
Munchery Valued at About $300M Amid Food Fight - seventyhorses
http://blogs.wsj.com/digits/2015/05/22/munchery-valued-at-about-300-million-amid-food-fight
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jbrad7354
Munchery has gone downhill in the last 3 or so months.

Prices are up, food quality, variety and portions are down.

If someone from Munchery is reading this: get your s __t together, please. I
don 't mind paying more, but QA on the food needs a lot of improvement.

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m3talridl3y
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.

~~~
ChuckMcM
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.

~~~
ashurbanipal
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.

~~~
ChuckMcM
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.

