March 5, 2019
After several failed attempts to find a buyer and abruptly suspending operations in January, the San Francisco-based food delivery business has filed for Chapter 11 bankruptcy protection.
James Beriker, who became CEO and joined the company’s board in late 2016, has cited similar failed food startups and indicated that « making and delivering freshly prepared food directly to consumers proved not to be a sustainable business model, » per the 17-page declaration filed with the San Francisco division of the US Bankruptcy Court last week.
Munchery was co-founded in 2011 by Tri Tran and Conrad Chu, who departed the company in January 2017 after the business completed a layoff that reduced the number of employees in its San Francisco office to fewer than 50.
After its inception, the company expanded to Seattle in 2014, and New York and Los Angeles in 2015. It has raised around $120 million in total VC funding from backers including Menlo Ventures, Sherpa Capital and E-Ventures. Munchery reached a $300 million valuation in 2015, which then nosedived to $65 million in 2017 after the business raised $5 million as part of a recapitalization strategy, per Bloomberg.
The business is now liable for $28.3 million in secured debt to its lenders and $6 million more in unsecured debt—part of which is owed to former customers who have gift card balances.
What went wrong?
Munchery’s original strategy was to create a platform that enabled local chefs to make and sell fresh meals directly to customers through the company’s website and mobile apps, with Munchery paying for the costs associated with kitchen operations, ingredients and supplies, marketing and taking orders. Eventually, the company eliminated its partnerships with chefs and took over total responsibility for preparing, selling and delivering meals directly to customers. As the startup grew, it launched its meal-kit business in 2015.
Then, the trouble seems to have begun. Due to the availability of VC funding and low-cost debt, the company began to expand too quickly in its earlier years before it had established a scalable business model, per the bankruptcy filing. Realizing that a change needed to be made, the business conducted research and analysis in early 2017 that helped it reduce EBITDA losses by 49% and marketing spend by 59% at the end of that year. Those improvements evidently came at a cost to Munchery’s employees, however, as significant layoffs and the co-founders’ departures took place that same year.
Munchery’s business model also « relied heavily on the ability to attract new customers, » per the filing. The company utilized promotional offers to keep the ship afloat for awhile, but it was hard to retain customers, especially with an increasing amount of competition from other similar meal-kit startups including Blue Apron, HelloFresh and Plated, and food delivery businesses such as Door Dash, Postmates and GrubHub.
The filing also cites Blue Apron’s IPO in 2017 as one of the reasons for Munchery’s demise, indicating that Blue Apron’s reporting of its customer acquisition costs, loss of enterprise value and other metrics resulted in a negative impact on access to financing for startups in the food delivery business.
By May 2018, Munchery had shut down operations of its Los Angeles, Seattle and New York facilities. A few months later, it began selling its branded products at several Costcoand Amazon Go locations, but failed to achieve gross margin targets. In January of this year, it announced plans to close down.
Joining the club
The foodtech industry as a whole is not a stranger to shutdowns and wasted VC funding.
Meal delivery startup SpoonRocket shut down operations in 2016 after raising more than $60 million in VC funding from firms such as General Catalyst Partners, FundersClub and Base Ventures. It was later acquired by Latin American food delivery startup iFood.
New York-based Maple called it quits in May 2017 after raising some $30 million from investors including Thrive Capital and Primary Venture Partners. Dinner Lab, Kitchit and Take Eat Easy are also on the list of food-related startups that have folded over the last few years. And Blue Apron, one of the first entrants into the nascent industry, went public in 2017 but has yet to turn a profit, though it expects to do so sometime this year, per reports.