If you live in the SF Bay Area, you have probably heard the news about the prepared-meal delivery company Munchery, who shut their doors and their bank accounts recently without paying their vendors or employees. I’m sorry for anyone affected by this incident.
Many TFF subscribers have already read my opinions about venture capital-funded start ups that promise to “shake up” the food business. They offer things that existing business owners know are simply too good to be true: Extensive freebies and free delivery along with dubious claims that all their ingredients are locally sourced from organic and sustainable farms. And they all claim to do this in the interest of “revolutionizing the food system”. But their only real goal is to make themselves wealthy if and when Wall Street takes them public in an IPO.
There are numerous problems with this model. The first is the idea that food should be cheaper than it already is, and technology can make this happen. That is simply untrue. The profit margin in the farming and food businesses is low; there is literally no fat to be removed. And nothing that companies like Blue Apron or Munchery did fundamentally changed those economics. The founders who ran these companies were either naive, ill-informed, or simply lying. And as stories from inside these businesses start to leak out, it is clear they were also poor and inexperienced managers.
Second, food is a mature market with a relatively fixed demand. Munchery and the others have not created new products, but rather taken market share from existing restaurants, supermarkets and other companies. Their only advantage was the free money from venture capital. Other businesses could not afford to spend more than they make in order to compete. Thus, the VC-backed startup model in this instance was not “disruptive”. It was profoundly anti-competitive.
Third, the companies they were competing against are better run. Lots of people can run an unprofitable business if they have an endless source of someone else’s money. Established business owners are the ones who have figured out how to be sustainably profitable. And yet these were the businesses that Munchery and the others were impacting or eliminating.
Fourth, Venture Capitalists are not held accountable. Sure, VCs are putting their money at risk when they finance companies like Munchery. But that risk should not be limited to the funds they have already invested. Munchery shut down without paying its employees or vendors, and it’s unlikely many of the creditors will get much out of their bankruptcy. The VC firms that retain an ownership stake in a startup should be legally required to make good on all the company’s debts when it fails. This would raise the bar on what type of companies venture capitalists fund, forcing them to spend more time evaluating the viability of startups and ensuring that they retain enough funds to pay their debts if and when they shut down.
In the end, the business model of Munchery, Blue Apron and so many others in the sector had only one real goal: to take business from thousands of small businesses and outsource limited profits to Wall Street. It was a terrible idea all around, and certainly not good for our economy or society as a whole.
I have sent a letter to my state Assemblywoman asking her to look into legislation requiring VCs to cover the debts of the companies they fund. I believe it is in the interest of the state of California to more strongly discourage VCs from funding companies that they do not have absolute confidence in. Small businesses in this economy need all the protection they can get, and face numerous layers of regulation that raise their costs and lower their profits. Wealthy Venture Capitalists should be subject to regulation and oversight that is just as strong, or stronger.