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PITCHBOOK: How the changing restaurant industry has shaped investors' appetite for food and robotics

Click to go to original article published by Pitchbook.

APRIL 2020


On a sunny Seattle morning in early October, 620 people streamed into a waterfront conference center. The mix of investors, founders and speakers was ready to chow on gourmet doughnuts and plunge into the burgeoning realm of food tech at the fifth annual Smart Kitchen Summit.


At a panel dubbed "How AI Will Reshape Food Markets," Zume chief technology officer Chris Satchell took the stage. Though Zume's reputation was still largely linked to pizza, Satchell emphasized that his company was refocusing to solve problems along the entire food supply chain—like sustainable packaging—fueled by data collected from its pizza operations. "That's where we think a lot of the magic will happen," he said in a post-panel interview.


One month later, Zume was in fundraising talks at a staggering $4 billion valuation, according to Recode, a little more than a year after it scored $375 million from SoftBank at a roughly $2 billion valuation.


Then, in a stunning turn of events, Zume laid off 360 employees in January—more than half its staff—and formally shuttered the pizza robot endeavor that had anchored the company since its 2015 birth. Only the focus on packaging would remain. (Zume declined to comment for this story.)


Perhaps Zume was another casualty of SoftBank's cash-splashing approach and demands to rapidly scale; the Japanese giant's $100 billion Vision Fund has become famous for its mega-rounds and somewhat infamous for several recent high-profile failures, WeWork among them.


Zume's meteoric rise and fall aside, the three-way intersection of robotics, automation and food sits at a critical juncture. Venture investment in the space has boomed over the past two years, and investors say competition for those deals has been heating up. Also, if a recession hits, automation could help keep food-service operations afloat.


That said, the engineering involved in integrating robots into non-uniform kitchens is no small task, and such an effort will require an immense capital outlay.


Investors are weighing these factors with renewed vigor. Can they find a balance?


A wave of startups has made landfall in a food tech world that broadly claimed $13.5 billion in venture capital across 440 deals worldwide in 2019, according to PitchBook data.

Companies under the more-specific food robotics umbrella aim to leverage automation to make key tasks in the food industry faster, safer, more reliable and, over time, less expensive. Some of these solutions can replace or augment tasks traditionally completed by human workers. Here, investors spread $1.3 billion across 23 deals last year.


Michael Wolf, the CEO of a food tech-focused publication called The Spoon and creator of the Smart Kitchen Summit, said that while kitchen robotics are in the "fourth or fifth inning of the ballgame," the technology presents an opportunity that high-volume, fast-service restaurants will need to tap into to remain competitive.


"I tend to be a little bit skeptical as an investor, but I'd continue to see this as a huge growth opportunity," he said.


Still, Zume's recent notoriety has sounded alarms in Silicon Valley and beyond. In February, outlets including Bloomberg and Business Insider investigated the management style of co-founder and CEO Alex Garden, who was painted as egotistical and erratic at times. For example, Garden reportedly directed hiring managers to recruit young, attractive women for entry-level jobs and once purchased a British double-decker bus to convert into an oversized pizza truck for a company party.


Investors will take a harder look at food automation startups following Zume's high-profile troubles, according to Brian Frank, the general partner at FTW Ventures.


"A lot of capital has rushed in with a lot of wide-eyed optimism, and we're now starting to figure out what works and what doesn't," he said. "I think the next generation of capital will be much more educated now that this first generation of capital has gone through."


It's also important to consider that Zume was never a pure-play robotics company, unlike other startups in the space, including Miso Robotics (robotic fry cook), Bear Robotics (Roomba-like front-of-house food delivery bot), Dishcraft (industrial dishwashing robot) and Cafe X (robot barista).


As its core business model, Zume wanted to become the "Amazon of food" by cracking the code for meal delivery logistics, according to Gennadiy Goldenshteyn, a food tech consultant who worked with Zume while in a previous role. "This whole idea of robotics was really inflated," he said, "and I think it was inflated for the consumers and not the investors."


While Zume's logistics business was successful, Goldenshteyn said the company "got caught in the SoftBank trap of the change of focus going from 'scale at all costs' to 'now you have to actually be profitable.'"


Automation becomes especially attractive when you consider that many restaurants are also facing staffing challenges. Approximately 35% of restaurant operators in the US report that they currently have job openings that are difficult to fill, according to the National Restaurant Association. That's up from 27% in 2015.


This reality has fueled Picnic, a Seattle-based startup building a compact, automated assembly system that can churn out nearly 300 customizable, oven-ready pizzas per hour.


Steve Dominguez, a VP at venue concession contractor Centerplate, supervised Picnic's beta test at the Seattle Mariners' T-Mobile Park last September during a dozen games. Dominguez said the hardest part of his job is staffing people, and product consistency suffers as a result. He hopes to include the system in operations going forward and said his employees were receptive to the kitchen addition, especially given their jobs weren't endangered—just made easier.


"I think it's always going to need a human touch because there's stuff that automation can't do," Dominguez said.


Picnic CEO Clayton Wood said potential customers who viewed demonstrations of the early prototype showed an interest and need for the product. "What's happened months later is they actually had to close their store because they couldn't get enough workers to work in their restaurant," he said.


Given the inextricable ties between automation and the job market, the economy's health underpins much of the industry. A recession could increase the number of unemployed people looking for work, as well as those willing to take lower-paying positions in places like food service, thus potentially lessening the need for robotics. Simultaneously, cash-strapped restaurant owners might be unable to purchase these costly systems.


On the other hand, an economic contraction could also beget opportunities for savvy businesses, according to Brita Rosenheim, a partner at Better Food Ventures. She said automation presents a compelling solution for restaurant owners who would feel even greater pressure to drive operational efficiencies—if the price is right.

"The upfront costs have to align with the cost savings. We're not quite at that equilibrium with most technologies … We're at the very beginning stage of this," Rosenheim said.


Nonetheless, not all investors are bullish on food automation. Andrew Bluestein, a managing partner at Bluestein & Associates, a family office that targets food investments, said he hasn't touched robotics in his six years covering the space.


"Robotics sounds nice in principle and theory, but it's really complex, and it oftentimes fails when you try to put it into the market," Bluestein said.


"It's going to take a lot longer and a lot more capital than I think most people anticipate."


Despite these funding needs, innovation in the food industry presents a massive market opportunity that underscores cautious investor optimism. People generally eat thrice per day, after all.


"There's still a lot of interesting opportunities in the space … Zume captured a lot of imaginations because of the promise of that," said James Wang, a general partner at Creative Ventures. "I still think that's there, regardless of whatever internal issues Zume has had."


Indeed, a significant degree of investor appetite and excitement appears to persist. Before long, robotic kitchen technology could become as commonplace as once-novel tools like microwaves or toasters.


"When I started looking at the space 10 years ago, people didn't even understand what food tech meant," Rosenheim said. "Now, even my parents understand what food tech is."

Click to go to original article published by Pitchbook.