Pop-Up Pantry closes its doors amid greater than anticipated costs

By Michael Carney , written on January 18, 2013

From The News Desk

More often than entrepreneurs would like to admit, a good idea is not enough to create a sustainable business. All the demand in the world is not always sufficient overcome the economics of acquiring customers and then delivering your product or service.

Gourmet food delivery startup Pop-Up Pantry learned this lesson this the hard way. In the five plus months since launching publicly in August, the site’s membership has grown steadily month-over-month, says co-founder David Hauslaib, topping out at 1,300 customers ordering as many as eight three course meals per month. The problem, is that the cost of delivering restaurant quality food anywhere in the country, proved greater than expected.

Today, the company that graduated from the Launchpad LA accelerator and raised a $1.7 million Seed round from GRP Partners and Crosscut Ventures in July, is shutting its doors for good. Customers will be notified shortly and all outstanding customer balances will be addressed going forward.

So what went wrong?

Hauslaib and his co-founder Tom Balamaci knew that the Pop-Up Pantry model was expensive. They had hoped to reach scale quickly to take advantage of improving economies along the way. The company was managing all food development, manufacturing, and fulfillment in-house. Two day air shipping on cross country orders often cost as much as $45 – more than the company’s $35 to $40 cost of a meal for two.

These numbers would improve dramatically if and when the company began shipping 2,000 meals per day, rather than 200. Its interim goal was to get to gross margin profitability, meaning it wasn’t losing money on the cost of food and delivery. At that point, the business becomes one of arbitrage between cost of customer acquisition and customer lifetime value.

When growth came slower than expected, it became clear that additional financing would be required. Unfortunately, this came at a time when investor appetite for risk, especially in the tumultuous subscription commerce segment, is lower than it’s been in years.

Pop-Up Pantry still has money in the bank, according to a source with knowledge of the situation – although they declined to specify how much – but the founders and their investors apparently made the collective decision that it would be imprudent to continue spending it unprofitably. I asked the founder when the final decision was made. “Tom and I remained confident that we were going to [be able to] continue the business long term until very recently,” he said. “This all happened in a matter of days.”

Hauslaib all but confirmed that he expected new financing to come through, although he wouldn't say this explicitly. That it didn’t seems to have caught him off guard and left the business with little option other than to wind down.

At its peak, Pop-Up Pantry had 10 full time employees and 20 to 30 contractors. As of today, its team has been reduced to four. The company explored options for strategic partnerships and acqui-hires, but were unsuccessful. They were working on a heavily compressed timeline. Pop-Up Pantry has some intellectual property assets, including its proprietary food testing, manufacturing, and blast freezing process, as well as a proprietary ecommerce and inventory management platform. What will become of these is still being sorted out.

Another LA startup, Fresh Dish, is pursuing a similar meal delivery business, but with a dramatically different – and seemingly more cost effective – model. The company emerging out of the Science incubator delivers un-cooked raw ingredients and meal preparation instructions. The average meal, costs $8 to $12, although the startup likely has similar shipping costs to those of Pop-Up Pantry.

I asked Hauslaib what-- if anything-- he could have done differently to achieve a different outcome if given a second chance.

“Not much,” he told me. “We have confidence around all of our big decisions – going national, signing a TV partnership with MasterChef, focusing on delivering a high-end experience at home. Our traction bears out the demand for this.”

It can be hard to answer such questions so objectively so soon after pouring your heart and soul into something. We give Hauslaib props for openly talking about the decision, while so many startups just go dark. As Francisco Dao captured so acutely, the last days of a startup can be painful and lonely. Surprisingly, Hauslaib didn’t sound defeated when we spoke.

“Tom and I remain huge believers in the brand and the service," he said. “Make no mistake. We think that there’s a huge opportunity here and its a big disappointment to us that we can’t continue. The timing is perfect from a business perspective, but maybe not the financing perspective. We are in an environment when so many Americans consider themselves foodies, are conscious about what they put into their bodies, and are educated through food blogs and TV shows.”

PandoDaily reached out to investors at GRP Partners, Crosscut Ventures, and Launchpad LA, all of which declined to comment for this story.