The New Fast Food – The Rise of the Delivery-Only, Mobile-First Restaurant Chain

sprig logo

I was trying to understand why food startups are so hot when I ran across the following two charts.

goog-cmg

In the image, you’ll notice that I circled a line labeled “P/E.” In the language of finance, P/E is short for “price-to-earnings ratio,” which is the relative value of a company’s stock price to its profitability (aka earnings). When a company enjoys a high stock price yet barely turns a profit––like Amazon––it shows in the P/E ratio.

This typically happens when investors think the company will grow and reap huge profits down the road at some later date (or that someone else will pay an even higher price later on). Generally speaking, having a high P/E ratio means that investors like you and believe that you have a bright future.

The average P/E ratio on the major stock markets indices is 15. Google’s P/E ratio is 30. Chipotle’s P/E ratio is 56. Said another way: Chipotle’s profits are worth more than Google’s.

Mind. Blown.

Which brings me to the original inspiration for this post: Sprig.

Gagan Biyani, the founder of Sprig, is a friend of mine. Sometime last year we caught up and he told me about a new food delivery startup he was working on. They’d make the food themselves, he explained, and deliver it too — really fast.

Oof, I thought. Not a bad idea, but sounds like a tough sell to the capital markets. Lots of upfront cost, little relative profit, no clear customer lock-in or network effect. How would they ever join the 10x revenue club?

Since that conversation, Sprig has gone on to raise over $10 million from Greylock and others. Immediately, the floodgates opened: SpoonRocket raised $10 million.Munchery raised $28 million. Capital has literally flooded the food space, but I still didn’t get it. Why? What were the VCs seeing that I wasn’t?

At first glance, these companies reminded me of Postmates, which I classify as a premium service targeting a niche audience of wealthy urbanites willing to pay a 30 percent premium to have food delivered. How big could these businesses get, really, especially outside of the SF bubble? What the hell were investors thinking?

As I thought about it more, I realized that while Postmates and Caviar are services on top of restaurants, Sprig, Munchery and SpoonRocket are restaurants. Really, they’re the new fast food chains.

Like a Chipotle, these new fast food chains operate commercial kitchens, pay a chef to design their menu and hire low-skilled minions to mass-produce the actual food dishes. Unlike a Chipotle, these new fast food chains can lease out cheap real commercial real estate in out of the way, low-cost locations. Not only do the new fast food chains pay less per square foot of real estatec, they also need a fewer locations and thus less real estate in absolute terms. How many locations does SpoonRocket need to feed all of San Francisco? Three… maybe? Then think of Burger King — how many locations would they need to serve an equivalent volume of customers? Fifteen? Twenty?

And finally, instead of someone upselling you fries with that, the new fast food chains seal the deal with nice photography and a well-designed mobile app. Not bad efficiency.

Yet for the money they save on cashiers, the new fast food chains introduce a new, countervailing cost: human delivery agents. And with fuel costs being driven up by the rise of China’s middle class, delivery ain’t cheap — Sprig pays their SF delivery workers $16 an hour.

Software is eating food.

From an operations perspective, the relative costs of these inputs — real estate, food prep, delivery — are going to determine how profitable the new fast food chains are. The pressure to increase efficiency and drive down the costs in these companies will be great. For the workers on the other side of the iPhone app, the old industrial logic of low-pay-for-low-skill will apply just as it ever has, especially as more of the intelligence and skill becomes centralized in the form of software and the buffeting effect of venture capital goes away in five years or so when these companies mature.

Due to their vertically integrated operations, these companies can reimagine the entire value chain from the vantage point of software. They can apply A/B testing and innovative startup thinking to not just their website or mobile apps, but the entire food production and cooking process. Here, in the unglamorous backend of operations, is where the profits will be won or lost.

By way of comparison, the publicly traded stocks of the old fast food companies are kicking ass. In terms of P/E ratios, McDonald’s shares are doing better than Apple’sStarbucks is beating the pants off of Facebook and nipping on the buds of Amazon.

How big can these businesses get? In a word, huge. By market cap, McDonald’s is a $100 billion business — that’s two-thirds of an Amazon. At $19 billion, Chipotle is worth a whole WhatsApp. Hell, Taco Bell’s parent company is almost worth one-and-a-half Twitters.

US Food Spending - at home vs outside of home

Whither the next unicorn(s)? Food. Trillions of dollars of consumption are quite literally in play.

U.S. consumers spend $6,130 a year on food (~10 percent of all spending, depending how you slice it). And a dollar of Chipotle’s profit is worth more than a dollar of Google’s.

There will many winners. Unlike social networks or online marketplaces, there’s no winner-take-all dynamic in the food world. Homebrew’s Satya Patel summed up the typical VC mindset in his own explanation of why Homebrew is avoiding the food space, writing: “Many markets have room for more than one “winner” but very few have room for more than two or three.” Satya is wrong about food.

Food is a market like the Internet is a market — it’s too big to be to considered just one “market.” There’s high-end, low-end, middle of the road, Mexican, Sushi, Thai, Burgers, etc. The list goes on and on forever. Witness Jack in the Box ($2.4 billion), Panera Bread ($4 billion), Starbucks ($58 billion), Burger King ($9.4 billion), and more. The list of billion-dollar restaurant chains goes on and on, addressing all manner of market segments. Practically speaking, people don’t want to eat the same thing every day, thus supplier diversity is natural, organic and inevitable. And so it will be with the new fast-food chains who disrupt the old.

The food opportunity is so big because people need to eat three times a day. And unlike casual social interaction — here’s looking at you, Facebook — people happily pay for food. Counted in terms of DAUs, the number of  potential daily active users for these companies is in the billions.

A thundering herd of food unicorns is assembling itself on the horizon. Prepare yourself. It’s not a fad. It’s not over yet. And you’re not too late.

This is just the beginning.

This post originally appeared in TechCrunch.

Farewell to All That

“Each time you crest the rise in front of you, it just makes it clear the size of the even larger hill that looms beyond it. It goes on for a long time.” -Marc Randolph, Founder/CEO Netflix

****

After six years in the saddle as an entrepreneur, I’ve decided to hang up my hat and get a job.

Two weeks ago, the first wire hit our bank account––EasyFridge‘s first investment! I was excited at first. It felt good, validating and all that. After a few days, however, a different thought occupied me: “Am I ready to do this for the next five years?” 

 If you’ve never started a company before, this is a question you need to ask yourself.

For me, the answer was “definitely not.”

I’m tired. I took just two weeks off after the SpeakerText acquisition closed. In retrospect, that was a mistake. I should have taken more time, have made an honest effort to charge my batteries. But I didn’t. And now I’m paying the price.

As a result, I decided to return the capital to our investors (100 cents on the dollar) and move on.

Now I’m looking for a job.

Ill-Be-Back

Knowing When to Flip.

push button to exit

Magazines take your photo. Venture Capitalists offer to invest over email.  Billionaires smoke weed in your living room. No one doubts you.

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Your company is hot. You are hot. And it feels awesome.

To struggle for months, to dream for years––and then to have the world’s attention. It feels like success. It feels like you’re living the dream. 

But is it?

In that moment, the hardest thing in the world to do is to keep your head, to stay grounded to the reality of your shitty, mismanaged, high churn, unknown CAC, low LTV, money losing company.

Hubris is the easiest sin. I’ve seen it so many times, in myself and others.

Google offered TaskRabbit a hefty sum to power Google Shopping Express. They said no, we’re building the “gig economy.” Whither TaskRabbit now? Management churn, layoffs and a $40M liquidation preference, that’s where.

Google tried to buy Path $150M. They said no, we’re going to be the next Facebook. Now they sell e-stickers in Asia and can hardly raise a Series C.

And yet, in the moment of decision, the future is unknown and unknowable.

Being a founder, a CEO, is fucking hard. You could have made all the wrong choices––hired the wrong team, invested in the wrong technology, picked a terrible business model––and yet if you sell  for the right price at the right time, it doesn’t matter, you won. Indisputably.

The question is: When is the right time to flip?

Answering that question requires a profound level of self-awareness on the part of the entrepreneur and the management team. You have to see through all the press, all the ego-gratifying pomp and circumstances to see your own inner strengths and weaknesses. If your business is fundamentally weak and overvalued by the market, sell. If not, stay the course, take the big VC money. Go hard.

Selling your company requires acknowledging a strategic inner weakness.

Think about that. It’s easy to do when you’re running out of cash and ignored by the press, but how many entrepreneurs can truly see themselves thus–naked in the mirror– during that moment of glory?

***

This post is dedicated to Tony Faddel & the team at Nest, who flipped a niche product with grand plans and a decades long replacement cycle into an epic $3.2B all cash sale to Google. Congratulations, you played the game better than I could ever hope.

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Humility the Hard Way

Japanese generals humbled

So much of the best advice is impossible to hear when you are first starting out. Success feels within our grasp, just a sprint or two away. We’re in too much of a hurry to listen.

Failure slows you down. The pain of failure forces you to stop. Failure creates the context where one can truly listen and absorb advice from the grizzled veterans around us. I think the technical term is humility.

If you learned this lesson the hard way, don’t worry, you are not alone.

If you haven’t, consider slowing down for a moment and taking the easier path. There may be no answers outside of those that you create for yourself, but there is still much to be learned.

Japanese generals humbled

Race, Ethnicity & Silicon Valley

Ray Mireles

Silicon Valley favors the brash and the brilliant. If you have a pedigree and a network (e.g. if you studied Computer Science at Stanford), the bar

is lower. People will doubt you less. The corollary to this, of course, is that the more of a nobody you are, the harder it is and the higher self-esteem and courage it will take for you to succeed.

Courage is in short supply… everywhere.

A startup is a scary, lonely endeavor. It takes either desperation or an unreasonably big ego to make it work.

Imbalances of power are a feature of the human condition. Much like your forefathers (and even more so your foremothers), the odds are against you

Go forth with determination, grit your teeth and get ready to kick some ass.

my dad, a scrappy mofo if there ever was one.The man in the photo is my old man. Born in 1929, he picked cotton by hand as a child, laid railroad tracks as a teenager, survived the zoot suit riots in East LA, joined the Air Force, played lothario in Oakland and then paid his way through UCLA as a pipeline construction worker. He earned a PhD and retired as a professor. He was given little, he accomplished much, he inspires me still. 

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How to Negotiate Price Without Being a Jerk

If you’ve never done it before, price negotiations are easy to fuck up, especially when you need to have a non-adversarial long-term relationship with the guy on the other side of the table. Think:

  • Employee Salaries
  • Venture Capital Valuations

In either case, you want your employer or VC to not hate you after the fact, and vice versa. For some perspective, I’ve fucked this up royally more than once. Like, laugh out loud it’s so absurd and embarrassing kind of fuck up. Here’s the story:

It was the summer of 2010. My 3 SpeakerText co-founders and I were living together in a 2 bedroom apartment in Pittsburgh. We had $900 in the bank and rent paid for a full month and a half. In other words, we were on top of the world, but pretty goddamn close to the edge. But, being the resourceful entrepreneur I am, I had 3 angel investors lined up to put in ~$50k, which felt like an ungodly amount of money at the time.  Here’s a word-for-word excerpt from the email negotiations (emphasis carried from the original).

Investor: Last question I think- have you guys formed Board of Directors yet? Advisor is cool, but would be interesting and valuable to be the independent board member (usually at this stage, 2 founders + 1 independent on board). Not asking for more shares, just slightly different status.
Idiotic Younger Me: Seriously?? Yes. I am the board. And no, I will not add you as a director. There is absolutely no way in hell that is going to happen at this stage in the game. Whoever told you that you should get a board seat for a $10k investment needs to put down the crack pipe. Having an outside director at this point would be completely, outrageously inappropriate. Put. The. Crack. Pipe. Down.

Yes, I actually wrote that. And yes, I too still cringe in disbelief while reading the words.

Truth is, the investor was just trying to be helpful, but in the heat of the moment, I interpreted his well-intended ask as an act of malicious overreach while company was vulnerable.

But here’s the thing: Shit happens in business and in life. Emotions run high––not because people are stupid, but because the outcome matters! It’s perfectly normal for you to feel outraged or offended when someone makes you a lowball offer. And sometimes displaying strong emotion can be tactically useful.

But please, keep a cool head. If you’re gonna fly off the handle, do it for strategic reasons. Don’t take things personally. The game itself is antagonistic. Don’t hate the players on the other side. You will have to work with them when the dust settles. Remember that.

The other thing to remember: It’s easy for either side in a negotiation to misconstrue helpfulness, confusion or even rational self-interest as an act of malice when it’s not. Email compounds this. Face-to-face interaction lessens it.

Bad things happen when you demonize the other side.

Oh yeah, about that investor: Shortly after hitting send, my co-founders “helped” me realize the error / face-palm of my ways. The next day, I flew to Boston to meet him, apologized my ass off, drank a beer with the man and subsequently collected our first $10,000 check. No board seat was given. We went on to raise $1,100,000 from over a dozen investors, including Google, before selling to a competitor in Q3 2012.

It wasn’t my first or only fuck up, nor will it likely be my last, but the episode did teach me to check myself when things get heated.

Email is bad. Strong feelings are normal. Keep your head.

***

With that as a pre-amble, here’s my tactical advice for price negotiations in the context of a salary:

  1. Avoid email if you can, as email tends to add a more aggressive/adversarial tone than either party intends.
  2. Be respectful. Demonstrate excitement about the job and the people. Never bad mouth or shit talk the offer or the people.

If you have to do email, then maybe say something like:

Hi Potential Bossman/Investor,

Thanks for your offer. I’m extremely excited about XYZ and the opportunity it represents. After meeting the team and digging into the details, I want to say ‘yes.’ My only concern is the price.

If you can increase the  offer to $N+Y, then getting on board becomes an easy decision for me. If not, I will have to think about it some more. I’m also open to hearing other creative suggestions.

Your thoughts?

Sincerely & Respectfully,
-Guy Who Wants A Better Price

***

Please learn from my mistakes. I made them so you don’t have to. Too many people learn the hard way.

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Caveat: If you’re dealing with a sharky asshole on the otherside, do yourself a favor and try to find someone who’s not a sharky asshole to work with. Life is just too short. If you’ve got no other options or you don’t need (or want) to maintain a collaborative relationship after the negotiations are over, then go ahead and be a sharky asshole.

Be Grateful for the American Empire (the Alternative is Much Worse)

American Flag

A friend of mine living in Pakistan took to Facebook to grumble about American imperialism in her country and the region. This is what I wrote in response:

Unfortunately, if the US didn’t act like “the world’s police”, then you’d see a bunch of smaller players duke it out and wrestle for control over the world’s resources and strategic choke points. It would, sadly, be a much bloodier world with more fluid borders and more frequent wars of conquest. It would neither be a nicer world nor a more just one. It would be one filled with even more struggle and even more petty tyrants trying to realize their own selfish ambitions.

The US, for all its flaws, its solipsism and its arrogance, is a force for good in the world––if not compared to the ideal, then compared to the alternative as suggested by all of human history.

The post-WW2 era of US hegemony has seen less wars and less killing than the 70+ year period that preceded it. More countries are free and live under some form of self-rule. The age of empire ended in no small part thanks to American values and political pressure.

Does that mean the weak nations of the earth can go about their business without hassle? Yes, just so long as the global economy doesn’t require your resources to function. Or those of your neighbors. Or your trade routes.

If you want real freedom, I suggest either acquire nuclear weapons and a blue water navy or simply be irrelevant to the security and economic needs of the ailing hegemon and her rising rival, China. Or your more powerful neighbors.

Does it suck that the world works this way? To be honest, yes it does. We should all be able to live freely and under conditions of self-rule and autonomy. But doing so would require not just the USA to withdraw from foreign entanglement, but also her enemies and, hell, her allies too. We’re all just frenemies on some level, after all (remember, the Brits burned down the White House at one point).

College students and citizens of countries too coddled (i.e. Europe, who enjoys US military & nuclear protection vis a vis NATO) or too weak to be guilty of the same will find this state of affairs repulsive. And again, it only looks favorable when compared to the state of constant instability and recurring great wars that it replaced––an era which your grandparents witnessed only as children and not long enough to see the great meta-pattern.

Let me repeat that, as it bears repeating: If the US wasn’t throwing its weight around as the world’s clumsy policeman, you’d end up with a world of warring mobsters whose battling would leave your streets red with blood every few years. It’s not clear that you would see a more palatable or pleasant alternative. At least that’s what the historical record suggests.

In no case would you and your country be simply left alone. You would just trade one bastard for several.

But if you really want sovereignty, look into that blue water navy thing. Or at least a ballistic missile submarine. Getting nukes were a solid first step, but without a submarine force they’re vulnerable and the big boy generals still gander they could  wipe ’em out in a pre-emptive strike if needs be. And yes, this crude realization does in fact change the military & political calculus.

Only catch is you need an big economy to support these efforts, and that ain’t cheap or easy to build. But hey, at least it’s doable.

A Letter to My Son

Father and Son during a blackberry picking party.

Luca’s school asked me to write him a letter for mail day. I asked if I could send an email instead. They said ‘yes.’ Here’s what I wrote…

Hello Son,

Your old man here.

First off, I love you. Remember that, especially those early, early mornings when you want to play and I pretend to not notice you sitting on my head and slapping me in the eye. I’m not actually asleep during those times, but I wish I was, and the first step to realizing a dream is acting as though it was already true.

Secondly, I hear that you’ve made friends with the new kid, Cairo. Congratulations and good work. Not only does this allay any latent concerns about sociopathy, but great friendships are a key component to happiness in life. Be kind and generous with your friends. Do it right and you never know just how long the relationship will last. Heck, I’m still friends with Richard Hamilton, and we met in pre-school.

Third, be kind to your teachers. They clearly love you, especially that one Sofia.

With love, your old man.
-Pa

Matt Mireles and Luca Boyle-Mireles Father and Son during a blackberry picking party.

Valediction, Memorial Day

American Infantry

Thanks to all the military veterans out there. You put your ass on the line, be it for freedom or some politician’s folly. You risked life, limb and long fits of boredom for we the safe and only occasionally grateful. It is because of your sacrifice that we can enjoy the fruits of peace and the commercially-focused mindset that comes with it. The blessing is decidedly mixed, as our country might be better off had we tasted what you tasted during your time of service and sacrifice. Freedom ain’t free, but you have borne the cost more than I. Thank you, ladies and gentlemen of the American Armed Services. I salute you and live in debt to your quiet, humble heroism. Special thanks to Major Dan Boyle (US Army), Johnny Kuskie (USMC), Luke Stalcup (US Army) and Jake Warner (USMC).

A Good Startup CEO


I became a startup CEO because it was the only palatable job I could find. But I never really knew how to do the job well.

After $1.1MM, 17 employees, 4 years and 2 companies, I think I’ve finally figured it out.

The first job of a CEO is to define the mission, to set the goalposts and to define the units used to measure progress along the way. Fail that and there’s no hope. Your ship is rudderless. Even the best people will flail and work in discord.

The second job of a CEO is to build the organization and recruit the best possible team to execute on job #1. Do this wrong and you’ll underperform. You are beatable. Hell, do it really wrong and you’ll never ship a product. Do it right and you can build the next Google.

The third job of a CEO is to acquire the resources––money, typically––to build the team and buy the equipment you need to properly execute on job #1. Money is an enabler, a necessary reagent like oxygen, that keeps the fire that is your startup alive. It’s presence guarantees only survival, not success.

If you do job #1 right, the rest is a lot easier. Do it wrong and you’re in for a long, unfulfilling slog.