In the end, Munchery taught all startups a valuable lesson: Make sure you have a profitable business model before expanding quickly.
— Danni Santana
Food delivery startup Munchery’s employees were suddenly summoned to a staff meeting on Monday in the company’s central kitchen in South San Francisco. There, with security guards standing nearby, the company’s chief executive officer, James Beriker, announced to the hundred-some employees present that the business was shutting down immediately. This would be their last day. Final paychecks would be distributed by hand. There would be no severance. Some people cried.
Munchery was once a high-flying company, raising at least $120 million to bring freshly made meals to customers, and reaching a valuation of $300 million. But this week, it fired some 250 people and delivered its last meal, becoming the latest venture capital-backed delivery company to cease operations.
According to two people who were at the meeting on Monday, Beriker told employees to leave behind any company property, including the hundreds of meals that they had just finished preparing. Both people asked not to be identified because the gathering was private. The CEO said that everything left was now the property of the bank. (Beriker said in an e-mail that the final meals had been delivered and the startup had donated what was left over.)
Munchery’s decision to cease operations on Monday came as a surprise to many employees. Some of them had been busy prepping meals ahead of the announcement. But the warning signs had been clear for a while: There had been calls from vendors demanding to be paid, one of the people said. A company forklift was repossessed. And the startup had half a year earlier shut down service in several cities.
On social media and in a lawsuit, suppliers have claimed Munchery owes them tens of thousands of dollars. And the state of Delaware, where Munchery is incorporated, says the company has yet to pay $143,429.63 in overdue taxes, according to a page on its website.
The news of Munchery’s demise arrived abruptly, employees said, but in another light, it was a blowup years in the making.
Munchery was founded in 2010, just as the instant-gratification economy began to take off, driven by an increase in the number of independent contractors following the financial crisis. The startup raised money from Menlo Ventures, Sherpa Capital and other investors. But by 2016, it was struggling. Bloomberg reported that hundreds of thousands of Munchery’s meals had gone unsold. Some were donated while others went to waste and were thrown away. Bloomberg also reported that Munchery was losing as much as $5 million a month.
Munchery was far from the only company in the industry to stumble. Food delivery startups have largely split into two groups: Those with hundreds of millions in investor money, and those without it. Last year saw new funding for a few formidable players—among them Instacart Inc., DoorDash Inc. and Uber Technologies Inc.—but there are other companies that raised millions only to implode. The food delivery startup graveyard is filled with names like SpoonRocket, Maple and Sprig. And early industry poster child Blue Apron Holdings Inc. has cratered in the public markets.
While many startups manage to lose money and still stay afloat with investor cash, Munchery had significant trouble keeping costs down. The company invested in expensive kitchens and expanded to multiple states before it had a proven business model—a strategy that multiplied its costs.
As Munchery tried to stabilize itself, it cycled through both strategies and executives. It started out delivering cooked meals, later tacking on a meal-kit delivery business and a subscription service. In late 2016, it replaced its co-founder and CEO, Tri Tran, with Beriker, who had been the CEO of a job search site called Simply Hired.
Beriker cut employees soon after joining, and the company’s founders left its board. Investor Jeffrey Housenbold stepped off the board in February 2017 and then led a $535 million investment in DoorDash the following year, after joining SoftBank Group Corp.’s Vision Fund as managing partner.
Meanwhile, two venture capitalists who led investments in Munchery both parted ways with their respective venture capital firms: Pravin Vazirani has departed from Menlo Ventures while Shervin Pishevar, a Sherpa Capital co-founder, left the firm amid allegations of sexual misconduct.
As the company’s predicament worsened, Beriker’s strategy was to cut costs while trying to find a buyer, according two people familiar with the matter, both of whom asked not to be identified because the discussions were private. But Beriker wasn’t able to find an acquirer before the company’s debts became too cumbersome, they said. The startup’s kitchens and other assets will now likely be sold to help pay back its debts, one of the people said.
In an e-mail, Beriker said the company “got very close to a long-term sustainable business,” but couldn’t keep up with its “early aggressive expansion strategy,” the fierce competition in the industry and the “extremely high cost” of Bay Area salaries. “Ultimately our investors and the board could no longer rationalize financing a business model that could not both grow and be profitable,” he said. “It was a very difficult decision.”Tran, Munchery’s co-founder, whose compelling story of immigrating to the U.S. from Vietnam helped draw attention to the company, said he was sad to see it shutting down. “Obviously we were not a utopia where we did not make mistakes,” Tran said. But he added that the company helped prove that there was demand for the service. “I feel like we trailblazed that and we proved that people want this,” he said.
The sudden end to Munchery’s business, rather than a gradual fading away, unsettled employees and customers alike. The company had been selling gift cards at least through the holidays. Beriker said Munchery is currently “in the process of responding to customer requests.” In an e-mail, he wrote, “We have suspended our operations, not filed for bankruptcy” and that, now without employees, “we are currently considering the appropriate process to pay our creditors and wind down the company.”
Liliana Sirotzky, a new mother, had recently received a $550 Munchery gift card from friends. On Tuesday, she got an e-mail from the startup: “Today, with a heavy heart, we’re reaching out to announce that Munchery is closing its doors and ending operations effective immediately.” The closure is “such a shame,” Sirotzky said. She’s still waiting to hear back about her refund.
©2019 Bloomberg L.P.