Munchery Folds, and These Local Businesses Are Paying the Price

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The Babes Bakeshop employees at a bake sale protest outside of Sherpa Capital, one of the VC firms that invested in Munchery. (Sam Harnett/KQED)

It took eight years for Lenore Estrada to grow her business, Three Babes Bakeshop, to 19 employees and $1 million in gross sales. To do that, she’s had to sell a lot of pies.

Until recently, Estrada sold many of those pies through Munchery, a meal delivery company based in San Francisco, where customers could place their orders with a smartphone app. The partnership brought in some steady income, but ended up backfiring on her.

Lenore Estrada baked around a thousand pies for a Munchery order at Thanksgiving.
Lenore Estrada baked around 1,000 pies for a Munchery order at Thanksgiving. (Sam Harnett/KQED)

On Thanksgiving, Munchery put in an order for around 1,000 pies, which Estrada baked herself even though she had a 2-month-old baby at home. “I worked the graveyard shift,” Estrada said. “I left my baby at home and I would work here from 10 p.m. to 8 a.m., just keeping the ovens full.”

The order was worth $20,000. Munchery, like many big wholesalers, usually paid Estrada late, but this time the check never came. In mid-January, Munchery closed.

Estrada said no one from the company contacted her to let her know — she found out only because she’d once used Munchery as a customer.

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“I purchased a sandwich from them before, so I’m now on their listserv,” she said. “I received an email at the same time as all the other customers of theirs, saying that they regretted to inform us that they were closing down.”

Munchery started in San Francisco in 2010, and it quickly expanded to other major metro areas, like New York and Los Angeles. It was a part of a wave of meal delivery startups that promised to “disrupt” the dining industry.

Many of these companies, like Sprig, Bento and SpoonRocket, have closed along with Munchery, many because they weren't able to operate independently of venture capital. Munchery had $125 million in venture capital money, which it socked into things like pie orders and advertising.

In 2017, Munchery began laying off workers. It halted service in  Los Angeles, New York City and Seattle. One investor, who did not want his name used, said he saw the writing on the wall and counseled CEO James Beriker to wind the company down this past fall.

But Beriker pushed on.

In an email to KQED, he said that additional financing fell through very suddenly. Two weeks ago, the company abruptly shut down.

"It was [a] difficult decision and was extremely disappointing for all of us who worked so hard to turn the business around over the last two years," Beriker wrote.

Munchery is still in debt to a number of bakers and chefs in San Francisco, including Dandelion Chocolate, Crumble & Whisk, Hodo Soy and Petit Pot. The businesses are collectively owed over $50,000, and the owners are taking to social media to try to raise awareness about their plight.

On Monday, Estrada held a protest bake sale outside the San Francisco offices of Sherpa Capital, one of the VC firms that invested in Munchery. She said she has spoken to representatives of the San Francisco mayor's office and the state Department of Justice, but sees little recourse. She said she and other small businesses are bearing the financial consequences of a failed venture capital experiment.

Lenore Estrada held a protest bake sale to bring attention to the debts that Munchery owe her and other small businesses
Lenore Estrada held a protest bake sale to bring attention to the money that Munchery owes her and other small businesses. (Sam Harnett/KQED)

This whole scenario does not surprise Mara Zepeda, an entrepreneur who helped begin Zebras Unite. The group advocates for more inclusive tech companies that focus on sustainability and responsibility, rather than the hyperfast growth and profit demanded by venture capital.

“Criticizing venture capital for being too high-growth is like criticizing fire for being hot,” Zepeda said.

Venture capital investment in the U.S. is at an all-time high, surpassing the 2000s dot-com levels for the first time. Zepeda said VC money puts pressure on companies to expand faster than may be wise in the hopes that someone will buy them up or provide more cash before the money runs out.

Aniyia Williams, an entrepreneur who lives in San Francisco’s Bayview neighborhood not far from the Three Babes Bakeshop, said she felt that pressure. Williams started a venture-backed company, Tinsel, which made ornamental headphones.

“You’re trying to just move at the speed of light," Williams said. "It always feels like, OK, you’re just that much closer to finding that next investor who’s going to be the one who writes that check that’s going to save you.”

At one point, her company was pushed to the brink, but Williams said she was able to pay off all her debts — not because anyone forced her to, but because she made a personal decision to prioritize it. Tinsel is now in a bit of stasis mode while Williams tries to sort out her next move.

Minimizing damage to other businesses isn't such a high priority for many venture-backed companies Williams said. “Fundraising becomes the business model, and these partners you’ve had along the way can get caught in the wake.”

Getting caught in the wake of Munchery's failure is especially damaging for small companies like Three Babes Bakeshop. Owner Estrada said she pays herself only $30,000 a year, and her margin for survival is razor-thin.

Estrada said some of her customers suggested she run a GoFundMe campaign to recoup her losses, but she doesn’t want the burden to fall on friends and customers. “What we want is for the venture capitalists, the investors and board members to take responsibility and write a check for the money that we’re owed,” she said.

Losing $20,000 means Estrada won’t be able to expand this year like she had planned, and she’s going to have to scrape to continue offering health care and benefits to her employees.

Munchery's former CEO Beriker says he’s "personally working on potential solutions," but by law the company must pay banks and employees before vendors like Estrada.

"I realize just how hard this is for local businesses," Beriker wrote in an email. "We have so appreciated our partners, large and small, and deeply regret the impact that our lack of funding and sudden decision to shut down had on their businesses and families."

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Earlier this week, a group of former employees filed a class-action lawsuit against Munchery, demanding back pay and saying the company failed to give them the required 60-day advance notice of an intended layoff.