
Blue Apron May Need to Raise More Money Soon After Shrunken IPO - kgwgk
https://www.bloomberg.com/news/articles/2017-06-29/blue-apron-may-need-to-raise-more-money-soon-after-shrunken-ipo
======
aresant
We are in an age of the "hurry let's IPO before they realize our customer
acquisition costs are unsustainable" IPO.

Take Blue Apron, for instance.

They stated their blended Cost Per Customer is $94 in their prospectus, this #
has been parroted all over the place.

This little piece of "hope the Analysts dont dig in" masks their most recent
quarter costs which exploded to $460 per customer. (1)

This is a classic, groupon-like example of somebody figuring out a really
profitable niche that's easily duplicate and relies almost entirely on paid
media to drive acquisition.

The efficiency and sheer scale of todays' online advertising market means that
if you're armed with a shit ton of cash you can buy your way into public-
market growth.

Sustainable it is not.

No wonder they don't bother reporting a pesky little detail like "churn" in
their prospectus (2)

I wonder how much longer companies will be able to get away with this game.

(1) [https://www.recode.net/2017/6/1/15727182/blue-apron-
ipo-s1-a...](https://www.recode.net/2017/6/1/15727182/blue-apron-
ipo-s1-analysis-customer-acquisition-marketing-churn)

(2) [https://www.forbes.com/sites/neilstern/2017/06/05/meal-
prep-...](https://www.forbes.com/sites/neilstern/2017/06/05/meal-prep-pioneer-
blue-apron-preps-for-an-ipo/#760d979313ef)

~~~
Mizza
Even $94 seems high to me, but $460?!

I don't have any context for those figures though, does anybody know of a
common cost per customer acquisition across industries/products? Maybe my
intuition as a humble programmer is way off, but that seems incredibly high.

~~~
eldavido
To throw some actual _data_ into this conversation:

From the S-1, this is a 68% COGS business, meaning their unit margins are 32%.
You can debate whether some of their opex belongs above or below the line, but
let's assume the 32% number is baseline credible.

The business had 4.1 orders/customer last quarter with an average order value
of $57.23, meaning 73.21 of gross profit per customer. That means they recoup
their marketing spend in 6 quarters.

The big questions, in my mind, are (1) will people continue to be customers
after a period of time and (2) will CAC stay the same, rise, or fall? I think
there's more room for disagreement here than people admit. I haven't looked
too closely at their IPO pricing, but there is some amount I would pay for a
share of stock in this company - it's >$0. I'm just not sure how that number
compares to the current share price.

~~~
jamesash
From yesterday WSJ: "Daniel McCarthy, a professor of marketing at Emory
University, analyzed Blue Apron’s numbers and estimated that roughly 60% of
customers stop using the service after six months."
[https://www.wsj.com/articles/blue-apron-chops-its-ipo-
price-...](https://www.wsj.com/articles/blue-apron-chops-its-ipo-price-
range-1498652104)

~~~
naravara
It makes sense. My girlfriend and I have been doing it for about a month. We
like the variety, the sense of surprise, and the ingredients are actually
fresher than most of the produce at our grocery stores so the price per meal
is almost worth it. (Though we'd prefer bringing it down to about $7 per
rather than $10.

Where the value falls down is in how much of a time sink it is. These meals
take a fair amount of prep, and in exchange for all that time you only get two
meals.

When I cook on my own I usually batch enough to have at least another 2-3
meals worth of leftovers. If they set it up as a channel for weekly meal prep
rather than 3 fun new recipes to try we'd be much more inclined to stick with
it, but as it is it's just too much work for busy people to do every week.

~~~
jaggederest
It's funny because the difference between their current prices and the price
people would prefer to pay is exactly their margins, per above.

~~~
naravara
That is pretty funny.

If they provided larger meal sizes it would probably come closer. They'd be
able to provide you one meal's type of food (less variety, fewer things to
measure, and fewer types of ingredients = easier supply chain management) and
you could get 5 or so meals out of one cooking session's worth of prep.

It probably still wouldn't come down to $7. But I assume there are people more
willing to pay than me out there who would be happy with it.

~~~
curun1r
I know I'd do it if I could lower the per-meal cost by buying more of the same
thing. I typically do all my prep work for a whole week of meals on Sunday
night so that cooking each night takes 10-20 min. I'd pay for a Blue Apron
type service that saved me that work and the trip to the store. Plus, it would
be somewhat more environmentally sustainable to ship a week's worth of food
instead of just 2 meals.

But Blue Apron, as it is now, isn't cheaper or easier than what I do now and
it's a nightmare of wasted packaging.

------
ChuckMcM
Congratulations on getting to the IPO, that is a huge amount of work and worth
celebrating.

That said, it pretty much defines squeaking through the exit. Interested to
read the reorganization they did last year in the S-1 [1] presumably to
normalize all of the various rights clauses from previous funding rounds and
to dump some otherwise undesirable baggage on what was left, aka "Opco". That
they had a 1:10 and 1:5 splits on their early stock and have not done a
reverse split prior to the IPO suggests the employees will do ok, assuming
they can sell their stock at some point. It seems healthier than the
Silverspring Networks IPO (SSNI) which was anemic at best and just got worse
over time.

Let's hope that they keep their expenses in line and can crack the nut of
acquiring new customers more cheaply than their competitors.

[1]
[https://www.sec.gov/Archives/edgar/data/1701114/000104746917...](https://www.sec.gov/Archives/edgar/data/1701114/000104746917003765/a2232259zs-1.htm)

~~~
benmanns
Why would a reverse split affect employees? Is it only in the case that an
employee thinks:

• I have 10,000 shares

• GOOG is $1,000

• We're going to be the next GOOG

• 10,000 * $1,000

• I'm worth $10m

I don't see how anything related to % of ownership or intrinsic value would
change with a reverse split.

~~~
ChuckMcM
It is simpler than that. If you have 50,000 share option of a tradeable stock
and it goes up $1[1] you feel great you just made $50,000! If just prior to
the IPO your company does a reverse 50:1 split and you now have options for
1,000 shares of stock and it goes up $1 you, gee, that's nice and all but
really it isn't enough to get a new Macbook Pro.

The other thing that happens is your strike price goes up in proportion. So if
it cost you $1/share to exercise your 50,000 share option its going to cost
you $50 a share to exercise your 1,000 share option.

[1] of course it has to be above water.

~~~
harryh
Ya, but if a share of stock was going to go up $1 before a reverse 50:1 split
it would go up $50 after the split.

Splits are financially meaningless. They're just done to keep the per share
price in the range of what people consider "normal."

~~~
ChuckMcM
It is the context that is important here, and the context is 'startup
transitioning from privately held to publicly traded'. And the point of view
is 'non-founder' employee with incentive stock options.

Prior to being publicly traded, stock options at a start up are essentially
worthless. If you exercise them you have to pay tax on them, and generally if
you did exercise them nobody would buy them from you. So worthless. And while
it is perfectly fun to say "everyone says" or "at the last raise" this company
is worth $x and my share of that would be $y, if you've been around you know
that _that_ number is also grossly inaccurate. Because really there are things
like liquidation preferences, assignment to creditors, and all sorts of other
legal maneuvers that do one thing, they convert unvested incentive stock
options for common stock into a value slightly less than the recycled paper
they are printed on.

So when you transition from the realm of 'privately held' to 'publicly
traded', two magical things happen. First, _all_ shares convert to common
stock (although possibly separate classes of stock), and you can sell those
shares that you either already own, or you become the owner of by paying the
'strike' price on your vested options and taking possession of them.

Always, in that last moment, and Blue Apron was no exception, as the cap table
is re-balanced and the company prepares to be a 'real' publicly traded entity,
employee stock options get dealt with. In part because there is going to be a
new option pool allocated for giving out to new employees or refreshing grants
of existing employees, and because sometimes the bankers taking the company
make it part of their terms and conditions in order to take the company
public.

The grand result, the finale if you will, is that on the day the company you
work for goes public, you get crystal clarity on exactly how many shares you
have options to buy, when you will be able to buy them, and what you will pay
for them to buy them. And if that day comes, and on the other side of the
opening bell of the NYSE or NASDAQ that day you have more than 10,000 shares
in options, with a strike price that is lower than the current price, there is
a big psychological pump attached to your brain.

I've seen it happen to literally hundreds of my peers as they and I made that
switch. And now, while watching the ticker tape on CNBC or the headline news,
occasionally the new ticker symbol for your company will go across the bottom
with either a +nn or -nn next to it for going up or down in price. And _if_
you own at least 10,000 shares in options it is like watching a car appear and
disappear in your future as it goes up and down, or a house down payment, or a
college fund. It is potential wealth made actual right in front of your eyes
and sometimes it is impossible to take your eye off the ticker.

And since movements of a few dollars is common in freshly traded companies it
can drive you nuts. During the dot.com days a friend of mine and I would joke
about being "up two Porsche's today", "oops, we've lost about a Porsche and a
half today" where we had chosen $50,000 to represent the value of one Porsche
sports car.

And so, _if_ you are in that context (and a bunch of Blue Apron employees are
today, just like SNAP employees were earlier) and _if_ this is suddenly your
single largest "investment" because yesterday your stock was unsaleable and
today you could sell it[1] what happened in that twilight moment between
private and pubic can get oddly personal and twisted.

That is especially true if there was a big reverse split or if the entire
company sort of stepped from one place to another and converted your vested
options in the old company into unvested options in the new company.

It is also perversely irrelevant what percentage of the company you own if
your current option value, after paying the strike price, is more money than
you've ever had at one time before.

[1] Often there are restrictions and lock ups and black out periods and all
sorts of constraints, except as many people know if you don't work for the
company. So in the dot com days people would quit, exercise, and sell because
once they quit the restrictions came off.

~~~
harryh
OK ya, that's all true. And a great description of the psychology of what it's
like to be an employee at a company that IPOs.

But it doesn't have anything to do with splits. Having 50,000 shares and
seeing the price go up $1 is the same as having 10,000 shares and seeing the
price go up $5.

------
JumpCrisscross
"Blue Apron's executives and venture investors own Class B stock, which gets
10 votes per share and gives them control of the company. It sold Class A
stock, with one vote per share, to the public in the IPO. It is keeping around
Class C stock, with zero votes, to use as acquisition currency and avoid
diluting its insiders in the future. Dual-class stock, triple-class stock,
nonvoting stock, entrenched insider voting power: All of these are things that
investors profess to hate. But in hot IPOs like the one for Snap Inc., which
sold nonvoting stock to the public, priced above its offering range, and then
jumped on the first day of trading, investors seemed perfectly willing to
ignore the governance issues and pay up for startups.

And then in ice-cold IPOs like Blue Apron's ... what? Blue Apron cut its
valuation by a billion dollars -- and cut the amount of money it was raising
by $100 million -- when it repriced this IPO from $15-$17 down to $10. What do
you think the discussions were around the voting rights? Did any investor say
"I'll pay $10, or $12 if you scrap the triple-class structure"? Did any banker
say to the company "this deal is not going well, and we'll need to reprice,
but you might get a better price without the triple-class structure"? Or is
there just no tradeoff at all between governance and economics: Hot deals get
done with bad governance, and cold deals get done with bad governance, but no
one can just move a slider to increase valuations by improving governance?"

[https://www.bloomberg.com/view/articles/2017-06-29/stress-
te...](https://www.bloomberg.com/view/articles/2017-06-29/stress-tests-and-
meal-deliveries)

------
ithinkinstereo
_Blue Apron believes its cash and borrowing capacity will be sufficient for at
least a year, it said in its revised deal prospectus after lowering its IPO
price range._

That's crazy they only have a year's worth of runway. I'd imagine that today's
tepid IPO is going to make it that much harder to raise additional private
capital. Looks like they'll have to take on additional debt financing just to
keep the lights on, let alone fuel more growth.

That seems to be backed up by the final paragraph:

 _With its reduced IPO, Blue Apron no longer intends to pay down existing debt
with the proceeds, according to its deal filing. Instead, the funds will all
go toward working capital, capital expenditures and general corporate
purposes._

If you didn't catch it, there was an excellent discussion about Blue Apron the
other day:
[https://news.ycombinator.com/item?id=14646679](https://news.ycombinator.com/item?id=14646679)

~~~
M_PatrickCPA
I wouldn't necessarily conclude that they only have one year's worth of
runway. Many companies state that they are funded for the next 12 months. It
can be pretty boilerplate. See comparison of Blue Apron vs. Apple below.

Blue Apron (1):

We believe that our existing cash and cash equivalents, together with cash
generated from operations and available borrowing capacity under our revolving
credit facility, will be sufficient to meet our anticipated cash needs for at
least the next 12 months.

Apple (2):

The Company believes its existing balances of cash, cash equivalents and
marketable securities will be sufficient to satisfy its working capital needs,
capital asset purchases, outstanding commitments and other liquidity
requirements associated with its existing operations over the next 12 months.

(1)
[https://www.sec.gov/Archives/edgar/data/1701114/000104746917...](https://www.sec.gov/Archives/edgar/data/1701114/000104746917004316/a2232581z424b4.htm)

(2)
[https://www.sec.gov/Archives/edgar/data/320193/0001628280160...](https://www.sec.gov/Archives/edgar/data/320193/000162828016020309/a201610-k9242016.htm#s312F59D5215853C98A92CF2CB1813E50)

------
code4tee
This is a big shot across the bow to startups looking to go public.

Message: You're not ready to float if you're not floating, i.e. have a viable
business model and can fund operations with revenues.

Also, having a down round after going public likely rained hard on a lot of
people's options situations.

~~~
kevmo
> can fund operations with revenues

I trust you mean currently existing ops, if frozen as is. Lots of companies go
public while still taking on debt because their ROI in expanding operations is
significantly higher than the interest rates. Amazon wasn't profitable for
years because of this.

------
adrenalinelol
Call me a cynic, but I get the feeling this IPO is more of an early
investor/founder cash out?

~~~
wweidendorf
In this case, none of the IPO proceeds went to existing shareholders. Based on
the prospectus, it would appear that all insiders are subject to either a
120-day or 180-day lock-up post IPO.

[https://www.sec.gov/Archives/edgar/data/1701114/000104746917...](https://www.sec.gov/Archives/edgar/data/1701114/000104746917004316/a2232581z424b4.htm#eo16601_shares_eligible_for_future_sale)

This seems more like a liquidity raise to fund future growth that just
happened to be timed incorrectly with respect to the Amazon / Whole Foods
announcement.

------
mychael
I would rather run a sustainable & profitable 100M company than a unicorn
billion dollar company with 12 months of runway.

~~~
dhebenudr
Haha, I'd rather run a sustainable $1m company! Frankly, I'd rather try to get
an actual (horsie) unicorn to take off from an airplane runway!

------
JohnJamesRambo
I would never invest in this company. My Mom gave me some extra meals of this
type and they are great but you still have to cook them, so they pile up, so
you cancel...

I don't know anyone that has stuck with the program long term but boy do I
hear about how great it is on the ads on all my podcasts.

------
jdubs
I don't understand how they will improve their numbers with the scrutiny of
the public demanding more share holder value.

I'm having blue apron tonight and I think it's a great product. Add salt and
pepper to taste.

------
loganfrederick
Only two years ago, Hortonworks IPO'd and then had to do a secondary offering
one year later as well: [http://www.businessinsider.com/hortonworks-shares-
tanking-af...](http://www.businessinsider.com/hortonworks-shares-tanking-
after-news-of-secondary-ipo-2016-1)

~~~
erdle
Tesla/SolarCity will be raising by the end of the year. It happens, a lot. But
how/why is a big deal.

------
increment_i
This IPO is getting absolutely torched, and for good reason. However, there is
a TON of money in foodie culture and food fandom. There's a reason half of
your relatives watch the Food Network non-stop.

Perhaps once this IPO brings in much needed capital, Blue Apron can start
bringing aboard celebrity chefs in promotional deals. Get Gordon Ramsay or
Bobby Flay to contribute a recipe, ingredients and a couple YouTube videos and
you might have something people will pay for. I'm sure they've thought of this
already.

~~~
ryanx435
I watch the food network all the time. You know why? Because food is non-
political. It's a positive vibe only type of programming: every place guy
ferrari goes to is delicious, every dish Gianni cooks is wonderful, and I
don't have to deal with the fear mongering that permeates literally every
other channel

~~~
ghaff
I generally agree with this. Put another way there's a lot to foodie culture
and interest in the Food Network that doesn't involve cooking pre-kitted but
relatively complicated meals on weeknights.

I suppose there's an argument to be made that none of these services have
really broken out because no one has wrapped sexy celebrity-based marketing
around their offering. (Added: And some of them have paired with celebrity
chefs.) But I'm skeptical. Most of them _do_ the localvore farm to table thing
in spades. I doubt that celebrity chef endorsements and videos and a major
missing ingredient.

------
alikoneko
I don't see the value prop in things like Blue Apron. It seems overpriced for
what it is. Between my roommate and myself, we cook every night (trading off
nights), and take the leftovers for lunches the next day. $60 for a curated
box of groceries for 3 meals just doesn't seem worth it. I spend half that
weekly, snacks included.

------
jeffdavis
Blue apron is tasty and fun. I hope they sicceed in some fashion. Seems like
the kind of thing young couples would do for a year, and would be a great
alternative to spending money and time at restaurants.

But they need to get the customer acquisition costs down enough that they make
good profit in that first year. After that, people will either lose interest
in cooking or get so interested that they do their own shopping and recipes.

To get a lot of long-term customers would require a cultural shift. They are
probably a bit early, but it might happen.

~~~
speedplane
Blue Apron is a great company with a solid product that could easily make a
good profit. The problem is that they can't sell themselves to VCs as a fun
way for couples to cook and spend time with each other. They have to disrupt
the dinner market, and convince VCs that they have sky-high evaluations.

~~~
ghaff
Presumably there are some economies of scale, startup costs, and minimum
volume to make all this work. But, yeah, with some clever PR and promotion
you'd think you could get a business of this type to the point where it's a
fairly attractive niche business. With less pressure to max out revenue per
customer _now_ it could even be a more attractive product that could more
easily survive alongside grocery delivery.

But, as you say, there's all this growth pressure to win the land grab and
dominate the category which puts customer acquisition costs through the roof.

[Added: Having said that, I think churn is always going to be a problem with a
business like this once the novelty wears off.]

------
WheelsAtLarge
Companies go public for 2 reasons: 1) as a way for funders and investors to
cash out or 2) to raise money since their other sources have dried out.

If the ipo was not enough, I doubt they will be able to raise any more money
at any reasonable valuation. They have a tough road ahead.

~~~
eldavido
You're forgetting a major third reason: to have a currency to do acquisitions.

If your stock isn't publicly traded, you can't issue shares to buy new
companies. Most acquisitions aren't all cash, they're a mix of cash and stock.

~~~
adrr
Or to supplement capital investments beyond getting loans. Building out a
logistics chain for any food company is very expensive.

------
alistproducer2
_" In its IPO prospectus, the company warned that it may never be profitable,
adding that it anticipates that “operating expenses and capital expenditures
will increase substantially in the foreseeable future.”_

Wait, what? Between the ICO craze, the amazing levitating stock market, and
things like a company that admits it probably won't ever make a dime of profit
being able to IPO, I've been feeling like nothing in the financial world has
made any sense for so long that I barely remember when it did.

~~~
slapshot
That's the one thing that's probably pretty standard. Here's Amazon's S-1 from
1997, or over 20 years ago:

 _[T]he Company believes that it will incur substantial operating losses for
the foreseeable future, and that the rate at which such losses will be
incurred will increase significantly from current levels. Although the Company
has experienced significant revenue growth in recent periods, such growth
rates are not sustainable and will decrease in the future. In view of the
rapidly evolving nature of the Company 's business and its limited operating
history, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as an indication of future performance._

[http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=3847...](http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=384706)

(edit:format)

