SpoonRocket shuts down
techcrunch.com
techcrunch.com
Am I reading this correctly, and the business metric this company managed to achieve is simply "selling food above cost", like every deli and diner in the country does? Or is the article instead suggesting that they were profitable after all logistics costs?
"But due to other costs" < aka paying for people, the website, the delivery, marketing, etc?
Over the long term, this is necessary but not sufficient to build a business line that makes sense. You also have to control all the other costs... which can be difficult if your business model requires large scale growth.
I, for one, am surprised they shut it down if they in fact had achieved positive contribution margin. Probably just couldn't tell a good enough story for how they'd grow, and demonstrate good upside, for new money in, given all the preferences/dilution/creditors already in their capital stack.
>> Contribution margin, or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. “Contribution” represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.
So, positive contribution margin should imply they covered all the fixed and variable costs, the way I read it.
But then, why do they need to shut down? It looks like their def on "contribution margin positive" is something else after all.
An explanation with an example can be found here[0].
But let's throw out some easy (but completely false numbers).
Assume:
The fixed cost for the entire operation for one month is $1000.
The operation makes 1000 widgets in one month.
A widget can be sold for $2.
Analysis:
If the company sells all 1000 widgets that it made in a month, then it will have revenue of $2000. If each widget had no variable costs, then each widget sold 'contributes' $2 to paying off the fixed costs of the company. $2 is greater than zero, so the company has a positive contribution margin.
Take the same assumptions as listed above, but the variable costs for each widget is $3. If the company sells all 1000 widgets, then it will have a revenue of $2000. However, each sale of the widget contributes -$1 towards the fixed costs of the company. Thus the company has a negative contribution margin.
So the first situation boils down to "we sold a widget for more than it costs to make", and the second situation boils down to "we sold a widget for less than it costs to make". Where "costs to make" includes just the variable costs. Which is what the article implies, "SpoonRocket had reached a positive contribution margin — it was selling meals for more than it cost to cook them."
Note also having a positive contribution margin also doesn't mean the company will ever realistically be profitable. Imagine a scenario where the fixed costs are $100.000 per month, and the contribution margin of each widget was $0.01 (ex: variable costs per widget $9.99, sale price $10). Each widget has a positive contribution margin, but the company would need to sell 10.000.000 per month to actually cover the fixed costs and become profitable.
Edit: had fixed/variable backwards on the first line.
[0] - http://www.accountingcoach.com/break-even-point/explanation/...
Which brings up another interesting point...I'm not sure how companies like this do cost accounting. When running a traditional business, say, a restaurant, variable costs (labor, food inputs) dominate vs. fixed costs. On the other hand, places like Microsoft spend a ton of cash to build a huge fixed asset (Windows) that gets sold to millions of people over time without any depletion, practically the very definition of a "fixed asset".
I wonder how Spoonrocket allocates their platform R&D in unit economics; how they do this will make all the difference in whether their "contribution margin" is in fact, positive, or not.
It's important to realize that even if a business is, strictly speaking, "profitable", it doesn't mean it's a good business. I don't stand on the corner selling newspapers because it's not a valuable use of my time vs. other pursuits, and a comparable argument can be made for use of shareholder capital, too.
That's not what the passage you included says. It says it only covers variable costs.
So, the passage explains what contribution margin is, but TC is talking about being "contribution margin positive". How would you understand the second term?
I've only ever heard contribution used in the sense of COGS, not foxed costs.
TC has a terrible reputation for using business terms that aren't really generally considered business terms.
Just not any VCs.
They are money losers. It only looks like they are not because of a temporary bubble. This bubble is popping and their losses are becoming clearer. There are many that will personally make money despite running a fund that loses money.
Their culture is steeped in groupthink. Which by definition results in malinvestment and destruction of wealth. This wealth comes from pensioners who can't get sufficient returns from lower risk investments.
At some point pension funds and pensioners are going to run out of money which will be bad.
Specifically for bootstrapped companies. VCs increase the input cost; labor and rent etc. And they subsidies competitors. E.g. Customers who would normally pay you for services get it free from a VC funded startup. Then VCs run out of money and competitor goes bust. This induces boom and bust cycles that mask steady improvements with hype. This hurts the market.
Programmers would be much better of with a steady market where there is a discoverable market value for their work.
The Kaufmann report on venture capital (which is not, to put it charitably, aggressively pro-venture-capital) is a good place to start on this.
As for bootstrappers (I am one of those, and have been for ~12 years now), I think @Pinboard has a thing or two to say about the VC threat/menace.
[1] http://techcrunch.com/2015/02/18/philz-coffee-funding/
[2] http://blogs.wsj.com/venturecapital/2014/11/12/sequoia-backe...
IOW, they're not, strictly speaking, a franchise.
In the bonefish grill's that I have been at (several), the managing partner is typically present at the restaurant when I have been there. As such this is in a sense like buying yourself a job. (You could say the same about some franchises but somehow I see this a bit differently..)
I knew a managing partner of a Carrabba's. He quit something like 2 years later and bought this little burger drive through. It must have been really bad at Carrabba's...
It's all of the costs and logistical pain of running a restaurant, with none of the margins. Brilliant!
"We were exploring different strategic options, but deals fell through last minute."
Of course deals fall trough last minute. It's not like they would fall through a few months in advance.
Some companies (e.g. in biotech, autonomous vehicles) may take significant upfront costs, but anything requiring massive scale to be profitable means the margins are going to be razor thin (see: Amazon vs. Jet.com, freight shipping, payment processors).
With early stage companies, many haven't even gotten to that point though. The first step is "Will someone pay for this?" Then the second is "Can we make money on each unit they sell." True profitability is "Can we sell enough units to cover our fixed costs"
What makes this interesting is the norm for a while was to fund #1. (And good ideas are still funded that way) #2 used to be the bar to get further funding, but now it looks like #3.
It makes sense if you consider very early examples like Amazon which took more than 10 years to become profitable. Unicorns like Twitter and Dropbox are not profitable and are unlikely to become so in the near future, but they have reached a scale that their finances are relatively secure for now.
http://www.bloomberg.com/news/articles/2016-03-11/instacart-...
Here's the money quote: "[Instacart] said 40% of the company's volume is profitable - meaning most orders still lose money. It also said that it will be profitable globally by summer. However, its calculation for profitability doesn't include the cost of office space, the cost of acquiring shopper workers, or the salaries of its executives, engineers, designers or other employees..."
In other words, a $2b company figured out how to "not lose money" 40% of the time when their lowest paid workers deliver things. Ignoring those pesky cost centers that are developers, designers, hiring managers and executives. When every corner deli within 10 miles of me delivers (often for free) and presumably does so profitably (disclaimer: I live in a major metro area).
Technology has a peculiar ability to light gigantic piles of money on fire. These are strange times we live in.
Most startups are actually looking for that magic formula. They spend spend spend until they find it, then scale scale scale to become a profitable business as a whole.
If you're running a company with 500 employees an a big office in San Francisco (where employees average ~$100k a year, fully loaded), and each of your deliveries nets 1% of a $50 order, on average ($0.50; not a ridiculously low net margin for the grocery industry, even in logistically optimal scenarios -- which delivery is not), you've gotta be doing (500 * $100,000) / .5 = 100 million sales a year just to break even. AKA, $5 billion a year revenue run rate.
So then you say: "OK, we'll just cut some of those expensive SF people, and we'll bring the curves closer together!" And that could happen. Or you could discover that getting those margins was only possible with X million sales a year, and getting those requires at least 500 employees to run operations without dropping the ball. And then your investors stop throwing money at you, because the business economics look scary, and the funding climate has changed. And then you die.
Again, this is not a made-up story.
When huge investors get involved in land-grab businesses before they're profitable, they're all betting that their horse will be the next Amazon. But there's only one Amazon. And even Amazon isn't that profitable. And Amazon started by competing in a high-margin industry.
In a business with sizable margins, it may be OK to discount some of these other things, but in a business with teeny tiny razor thin margins like grocery delivery, one should have a very healthy skepticism about hand-waving away real costs.
* For 40% of the orders, they achieve a positive gross margin * We anticipate reaching positive gross margin on 100% of orders by the end of year * Even after reaching positive gross margins, non-COGS operating costs are sufficiently high to result in a negative EBITDA
Often some items are actually loss-leaders, enticing you to come in more often, or to pair it with a more profitable item that makes up for its cost.
Sometimes it is, even more, obvious that something is a 'loss leader'; such as at fancy dinners where they'll simply give you bread for free while you wait for your meal or bars where they give you salty snacks like popcorn to encourage you to buy more beer and not leave to have a real meal somewhere else.
Just wanted to say thanks for the laugh! It's not often than a comment on HN makes me laugh out loud. As in laughing with you, not at you...
This is notable because some of the on-demand companies are engaged in a bidding war out of perceived land-grab economics, either on the supply or demand side (or both), so they price the customer-side service or the supply-side cut in such a way that the company loses money on most or all orders.
Think like: We'll deliver you a $8.50 sandwich for $10.25 and a $1 delivery fee, with a guaranteed payment to the driver of $5.00 per order.
If that's a little gobsmacking, suffice it to say that there are a lot of people with Uber envy, and that this is part of the playbook in expansion phase for them, too. (They are presently engaged in a bidding war against an Uber-for-China which is transferring billions of dollars from investors of both firms to drivers/riders.)
Under sane conditions, I'd presume this is the type of company that could get money, either through debt or equity. The business model works, it just needs scaled. However, that also assumes scaling the business does not also scale those other expenses at a ratio well below 1. If the ratio is closer to 1, it's a bit dubious to not count those towards the unit costs.
Maybe the Uber playbook shouldn't be used for every on-demand service or maybe it would be smart for on-demand services to offer a non-commodity product so their success is a lower bar than shooting the moon.
In fact, it's not even limited to startups. I worked for Red Bull many years ago and when they open a subsidiary in a new country, the only metric that matters for the first few years is how much money they are SPENDING on marketing & promotion - sales just aren't that important until the brand has been established.
I know I am but a tiny sample of the overall SF food market, but I'm squarely in the target demographic (work at home, don't like to go out to eat). I used SpoonRocket a few times, but entirely gave up on them after trying a few times. I love Sprig and order from the often. Here's why:
* SpoonRocket's meals simply weren't healthy. A lot of the folks in this space (Sprig, Munchery, etc.) are really focused on healthy food. I can call the Chinese place down the block and have an unhealthy meal delivered, but there traditionally have been very few good healthy options other than cooking yourself. SpoonRocket's food was heavy, carb-y, greasy, and just not that good.
* I know they had to do this for time efficiency/cost reasons, but the requirement that you meet the driver out at the curb was too big of a psychological barrier. I live/work in one of the (relatively rare, to be fair) SF highrises, but knowing that a SpoonRocket meal meant getting up, waiting for the elevator, going downstairs, meeting the driver, then going back upstairs - meant that I just never ordered from them (especially when Sprig will bring the meal right to my door.)
This just goes to show that in an absolute sense -- these relatively small differences might not matter (i.e. of course I'd rather go downstairs to pick up food vs. walk to a restaurant for lunch), but in the highly competitive environment where easier and healthier alternatives exist, their offering was unsustainable.
Ironically UberEATS launched officially today.
Source: I'm a co-founder, if my business fails it's my fucking fault.
"If they cut off one head, two more shall take it's place"
I found it so funny and off putting I sent a screenshot to my friends: http://imgur.com/He7Hfkj
Well, knowing Techcrunch they're probably overreacting, but this is a prediction I can get behind.
Maybe now VCs can invest in companies that don't rely on questionable labor tactics in order to deceive themselves and others into thinking that they're unicorns.
One start-up is an insignificant sample size.
What's the deal? ROI for food delivery seems ridiculously low in comparison to other options. I don't want to sound like a curmudgeon but it seems quite wasteful.
How are you figuring the ROI? If you're not factoring in opportunity cost, then you're not even considering it as an investment.
I make well over $100/hr doing contracting work. I can get a good meal delivered for $15. I highly doubt I could cook a decent meal in 9 minutes, and that's assuming ingredients and training are free (time and cost-wise).
Also, it may take 10 min but it won't require 10 minutes of unbound attention
On a personal note cooking dinner is just relaxing, it's good to get off the screen sometimes
Yes, but that's just a baseline. Even if you knock it down to $60, that doesn't change the overall result, especially when you consider the additional cost of groceries.
If you derive utility from cooking dinner, that's fine! I totally respect making individual choices which increase your utility. It's just the attitude that those of us who don't cook (and don't like cooking) are being economically irrational that annoys me.
Delivery food, even the "healthy" kind, is often packed with excessive amounts of sugars, salt, and artificial flavors. You're going to need to make a lot more than $100/hr pre-tax to afford the heart surgery, diabetes treatment, or other major health interventions that result from decades of eating food products prepared by people making about 10% of your base income.
Now that I think about it more, there was something odd about how most times I would order, the app would say 30-60 minutes which was discouraging, but experience told me it would be sooner, and it always was, like much much sooner, 5 minutes usually. I wonder how many customers didn't use it thinking "why would I wait 30-60 minutes?" oh well.... the drivers were very nice too...
I don't know where all they were located, but it felt more appropriate for dorm delivery than SF. Where's the kale man?!
I was a user since 2013 and enjoyed their stuff, too bad it's gone
wonder if sprig's gonna survive..
obviously, not for everyone, yah, 700 calories can add up
They also sometimes had salad. But in general the options were on the heavy side. I say this as a person who orders delivery from these apps regularly, and 80% of the time checked spoon rocket's options (and 5% of the time ordered).
So... Like the pizza place down the street?
I don't understand how anyone could think it has the margins to pay engineers, founders, and VCs.
1) Monopoly - If they can get enough lock-in on customers, they can outlast their competitors and then eventually move the prices up without losing customers (since there would be few viable alternatives).
2) Economies of Scale - In many businesses, the marginal cost does go down once you scale up significantly. They probably expected to cut the cost of food production significantly with volume pricing on raw materials and perhaps more automation of the cooking processes.
I think all of these services understand that this is a low margin business so you have to make up for it in high volume and short term losses are acceptable if you will win out eventually and increase the margins.
If McDonalds were to buy up every competing fast-food franchise in an area overnight, it'd be just a matter of time before somebody would open a Kurger Bing across the street.
Speaking of economies of scale, those are the kinds of economies of scale you need to compete with to make it big. You need to own half of your supply chain - which seems to be an anathema to VC-funded businesses.
A better question to ask is: Why aren't established food franchises, who own their logistics networks, and can compete on price, not interested in getting into this game? Perhaps they are all missing the forest through the trees - or perhaps food delivery-as-your-core-business is a race to unprofitability.
Now, if you do think that they are missing the forest through the trees, why not have your startup aim for a partnership with Subway, where they handle the food, and you handle the distribution?
I met Sama at one once. He was incredibly humble.
I'd be curious to know if any of the food delivery apps have incentivised delivery to grouped buyers. e.g., $10 if someone buys, $8 if 5+ people in the same street buy, etc. Encourage delivery efficiency and also delegate marketing to word of mouth.
Peter Thiel always uses restaurants as a good example of a business model that is so costly that there's no margin left, combined with the impossibility of a monopoly. So you take something that's already tight on margins and you make that even tighter with delivery.
Now, in the public markets, there's no problem jumping into a category; just buy some stock in X, Y, Z companies. But in the private market, if you didn't get in on X company's Series Y, you can't just buy in tomorrow to gain some exposure. So you invest in the next company with a similar concept (but perhaps in a different vertical).
All the while, nobody stops to think whether the newborn category they're chasing is even fundamentally viable, or if viable, whether it's nicely profitable at scale. Or whether it can bear so many entrants into the space.
Have you tried Sprig?
Hadn't heard of healthyout or thistle until now, but they don't seem to be on-demand food services?
EDIT: Munchery doesn't delivery for lunch so that's a pretty big limitation there.
Calling meals with 70g of fat "healthy" is a bit of a stretch.
They used to be more focused on good quality/fresh/healthy.
The menu is now the same every day and it's basically a restaurant delivery service where they pre-make the food in large quantities.
Presumably this is more sustainable for them money wise, but I used to order Munchery for dinner every single day (when open) for years, and now I do it maybe 1-2 times a week, begrudgingly.
Hopefully just a phase. They tried this same-every-day thing last year and lost a tonne of users.
http://sf.eater.com/2016/3/16/11247194/pascal-rigo-leaves-mu...
Especially this:
"I just did not share anymore their strategy for growth and their ‘vision’ for the future," Rigo wrote to Eater in an email.
The translation is: the food sucks.
They only operate in Sacramento. The main things I liked are that it takes usually under 10 minutes and there was no tipping or delivery fee. The price you saw is what you paid. However, they just added tipping to their app which isn't a good sign. On top of that, it asks you to tip before you even get your food and there is no option to tip later that I know of. I haven't ordered from them since I was first prompted to tip.
Older article that discusses them: http://www.bizjournals.com/sacramento/news/2015/10/30/what-s...
A quick timeline (from what I can remember):
- Initially started out in Berkeley / Emeryville area by a couple of Berkeley alumni who had previously launched a food delivery startup focused on midnight munchies (aka, unhealthy food for college-type students). Each meal was initially only $6, tasted quite good, and delivery only took ~15 minutes.
- Expanded to Oakland area (first Downtown, then eventually other areas like Lake Merritt). Meals were still only $6, taste was usually good but sometimes wasn't as good. Delivery was still fairly fast (usually <15 minutes), but could take up to 30 minutes.
- Expanded to SF. Meals became more expensive and had variable pricing (I think it was first $8, $10, then $12, depending on which dish). A delivery fee ($2.50) was created. Food quality dropped (usually was OK, but not as good as it used to be); meals could take up to 1hr to get delivered (usually under <30 min though)
- Started their elite food delivery plans which provided free meal delivery and a bit of extra credit, by agreeing to pay upfront each month (e.g. $20).
Thoughts:
- From a business perspective, I think SpoonRocket (SR) made a lot of the right moves. While a lot of people say "disruptive innovation" loosely right now, I think SR actually did it by: 1) focusing on a low-end market that wasn't well addressed (e.g. college students), 2) used a technology to rapidly improve the experience for this low-end market (e.g. using Google Maps to efficiently route drivers to deliver on-demand meals), and 3) go upstream in the market to gain market share in higher-end consumer segments.
- So why did SR fail? I'm speculating here, but I think it's because scaling all these type of on-delivery startups is really, really hard work. Unlike Google or Facebook which could effortlessly scale up across the world with its technology-heavy solution, scaling up a company like SR requires hiring a linear amount of employees like drivers and support staff. As others have noted, it's difficult to get the economics right for an inherently low-margin business with a high labor component.
- Can other food startups succeed? I'm willing to bet most food startups probably won't survive this fundraising crunch if it extends another year. As far as I could tell, SR was ran as a very lean operation where they tried to batch deliveries, produce a small set of meals in large quantities, and focused on efficiency (e.g. calling you two minutes ahead of time to minimize delivery driver's waiting time). If SR couldn't make the economics work, I'm not sure how others could. Perhaps by going more high-end than SR, and charging a higher price (a la Munchery) or is it perhaps by selling a lot more quantity?
- Lastly, what I'm hoping for is the "Airbnb" of food, where regular people could cook meals and sell them to neighbors on a marketplace with reviews, pictures, etc. Of course the economics would be challenging like any food business, but that's the kind of service that I could see myself regularly using. There's also the regulatory side (after all Airbnb itself has followed the policy of 'asked for forgiveness, rather than permission') Who doesn't like the sound of buying a home cooked meal from a neighbor?
Given the current lay of the land, I sadly find that to be a less likely to survive the regulatory requirements.
http://newyork.cbslocal.com/2013/09/11/cbs-2-investigation-u...
I won't claim this is a rational fear, but I'm personally far more apprehensive about buying food from my neighbor than I am about staying in said neighbor's home (airbnb) or getting a ride in their car (uber / lyft / etc.)
It'd take a lot for me to consider it, because it creates all kinds of awkwardness if the quality is poor, and I'd have little reason to trust that they'd deliver consistent quality.
It'd need to be far cheaper than any alternative, and I'd need to not afford the alternatives, before I'd consider something like that.
This is already happening here: https://josephine.com/
I looked at them once before, and there's nothing super close to where I live (would need to drive to pick it up), but I'd definitely consider using it if there was someone who cooked within walking distance of me.
There are some highlights from what we learned trying "Airbnb for food."
1. Our target was not home chefs, but instead professional chefs. We worked in the industry for several months and identified how difficult being a chef. Lack of progression, opportunity, and a chance to showcase your skill.
2. We rented out a commercial kitchen for chefs, let them work their own hours, and cook the things that they wanted. We took on amateur chefs as an experiment, using their passion and food samples as determinant/predictor of success.
3. We wrote stories for every chef and dish. We'd even take photos of the chefs and edit those to make sure that they looked just as respectable as they sounded.
The Findings:
1. Food quality was inconsistent, ranging from inedible to passable. Because most professional chefs (professional doesn't mean much) and home cooks don't have any experience running a business of their own, their ability to scale and cost-control is poor.
2. That resulted in not only inconsistent food, but insanely overpriced meals ($15 for a bowl of chili, $16 for shrimp & pesto pasta).
3. The amateur chefs we worked with did not understand how to cook outside of recipes and/or they'd cut corners in production. Resulting in some shockingly bad food or overpriced mediocre meals.
4. Because there is no one checking over the food during production, you can't catch people cutting corners. If any of our chefs woke up on the wrong side of the bed that day, one of these things would happen (shitty food, tiny portions, unfulfilled orders).
5. No rational user is going to stick around and experiment their way around a Wild West marketplace that has such a wide range of quality and price. And no amount of "humanization" with stories, photos is going to save the fact that the food sucks.
6. Chefs are really good at pumping up their own food. "Best in the Bay Area", "everyone tells me they love it", "people ask me to open my own restaurant all the time", "there's so much love in this", or "I cooked for X person for Y years". (None of this means anything.)
7. Poor retention (and deservedly so from shitty product) and declining sales. With small orders, our chefs earned minimum wage or worse, which either drove them away ("I quit, fuck you!") or encouraged them to cut even more corners (smaller portions, terrible inedible quality).
8. We experienced ridiculous turnover (someone would quit every week, mad rush to find someone else to replace, unconsciously lowering standards in desperation).
9. At the end of the day, if the food sucks, it sucks. Doesn't matter if it's coming from your "neighbors" or "supporting the local chef down the street".
We've now partner with the best Bay Area mobile food businesses and sell their most popular items. Mise is now sustainable, food quality is consistent/high, customers are really happy (feels awesome whenever we have power users). And we've been able to offer more affordable and better-tasting meals week over week.
Ben (my awesome cofounder) and I take a lot of pride in what we do now, because we know it's awesome food going out to awesome people at affordable prices.
Order for the week ahead, get it all delivered to your door on Saturday, and enjoy a meal on your own schedule. :)
www.eatmise.com
I really don't want to buy food from random strangers that are not regularly being inspected for the cleanliness of their operations. A dirty room or a car is an inconvenience. A meal prepared in an unsanitary way could potentially kill you.
I too have no desire to buy food from strangers, but I also feel like the potential risks of room-sharing or ride-sharing aren't limited to cleanliness. In both cases you're implicitly trusting a stranger with your physical safety.
Speaking for myself, I think I'm more comfortable with the notion of ride & room sharing because I can maintain a greater (and quite possibly illusory) sense of control. Drunk or unreliable driver? I can get out. Sketchy apartment? I can leave, or prop a chair against the door. etc.
Maybe Lyft will acquire Swig if they're not already cooking something up. :-D
But we only tried it because they offered a Groupon that put the price where we thought it should be. I've heard that in fact, they are doing very well, and I hope that is the case.
Revenue -Cost of Goods (food, in this case) = Gross Profit
Gross Profit -Sales & General, Administrative = Net profit
(SG&A = office space, Webdev, logistics, etc...)
I'm sorry, but anything else is just plan BS.
SpoonRocket... I suspect there is limited volume based on their market. (not everybody want's food delivered, people still like to go out every once and a while...)
Time to whip out my free Chipotle burrito coupons.
SpoonRocket also served the East Bay, which Sprig doesn't.
Sprig also serves Palo Alto and Chicago, which SpoonRocket doesn't.
How long it can survive at current unit economics is a different story.