story is similar to the kinds of armchair quarterbacking that goes on here, but with people who have investment funds.
So the 'Food as a Service' segment has had some recent traction. There are lots of new companies pursuing it from a variety of angles. The previous standard might be Marks & Spence a grocery chain in the UK which provided much of their product as pre-packaged ready (or nearly ready) to eat meals, this was picked up by folks like Trader Joes in the US and some other higher end markets.
The business story is pretty simple, on the side of people with no disposable income they shop at big box stores and make everything at home, at the really high end the food preparation is outsourced to favored restaurants and in house cooking staff. But in the upper middle where people don't want to "waste time" cooking, and don't want to "waste money" eating out, you have window which you can sell too. And yes, it is very similar to the window that opened up during the dot com boom, people with a bunch of excess cash and little discipline looking to apply it to making their life "better"[1].
The problem is that 'pre-preparing food' is both straight forward and difficult to protect with IP. So we have lots of people jumping in, one or two of which actually have the potential to succeed.[2]
If you're an investor and you are sitting on a pile of cash (and estimates range up to a trillion dollars of cash sitting around doing nothing) you look at the outcomes.
0) You do nothing and sit on your cash (the null hypothesis)
1) You invest and lose everything (the complete fail)
2) You invest in something and get a fraction of a return
3) You invest with a 1:1 return
4) You invest and get a 1:1+ return.
Standard stuff right? So if you can buy into the idea that this market will exist long term, then you know that the way it will come to pass is that several companies will start, some leaders will emerge, they will buy up the losers at a discount (option #2), they merge with mid-tier players (option #2), they emerge to lead the market (#3), or they end up winning the market (option #4). So you "buy in" by investing on one of the players. You have your quants come up with a model which can posit an expected rate of return for a given risk profile, and you dump your money in. Ok so still with me?
Now there aren't too many "new things" so there are a lot of players but not a lot of horses to bet on. That leads to pressure to push the model and consider them optimistically so that you have a chance of being in the race at the finish line. That pushes up valuations, and makes life difficult for founders[3].
If this goes pop (and it will) various VC firms will find it hard to raise a new fund, they will become the 'former VC' (there are quite a few of them). But nobody really cries crocodile tears over a VC having to take a pay cut from $500,000 a year to just $400,000 a year (a 20% cut mind you!).
[1] Not going to digress into defining better but these companies are empirical evidence of a one definition.
[2] Their success is going to depend on the continued largess of this upper middle mostly single or couples with no kids.
[3] Too much money chasing you can lead to some seriously bad decisions as a startup.
What are the potential returns to "winning a market" that has no IP protections, no barriers to entry, and a host of substitutes? I would argue that the industry characteristics suggest that any winners in this market will have low margins and few profits. I suspect you are right about the current supply/demand mix for investments driving unrealistic optimism on the part of VCs.
The financial return of being the leader in a market is significant. Consider that grocery stores are not IP protected and yet Safeway has done well. The trick being that you have to have operational expertise rather than technical expertise. The people who will win in the pre-prepared food markets will do so by figuring out the systems for putting the best product possible into the hands of consumers with the least cost to deliver. Then as the market grows they can under cut their competitors and later buy them to increase their market share. Making 2 - 5% margins is fine if you manage the volume without having to scale your costs.
As a former early Munchery (and Airbnb) employee, you sound like the worst type of arm chair quarterback – hopelessly wrong.
Munchery was first mover in the space and is an order of magnitude bigger than most in the space, and already doing volume that would blow your mind. Original investors in an A round don't reup to lead the B & C rounds unless there is some serious "proof" of customer base.
You could say the same thing for any "on-demand" startup out there. It's this kind of intellectual laziness ("It failed in the past so it couldn't possibly succeed now.") that prevented electric cars from happening sooner.
Some on-demand startups will work out magnificently and many others will not because the economics just don't make sense. In the case of Munchery, I think their valuation is very reasonable when you consider it's an order of magnitude less than that of one of their indirect competitors Blue Apron who is seeking a $2 billion valuation (as mentioned in the article).
11 comments
[ 3.9 ms ] story [ 39.3 ms ] threadWhat are you basing this on?
> is literally more work than walking down to the supermarket and picking up a pack of precooked chicken
Have you used Munchery before? If so, how exactly is it more work?
I think the more interesting aspect of this story is similar to the kinds of armchair quarterbacking that goes on here, but with people who have investment funds.
So the 'Food as a Service' segment has had some recent traction. There are lots of new companies pursuing it from a variety of angles. The previous standard might be Marks & Spence a grocery chain in the UK which provided much of their product as pre-packaged ready (or nearly ready) to eat meals, this was picked up by folks like Trader Joes in the US and some other higher end markets.
The business story is pretty simple, on the side of people with no disposable income they shop at big box stores and make everything at home, at the really high end the food preparation is outsourced to favored restaurants and in house cooking staff. But in the upper middle where people don't want to "waste time" cooking, and don't want to "waste money" eating out, you have window which you can sell too. And yes, it is very similar to the window that opened up during the dot com boom, people with a bunch of excess cash and little discipline looking to apply it to making their life "better"[1].
The problem is that 'pre-preparing food' is both straight forward and difficult to protect with IP. So we have lots of people jumping in, one or two of which actually have the potential to succeed.[2]
If you're an investor and you are sitting on a pile of cash (and estimates range up to a trillion dollars of cash sitting around doing nothing) you look at the outcomes.
0) You do nothing and sit on your cash (the null hypothesis)
1) You invest and lose everything (the complete fail)
2) You invest in something and get a fraction of a return
3) You invest with a 1:1 return
4) You invest and get a 1:1+ return.
Standard stuff right? So if you can buy into the idea that this market will exist long term, then you know that the way it will come to pass is that several companies will start, some leaders will emerge, they will buy up the losers at a discount (option #2), they merge with mid-tier players (option #2), they emerge to lead the market (#3), or they end up winning the market (option #4). So you "buy in" by investing on one of the players. You have your quants come up with a model which can posit an expected rate of return for a given risk profile, and you dump your money in. Ok so still with me?
Now there aren't too many "new things" so there are a lot of players but not a lot of horses to bet on. That leads to pressure to push the model and consider them optimistically so that you have a chance of being in the race at the finish line. That pushes up valuations, and makes life difficult for founders[3].
If this goes pop (and it will) various VC firms will find it hard to raise a new fund, they will become the 'former VC' (there are quite a few of them). But nobody really cries crocodile tears over a VC having to take a pay cut from $500,000 a year to just $400,000 a year (a 20% cut mind you!).
[1] Not going to digress into defining better but these companies are empirical evidence of a one definition.
[2] Their success is going to depend on the continued largess of this upper middle mostly single or couples with no kids.
[3] Too much money chasing you can lead to some seriously bad decisions as a startup.
Munchery was first mover in the space and is an order of magnitude bigger than most in the space, and already doing volume that would blow your mind. Original investors in an A round don't reup to lead the B & C rounds unless there is some serious "proof" of customer base.
Some on-demand startups will work out magnificently and many others will not because the economics just don't make sense. In the case of Munchery, I think their valuation is very reasonable when you consider it's an order of magnitude less than that of one of their indirect competitors Blue Apron who is seeking a $2 billion valuation (as mentioned in the article).
Prices are up, food quality, variety and portions are down.
If someone from Munchery is reading this: get your st together, please. I don't mind paying more, but QA on the food needs a lot of improvement.