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Tech-Driven Food Delivery Startups Aren’t Immune to SF’s Restaurant Woes

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Zesty is the latest to suffer

Zesty

Zesty, a health-focused catering startup, has laid off 13 people in the first week of the new year. And, late in 2016 it quietly terminated a $20,000 monthly lease on a 34,400 square-foot Mission District office space that it never used, according to people familiar with operations at the company.

The recent cuts stretch across multiple divisions at the company, and range from engineering to customer support, and represent between 10 percent and 20 percent of the total workforce, according to a Crunchbase count of staff.

“I think from our perspective, we set up some goals for 2016 that were ambitious and optimistic and made some decisions based on being able to hit those goals,” Zesty CEO Chris Hollindale told Eater in a telephone conversation. “As the year progressed it became clear that we had not been able to hit those goals, though that’s not to say business has not been good. We were just a little optimistic about our projections.”

The layoffs were a result of the over optimistic projections, he says.

Zesty is cutting back across the board

Zesty began to lease the $20,000 a month Mission office in October of 2015. At the time the company claimed it needed new space to accommodate expansion plans, which included the hire of former Google chef Nate Keller. But, according to the people with knowledge of Zesty’s operations, the firm never made the move, which may have cost the company hundreds of thousands of dollars in rent prior to exiting the lease agreement.

Hollindale says that killing the deal on the new office space had the same “root cause” as the layoffs. But it was also in part due to the fact that the company found a more appropriate space next door which “fell into their lap.”

The layoffs come at a time when food startups — especially those involved in the delivery business — are struggling to remain operational. In 2016 several small food startups ceased operations and others, such as well-funded Munchery, restructured.

Hollindale says that despite the changes in the business, 2016 was a good year for the company and saw “a lot of top line growth” referring to revenue. “We’ve made a ton of improvement on our margins,” he said, and added that per the company’s projections, it was on track to be profitable in the second quarter of this year. “We’ve made a ton of progress and the future is bright,” Hollindale said.

At least at one point, Zesty had a substantial war chest. Investors contributed $17 million to a 2015 funding round, according to a blog post penned by Zesty’s co-founder and former CEO David Langer. Langer resigned as top boss in July of 2016, and was replaced by then-CTO and fellow co-founder Chris Hollindale. Altogether Zesty has raised a total of just over $20 million.

Zesty’s competition has been raising money amid the company’s setbacks. During 2016 catering competitor ZeroCater convinced investors to give $4 million in funding, and Farm Hill raised $3 million, both of which are Bay Area-based.

But despite new investments in food startups — which have slowed in 2016, per data from Mattermark — these are troubled times for food startups in the Bay Area.

Even food delivery startups are struggling

Zesty’s business model promises to deliver “Google cafeteria-grade” meals to hungry startups, using registered dietitians and local chefs to develop recipes and menus for the companies. The meals are prepared by the chefs at their restaurants, which the company has previously said is designed to help restaurants “keep the lights on.” Delivery, service, and clean-up are all handled on-site by Zesty’s “Catering Captains.”

In November, food delivery startup Munchery, replaced its CEO amid reports the company was struggling to attain profitability — it is reportedly losing $3 million a month — dealing with high profile staff departures, and issues with food waste. Food waste has also been an issue for Zesty as well, and another of the reasons the company hired chef Keller.

Investors valued Munchery between $250 million and $275 million when it raised $85 million in 2015.

Food delivery startup Sprig, at which Keller was the opening executive chef, has also reorganized, trimmed its workforce and withdrawn from some markets. Similarly, Kitchit, an on demand personal chef service, shut its doors in April after failing to attain profitability. Berkeley-based SpoonRocket, Dinner Lab and Kitchensurfing also shut down in 2016.

And Blue Apron, which delivers meal kits that include ingredients and instructions, came under fire after a report surfaced that the company has had health and safety violations, violent incidents, and unhappy employees at one of its packing facilities in Richmond.

Hollindale told Eater that Zesty’s business is unlike those competing for consumer diners. “The consumer space is just as hard as it is made out,” he said. “The company was in the consumer space in 2013, and I think we found that very tough. There is a lot of competition to get growth, and many companies competing in a well funded environment.”

Hollindale sees Zesty’s business as fundamentally different. Its clients are typically corporations with between 20 and 500 employees. “That’s just fundamentally different, the behavior is different — most companies aren’t as price sensitive and more interested service, and healthy food for a variety of reasons,” he said.

This article has been updated to include quotes from the CEO.

Disclosure: Max Cherney's wife is involved with Zesty. She was not quoted as a source for this piece.

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