🥑#BustedTech: Munchery Filed for Bankruptcy.🥑

Short VC-Backed Hyper-Growth

We've previously discussed the process of an assignment for the benefit of creditors and posited that, as the private markets increasingly become the public markets, (later stage) "startups" will be more likely to file for chapter 11 than go the ABC route. Our conclusion was based primarily on three factors: (a) a number of these startups would have highly-developed and potentially valuable intellectual property and data, (b) more venture-backed companies have "venture debt" than the market generally recognizes, and (iii) parties involved, whether that's the lenders or the VCs, would want releases with respect to any failure and subsequent chapter 11 bankruptcy filing. Given continuing low — and as of this week, lower — yields and a system awash in capital looking for alternative sources of yield (read: venture capital), there's been a dearth of high profile startup failures of late. And, so, technically, we've been wrong. 

Yet, on February 28th, Munchery Inc. filed for bankruptcy in the Northern District of California (we previously noted the failure here and again here in a broader discussion of what we dubbed, “The Toys R Us Effect”). Munchery was a once-high-flying "tech" company founded in 2011 with the intent of providing freshly prepared meals to consumers. It made and fulfilled orders placed on its own app and also had a meal kit subcription business where customers received weekly kits with recipes and ingredients. Its greatest creation, however, might be its shockingly self-aware first day declaration — a piece of work that functions as a crash course for entrepreneurs on the evolution and subsequent trials and tribulations of a failing startup. 

Interestingly, the meal kit business wasn't part of the original business model. This represented the quintessential startup pivot: originally, the company's model was predicated upon co-cooking (another trend we've previously discussed) where professional chefs would leverage Munchery's kitchens (and, presumably, larger scale) to sell their products directly through Munchery's website and mobile apps. Of late, the co-cooking concept — despite some recent notable failures — has continued to gain traction. Apparently, former Uber CEO, Travis Kalanick, is very active in this space (see CloudKitchens). 

At the time, "food delivery was in its early stages." But local restaurant delivery has exploded ever since: Grub HubSeamlessDoor DashPostmatesCaviar, and Uber Eats are all over this space now. Similarly, in the meal kit space, Blue Apron inc. ($APRN)PlatedHello Fresh and SunBasket are just four of seemingly gazillions of meal kit services that time-compressed workaholics or parents can order to save time. 

As you can probably imagine, any company worth anything — especially after nearly a decade of operation and tens of millions of venture funding — will have some interesting proprietary technology. Here's the company's description of its tech (apologies in advance for length but it marks the crux of the bankruptcy filing): 

"The team’s early focus was to develop a proprietary technology platform to operate and optimize the entire process of making and delivering fresh food to customers. The technology developed and deployed by the company included: a front-end ecommerce platform, which allowed the company to post items daily and consumers to select, purchase and pay for meals through the company’s website and native apps; the production enterprise resource management (“ERP”) system, which enabled the company to develop and launch new recipes, manage the supply chain for fresh ingredients and supplies, produce the meals through batch cooking, and plate individual meals; the logistics and last-mile platform, which enabled the company to accurately and quickly pack-and-pack individual items and assemble orders using modified hand scanners, distribute orders via a hub-and-spoke system where refrigerated trucks would transport orders to specific zones and hand-off the orders to the assigned drivers; and, a driver app that assisted in managing and routing orders to arrive in the windows specified by customers. All of this was managed through a set of proprietary tracking and administrative tools used by the teams to monitor and mitigate operational issues—and connected to a customer relationship management platform. The team later developed algorithms to optimize the various aspects of the service to scale operations, increase efficiency, and improve the quality of the service. In addition, the company developed over three thousand meal recipes, including descriptions, nutritional information, and photographs. Over the life of the business, the company invested significantly in its technology capabilities, believing that the company’s ability to efficiently scale its operations leveraging technology would be a competitive advantage in the food delivery market."

All of that tech obviously required capital to develop. The company raised $120.7mm in three preferred equity financing rounds between 2013 and 2015. Investors included Menlo VenturesSherpa Capital, and E-Ventures. The company also had $11.8mm in venture debt ($8.4mm Comerica Bank and $3.4mm from TriplePoint Venture Growth BDC Corp.). 

The bankruptcy filing illustrates what happens when investors (the board) lose faith in founders and insist upon rejiggering the business to be operationally focused. First, they bring in a new operator and relegate the founders to other positions. With new management as cover, they then cut costs. Here, the new CEO's "first action" was to RIF 30 people from company HQ. Founders generally don't like to lose control and then see friends blown out, and so here, both founders resigned shortly after the RIF. This, in turn, gives the investors more latitude to bring in skilled operators which is precisely what they did.

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What to Make of the Credit Cycle. Part 9. (Long Summer Associate Programs)

Milbank Tweed Gives Summer Associates A Dose of Reality

Welcome to Part 9 of our ongoing series “What to Make of the Credit Cycle.” You can view previous parts here, here, here, here, here, here, here, and here (some paywall, some not…roll the dice).

Around a year ago, a partner at a major law firm shared his view with us that a clear-cut sign of a market top is when biglaw associate salaries go up. Subsequently, per CBS, this happened:

Some lines of work pay more than others. While Americans have largely seen lackluster wage growth during the past year, the roughly 500 associates laboring at Milbank, Tweed, Hadley & McCloy just drew a large bump in pay, putting the law firm at the top of the legal heap in terms of salaries paid to attorneys just starting out.

A spokesperson for the 690-lawyer firm confirmed that it is hiking associate salaries by $10,000 to $15,000, bringing a first-year associate's salary to $190,000. A second-year associate at the firm will now make $200,000, while an eight-year associate will pull in $330,000.

The prior high mark had been set two years ago by Cravath, Swaine & Moore, which upped starting pay by $20,000 to $180,000, an industry standard that was quickly matched by Milbank and multiple other firms.

Not to be over-powered in the ever-feverish stampede for the next generation of, cough, ”legal talent,” multiple firms (got bent and) fell in line, upping associate pay to match (or exceed) Milbank’s salary raise. Count on Abovethelaw for some added color:

Summer 2018 has really been the summer of money for Biglaw associates. Milbank got the party started by finally bringing NY (and its other offices) to $190K. Simpson Thacher upped the ante just two days later by matching the new salary scale and adding in special summer bonuses. And just a few days after that, Cravath reasserted its dominance as the firm that sets the market standard by increasing the standard base salary for senior associates over what was set by Milbank. 

And yet, elsewhere in the broader macroeconomy, economists everywhere are wondering why there are underwhelming wage increases (maybe because corporate legal bills just went up?!? 🤔). Per Forbes:

Wages rose 2.7% from a year earlier in June, below the 2.8% increase economists had expected and the increase may make little difference because inflation is also picking up and could soon outpace wages, meaning many workers have no real increase in buying power.

Bloomberg adds:

There are currently 6.7 million job openings — a record high. And the rate at which workers are quitting their jobs is higher than it was before the onset of the Great Recession. But wage growth is still noticeably slower than many economists and analysts expect (despite all the stories about employers desperate for workers).

Meanwhile, after a 5% salary increase prior to even working for a single (billable) hour, entering Milbank associates be like:

Source: Giphy

Source: Giphy

(PETITION Note: hopefully those associates don’t ever run the hourly calculation).

Law students looking forward to these new riches need to work hard this summer to ensure that they get an offer at the end of their respective summer associate programs. Indeed, they need to not screw up this:*

Nothing gives a realistic snapshot of life as a biglaw attorney like axe throwing, escape the room(s), the Olympics, cooking classes, and spectacular rooftop views. We’re serious.

Really. We are.

Having the aggressiveness, discipline and vigilance of an Olympic athlete is needed to navigate the halls of a biglaw firm (PETITION Note: sadly, they don’t teach you inter-office politics in law school). Knowing how to throw an axe may actually help lawyers wade through the morass. In fact, if we were associates, we would go on a shopping spree at Best Made and hang some dope-looking axes on the wall to leverage the intimidation factor.

Escape the room? Junior associates will want to do that every Friday evening to avoid the inevitable partner phone call asking for an “urgent!!”memo on some esoteric legal question that more-likely-than-not will NEVER come up. By Monday morning, of course. (Hot PETITION tip: the likelihood of said partner reading that memo on Monday morning — let alone by the end of the following week — is roughly about 1.27%).

Cooking classes? Sh*t. The closest you’ll get to cooking once you’re making that sweet $190k is receiving someone else’s via Seamless, UberEats or Caviar. In the office. Of course.

Rooftop views? Awesome. There’s nothing more lit than having a bird’s eye view to thousands of New Yorkers living their lives eating drinking and being merry while you’re stuck in the office. Those views are a double-edged sword, broheim. Make no mistake about that.

So, again, kudos to Milbank for giving its summer associates a realistic view of practice.

*Milbank “promoted” this tweet, by the way, which means that it wanted the world to know that we’ve once again reached peak-summer-associate. We’re old enough to remember when the earth exploded and summer associate offers were reneged or deferred starting dates. This will end just as well.

Caspar the Friendly (Non-)Restaurant

Walk through the streets of Manhattan these days and you are bound to see a lot of “for rent” signs taped to the windows of empty commercial spaces. In Captain Obvious fashion, Crain’s New York last week noted that Amazon is affecting a lot of mom-and-pop brick-and-mortar: revenue is down due to the online competition and rents in New York, despite tons of vacancy, remain unsustainable for many business owners. 

It’s rather simple: online retailing is eating up brick and mortar and there aren’t enough Bonobos, Birchbox and Warby Parker showrooms to fill the gap. After expanding to seemingly every corner of the City, banks are in contraction mode: there are now a number of shuttered Capital One and Chase locations in the City. And restaurants? We’ve covered that in detail: forget about it. Art galleries? Mwahahahahaha.  

Under the radar are the ghost restaurants that are quietly undermining the commercial real estate market and contributing to the over-supply of space. Wait, what? Ghost restaurants? Picture this: you're on billable hour 26 for the day and you're hungry. You go on Seamless and find a restaurant with glossy food-porn photos and reasonable prices. You order and 35 minutes later you're indulging in your tasty delights while questioning the meaning of life.

A week later, you've got 20 minutes free from the office and your significant other suggests going out to eat. You say, "I know a great restaurant with awesome food. Let's go." You look for an address but you can't find one. Because there isn't one. The place you ordered from has no physical presence whatsoever or, alternatively, is just a kitchen with no seating space. Now you're rubbing your belly and really having an existential crisis. WTF.  

With sky-high rents and quick turnover the norm, companies like the Green Summit Group are coming up with varying and unique restaurant concepts, locating themselves online only (or, at best, securing a small commercial space with no seating), skipping the long-term onerous lease with commercial landlords, partnering with commercial kitchens, and using Seamless and Grubhub for distribution.

This model promotes improvisation. One benefit of avoiding an actual storefront is the ability to test different food concepts and pivot menus if there are lower-than-anticipated sales. Rebranding is remarkably easy: just a new name, some different food porn photos, and an update to Seamless. To the extent that one company is running different concepts - say, Middle Eastern and Greek - it can also cross-pollinate by offering the exact same menu items per "restaurant" and sharing ingredients in the kitchen. This limits the need to source new ingredients or engage in extensive food prep training for each and every concept. 

It is questionable how sustainable these experiments are long-term. You can read more about some of the cons - loss of alcohol-related sales, no walk-ins, logistics complications - here. The fact is, though, that this represents yet another headwind confronting established restaurant companies. And that potentially means EVEN MORE restaurant bankruptcies in the near future.