Venture Scenes | Take 4

Matt Castellini

Published in

Venture Scenes

20 min readDec 31, 2020

My blog about Startups, Venture Capital, and Movies.

Ghost Kitchens: My Favorite Trend of 2020

Ghost Kitchens have enjoyed a meteoric rise in the past few years, and the pandemic only accelerated that growth in 2020. In 2019, as the overall food delivery space saw its Venture Capital funding fall by 21%, Ghost Kitchen funding rose to $2.1bn. Additionally, Ghost Kitchen's popularity was likewise growing exponentially leading into the pandemic, as evidenced by the number of mentions of Ghost Kitchens in the media. While year-end data is still hard to come by, most industry experts believe that the Ghost Kitchen Market growth accelerated dramatically throughout the pandemic. As we close out 2020, I wanted to provide an analysis of my favorite “breakout trend” of the past year, including the key elements, current status, primary benefits, and future opportunities for the Ghost Kitchen Market.

Key Elements

With Ghost Kitchens, customers order food via third-party apps, and that food is cooked and delivered from a delivery-only commercial kitchen. The key elements of Ghost Kitchens are as follows:

Ghost Kitchens have no brick & mortar dining locations. Ghost Kitchens can generally be thought of as “Meal Preparation Hubs” for online delivery. The precise layout of Ghost Kitchens can vary. Some operate out of communal stock rooms, while others will offer clients personalized space to oversee their inventory. The overarching goal is to provide chefs and restaurants utilizing the service with a streamlined kitchen optimized for delivery. According to Pitchbook, most Ghost Kitchens are likely located in densely populated cities worldwide, such as Chicago, New York, or Los Angeles.
Ghost Kitchens employ a minimal amount of workers. Given Ghost Kitchens’ bare-bones nature, there is no wait staff, no takeout windows, and theoretically no workers there to interface with customers who may show up. There is no front-of-house staff at most Ghost Kitchens. In some Ghost Kitchen locations, there are only two chefs on-site.
Ghost Kitchens usually have a menu that has been optimized for delivery or for the particular neighborhood that it operates within. Typically, Ghost Kitchens’ cuisine has been chosen for its ability to travel well and for its ability to satisfy an unmet or increasing demand in a particular neighborhood. Many restaurants and restaurant groups utilizing the Ghost Kitchen model will work independently or with a third-party to identify gaps between supply and demand for food delivery in specific neighborhoods. Once these gaps are identified, restaurants can tailor their menu and offerings to satisfy these areas of imbalance.
Some Ghost Kitchen operators strategically seek to utilize distressed real estate or otherwise unused storefronts, kitchens, or parking lots. Ghost Kitchens are frequently erected inside of properties that are distressed or vacant. Some have been built inside of refitted basements, while others operate in commissary kitchens or inside generalized industrial parks. Reef Technologies is a startup that creates “Pods” — shipping containers or trailers transformed into kitchens. The pods can be set up near office complexes, residential areas, or locations that display high demand for delivery.
Finally, the important players that currently operate in the space are venture-backed startups, third-party delivery companies, and restaurant brands. VC-funded companies such as CloudKitchens and Kitchen United will essentially build Ghost Kitchens and then sublease them to restaurants. Doordash has also entered the Ghost Kitchen space, building a kitchen last year that is leased out to restaurants while the company provides delivery services. Finally, restaurant chains and groups such as Wendy’s, Chik-Fil-A, and Lettuce Entertain You, have also utilized Ghost Kitchens.

Current State of Ghost Kitchens

Ghost Kitchens have existed for the better part of the past decade. If you count Domino’s as the original Ghost Kitchen, their existence stretches back to 1960! But aside from Dominoes, most Ghost Kitchens in the early-to-mid 2010s were operated as unlicensed kitchens that ultimately were shut down. In the past few years, the legitimized model for Ghost Kitchens has taken off.

Since the beginning of 2018, VC funds have invested well over $5bn into Ghost Kitchen startups, according to Pitchbook. Pitchbook also estimates that Ghost Kitchen deal values have increased by at least 2.4x each year since 2016. In 2019, as the overall food delivery space saw its Venture Capital funding fall by 21%, Ghost Kitchen funding rose to $2.1bn. In 2020, funding for Ghost Kitchens has dipped from 2019 — which investors attribute to the capital-intensive nature of the business model receiving less interest during the depths of the pandemic. But ghost Kitchens have still raised roughly $900mn thus far in 2020.

2020 seems to be the year that Ghost Kitchens have finally achieved mainstream status. Over the summer, Ghost Kitchen startups Zuul and Ikcon raised venture funding to expand their respective operations (Zuul is based in NYC, Ikcon in Dubai). In September, Virtual Kitchen raised $20mn at a post-money valuation of $105mn. Ordermark raised $120mn in October in order to scale up its ability to assist restaurants in finding available Virtual Kitchen spaces. In November, Reef Technologies raised $700mn to expand the amount of “Neighborhood Hubs” which will heavily involve Ghost Kitchens. In the past year, nearly every major national media outlet has written multiple pieces about the concept, including the Wall Street Journal, The New York Times, and NPR. Overall, mentions of Ghost Kitchens in the news media and public earnings calls have skyrocketed since late 2019-early 2020.

Some of the most prominent Venture Capital firms in the world have invested in the concept, including Sequoia Capital, Softbank Group, Andreessen Horowitz, Kleiner Perkins, and Founders Fund. Many of the Ghost Kitchen investors are also investors in the overall food delivery space. The most active prominent VC investors in the Ghost Kitchen space include Battery Ventures, ACME Capital, Greylock Partners, Lightbox, and Sequoia.

Aside from the traditional Venture Capital firms, some of the largest tech companies have placed significant investments in the Ghost Kitchen market. Amazon is one of the leading investors in Deliveroo, which is currently operating 16 ghost Kitchens in the UK. Google Ventures led the $40mn Series B round for Kitchen United in September of 2019. And former Uber CEO Travis Kalanick is the current CEO of CloudKitchens. Two other former Uber Execs, Ken Chong and Matt Sawchuck, co-founded Virtual Kitchen Co.

Startups and Companies

The Spoon has some of the best analysis dedicated to Food Tech and they outline the four main subcategories of Ghost Kitchens: Ghost Kitchen Infrastructure Providers, Restaurant-Operated Kitchens, Virtual Restaurant Providers, and Mobile Kitchens

Ghost Kitchen Infrastructure Providers are startups and companies that rent out space and kitchen equipment to restaurants or restaurant brands. These companies typically will charge either a subscription fee or a pay-as-you-go fee to use the kitchen infrastructure. Some of these companies have constructed the entirety of the Ghost Kitchen themselves, while others find retail locations to refit and outfit as Ghost Kitchens. These kitchen spaces can be large and are oftentimes housed in warehouse-resembling buildings. Multiple delivery-only restaurants can be held within one of these kitchens. The largest and most well-capitalized Ghost Kitchen Infrastructure Providers include CloudKitchens, Kitopi, Kitchen United, and Virtual Kitchen.

Virtual Restaurant Providers. Existing restaurants and Ghost Kitchens can have excess capacity for additional restaurant brands, types of cuisines, and menu items. Typically, Virtual Restaurants utilize this space to create food that can only be ordered digitally. Pitchbook summarizes the difference between Ghost Kitchens and Virtual restaurants as follows:

“Ghost kitchens should not be confused with ‘Virtual Restaurants,’ which refer to restaurant brands that operate within ghost kitchens that also sell through meal delivery platforms.”

Startups and companies that provide the necessities for the Virtual Restaurant experience fall under the category of “Virtual Restaurant Providers.” For example, Whole30 partnered with Chicago restaurant group Lettuce Entertain You and Grubhub in order to create Whole30 curated meals that would be distributed through LEY’s Ghost Kitchen space and delivered by Grubhub.

Restaurant Operated Kitchens. Typically this area consists of later-stage or public restaurant companies (MCD, SBUX, CHIK) that want to operate their own Ghost Kitchen instead of partnering with a Ghost Kitchen Infrastructure Provider. Starbucks is one of the more prolific developers of “to-go only” stores around the world. Chik-fil-A and The Halal Guys operate their own Ghost Kitchens in certain areas of the country, but they also partner with third-party Ghost Kitchen Infrastructure Providers as well.

Mobile Kitchens. To date, the least capitalized area of the Ghost Kitchen ecosystem is Mobile Kitchens. Ono Food Co. and Zume have created “Kitchen on Wheels” which are essentially next-generation food trucks that utilize predictive analytics and advanced technological initiatives. In 2019, &Pizza partnered with Zume, and the partnership drew significant media attention for the startup and its innovative take on the Food Truck business model.

TAM

The current size of the ghost kitchen market is hard to estimate. I believe it is reasonable to say that it is somewhere on the spectrum of the Food Truck market in the US ($1.2bn in 2019) and the TAM that some market research reports have cited ($43bn in 2019*). Promisingly, the market is still in its infancy, but it likely has achieved a multi-billion market value thus far. Euromonitor estimates that the Ghost Kitchen Market could reach a market size of $1 trillion by 2030.

*(The term Cloud Kitchen is often used interchangeably with Ghost Kitchen)

Euromonitor estimates there are 1,500 ghost kitchens in the US, 750 in the UK, 7,500+ in China, and 3,500+ in India (note, these figures represent third-party ghost kitchens and virtual restaurants). Below is a summary of some of the most interesting Ghost Kitchen companies operating in the US:

Reef Technologies has more than 100 ghost kitchens located in 20 markets throughout the United States. Reef recently raised $700mn of new financing, which the company will use to expand its operations from 4,800 to 10,000 locations across the United States. Co-founder and CEO Ari OJalvo stated that ghost kitchens will be a significant portion of the expansion effort moving forward.
Cloudkitchens has 41 ghost kitchen sites in 25 cities, with 1–5 sites per city. The company currently has the most locations (5) in Chicago and New York City.
Kitopi has established 30 kitchens in New York City, London, Kuwait, Riyadh, Abu Dhabi, and Dubai. The company raised a $60mn Series B financing in February to expand its operations across the world. The company intends to open 50 more ghost kitchens in the United States by the end of 2020.
Kitchen United currently operates in Chicago, Austin, Scottsdale, and Pasadena. The company intends to expand to New York City and Los Angeles. The company works with brands such as The Halal Guys, Jollibee, Wow Bad, Wendy’s, and White Castle. Kitchen United intends to build 400 ghost kitchens in the next few years.
Virtual Kitchen recently raised a $20mn Series B, a round led by Founders Fund. The company is expected to use the funds to continue its expansion efforts in the United States. As of February 2020, the company had 6 kitchens located in the San Francisco area (although this number is likely higher at this point).
DoorDash opened up its first Ghost Kitchen in Redwood City, CA in late 2019, known as Doordash Kitchens.
TruckBux is the operator of mobile ghost kitchens. The company’s platform makes it easy for locating food trucks while offering convenient payments as well as optimization and monitoring of sales and growth analytics, enabling consumers to locate food trucks and vendors to maximize their output (Pitchbook). The company has only raised $175k in financing and will likely look for a Seed round in the next year.
Use Kitch provides delivery concepts, caterers, food manufacturers, bakers, mobile food vendors, and other businesses with access to under-utilized kitchens sourced from hotels, restaurants, clubs, commissaries and ghost kitchen facilities, thereby enabling food entrepreneurs to grow their current businesses or bring new concepts to market with greater flexibility and reduced investment (Pitchbook). The company has raised minimal financing to date and will likely look for a Seed round in the next year.

The Advantages of Ghost Kitchens

I believe Ghost Kitchens provide the following advantages for restaurants and restaurant groups:

Expands Geographic Reach. The Ghost Kitchen model is advantageous for restaurants looking to expand their geographic reach without investing in a new dine-in location. Restaurants can establish a foothold in different neighborhoods and prove that demand exists for their particular menu and cuisine while increasing their throughput and growing their overall customer base. Restaurants and restaurateurs can also analyze data and pick strategic locations that have demonstrated an underlying demand for their particular type of cuisine or food. Without the upfront real-estate and overhead costs, it is easier for restaurants to move into new neighborhoods and fill any potential gaps in supply and demand.

Diversifies Revenue Stream into Delivery. The food delivery market has rapidly expanded over the past few years, and restaurants will need to capitalize on this particular market’s growth in order to thrive (and in some cases, survive). Statista estimates that the Online Food Delivery market will clock in at roughly $27bn in 2020, up 20% from 2019. Statista projects that the market will grow at a CAGR of 5.1% from 2020–2024, reaching a size of $32bn in 2024. The new reality of the restaurant industry is that delivery is going to be an increasingly vital part of the business model, and the pandemic has clearly accelerated this particular fact. For many restaurants, pivoting towards delivery has been a key method of survival throughout the pandemic. For consumers, a preference toward delivery may now be indefinitely embedded in their purchasing decisions. Bentobox conducted a survey that found that, once the pandemic subsided, 82% of food delivery diners intended to continue using online food delivery at the same frequency used during the pandemic. Restaurants can diversify and solidify their delivery revenue streams in the future by partnering with Ghost Kitchen providers.

Improved Economics versus Dine-in. This is one of the most significant benefits of utilizing the Ghost Kitchen model, and it solves one of the oldest and most potent problems in the restaurant industry. Typically, restaurants are capital-intensive, and 60% of new restaurants fail within their first five years due to high fixed capital costs. According to Pitchbook, rent for Ghost Kitchens can be 25x less expensive ($40,000 per month versus $1,500 per month) for restaurants. According to CloudKitchens, a 230 sq ft Ghost Kitchen can be constructed in two weeks for $30,000, whereas a 3,500 sq ft restaurant would require an investment of at least $1mn. Ghost Kitchens also require minimal labor costs outside of the chefs they will need to have on staff. In an industry where margins are razor-thin and third-party apps are charging 30% commissions on every delivery order, improving the overall economics and lowering real estate and labor costs is an extraordinary benefit for restaurants. Overall, Ghost Kitchens are an effective way for restaurants to drive up sales without a commensurate increase in capital costs.

Low-cost and lower-risk method to prove out a restaurant concept. One of the other defining benefits of operating through a Ghost Kitchen is the ability to test out new restaurant concepts and menu items. Many Ghost Kitchens can house multitudes of restaurant concepts, all from the same client. These concepts can be set up quickly, and the menu items can be tweaked or adjusted at any time. Ghost Kitchens are also advantageous because they can adapt to unexpected changes in diner behavior or tastes. Operators have the freedom and flexibility to pivot to a new concept without having to close any dine-in business down — rebranding becomes as simple as changing a logo on an app and providing new instructions to the Ghost Kitchen chefs. The nature of delivery apps and services means that restaurants will receive feedback for what is working and what is not at a much faster clip. Overall, Ghost Kitchens provide clients a level of culinary freedom and comfortability that is typically unheard of in the restaurant industry.

Future Opportunities

I believe the most significant future opportunities in the Ghost Kitchen space include (but are not limited to):

Ghost Kitchens utilized by more Delivery-Only Brands. One of the Ghost Kitchen model hallmarks is the ability to use the space to construct Virtual (delivery-only) Restaurant brands. There have been cases of restaurateurs cramming ten separate restaurant concepts into one ghost kitchen. Each of these concepts was able to deliver meals to customers using four different delivery platforms. A16Z cited the ability to create delivery-only brands as one reason it invested in Virtual Kitchen Co. According to the VC firm, the ability to allow “even the smallest food entrepreneurs to take advantage of the massive food delivery market,” is one of the strongest of the opportunities presented by Ghost Kitchens. Other Food Tech media outlets have similarly cited the ability to launch new restaurant concepts “exclusively in delivery apps” as one of Ghost Kitchens’ most promising use cases moving forward. I share these sentiments and believe that the rise of Ghost Kitchens will provide compelling opportunities for restaurateurs, big or small, to take advantage of the growth in food delivery.

Restaurants extending their reach to the suburbs of major cities. The rise of Ghost Kitchens in the suburbs will provide restaurants that are based in cities with an opportunity to extend their geographic reach. By expanding their footprint to the suburbs, restaurants will capitalize on unmet demand for their menu or even for their type of cuisine. Suppose a specific style of food was prevalent in the city but lacked representation in the suburbs. In that case, restaurants from the city could set up delivery-only operations in the suburbs to meet that demand. Restaurants would also be opening up their menu to a broader consumer base, which could ultimately result in greater conversions to its brick and mortar location(s) in the city. Consumers can utilize the third-party apps and delivery aspect of Ghost Kitchens to explore new kinds of cuisines and restaurant menus. That exploration could potentially lead them to discover a brand new favorite restaurant. I believe Ghost Kitchens represent a capitally-efficient method for restaurants to expand their customer base to the suburbs.

Restaurants finding and filling supply-demand gaps in dense metropolitan areas. The suburbs are not the only geographic opportunities for Ghost Kitchens. The ability to find and fill areas of supply-demand imbalance in dense urban areas is arguably a greater opportunity for the utilization of Ghost Kitchens in the future. There are numerous examples of restaurant chains or groups setting up Ghost Kitchen operations in downtown areas to take advantage of the population density and bias for certain types of food at certain hours of the day. Ghost Kitchens can be strategically placed to fill high volumes of the same food orders in high-density locations. Restaurants and restaurant groups can also work with third-party delivery apps to better understand where a restaurant menu or concept might best resonate in a metropolitan area.

Restaurant groups can utilize the Ghost Kitchen model en-masse. For restaurant groups, either independent or public, Ghost Kitchens represent a unique opportunity to boost revenues and customer base quickly. Many restaurant groups already have menu items and prime concepts for delivery (bowls, pizza, tacos, etc.). Restaurant chains also have the experience of quickly opening up new locations and strategically choosing those locations. As I have outlined, Ghost Kitchens represent a far cheaper and leaner method of opening new locations. Wendy’s, Chik-fil-A, Sweetgreen, and Lettuce Entertain You are but a few examples of restaurant chains and groups that have already seen the value in the Ghost Kitchen model. I anticipate many more restaurant groups and chains will turn to Ghost Kitchens in the near and distant future.

Conclusion

The attractiveness of the Ghost Kitchen model predates the pandemic, but COVID-19 has limited restaurants’ ability to serve patrons through standard methods of dining. Consumers have had to turn to food delivery as their primary source of “Food Away From Home. “ These factors have contributed to the robust growth of Ghost Kitchens and Ghost Kitchen funding in 2020, and have brought the concept into the mainstream. I anticipate that this growth will continue, and I see numerous avenues of opportunity for restaurants, restaurant groups, and startups in the Food Tech space.

(Special thanks to Jackson Bubala for his assistance with this piece)

Mic Check

Mike Dubois is one of the leading thought experts when it comes to e-commerce. I have really enjoyed his analysis of the impact that COVID has had on e-commerce. It’s a subject that I have written about in the past as well. But Mike singles out e-commerce enablement in this podcast episode, and I think that is one of the more exciting categories in Venture Capital. There are a number of startups that have emerged over the past few years that are attempting to bridge the gap between brick & mortar and e-commerce. These startups can work in a variety of ways; some of them provide the SaaS platforms that allow companies to create digital storefronts and sell on multiple e-commerce marketplaces. Others focus on specific e-commerce verticals and marketplaces such as Amazon. These startups, such as Downstream, Helium 10, and Junglescout, assist retailers that want to optimize their presence on Amazon specifically. As you can see below, e-commerce enablement is an increasingly popular area of Venture Capital financing. I fully expect the enthusiasm for this category of SaaS startups to continue.

The broader e-commerce SaaS space has also achieved healthy exits and financing rounds in 2020, continuing a trend that started in earnest in 2018. Squire Technologies raised a $59mn Series C round earlier this month at a post-money valuation of $250mn, representing a ~17.0x revenue multiple. Ecwid was LBO’d in May 2020 for $42mn and a post-money valuation of $63mn, representing a ~12.0x multiple. The IPO market has also been relatively favorable for e-commerce SaaS offerings. BigCommerce went public in 2020 at a revenue multiple of ~11.0x, Raycloud achieved a ~9.0x multiple through it’s IPO, and Lightspeed POS went public in March 2019 at a 5.25x multiple. I believe e-commerce SaaS companies had an outstanding 2020 and have more bright days of financings and robust exists ahead. And I think it is reasonable to assume that these kinds of exits and results will continue to trickle down to the specific category of e-commerce enablement startups.

Mike also touched on the topic of B2B marketplaces, which I intend to cover extensively in the next Take of Venture Scenes. The fact that we are at the beginning of the first inning when it comes to B2B marketplaces and commerce is truly exciting to me. It is an area that I hope to focus on in 2021, as there are some $1trn+ industries that are still conducting businesses the same way they did in 2001.

Movie Rec

Tenet

“Don’t try to understand it. Feel it.”

It is rare for a filmmaker to speak directly to his audience and instruct them on how to experience their movie. But that is precisely what Christopher Nolan did early on in this maddeningly confusing movie. At their core, Nolan’s scripts have always been smartly written puzzles. He plays with time more than any director in living memory, and most of his movies contain scenes that will be revisited in a new perspective or a new timeline. He regularly plays with audience interpretation, if not exactly their expectations. We typically know what we are walking into with a Nolan movie — and that usually means we know we are going to experience something we have never seen before. Something that stirs the kid inside of all of us that loves the movie theater experience. He has always been able to create scenes that produce pure wonderment from the audience. And I think he has accomplished that goal, once again, with Tenet.

But, let me start by saying this movie confused me and still confuses me, to no end. Once Tenet was finished, I went to Wikipedia to review the plot. After, I realized that I was not even sure what it was that had confused me. I did not know what I did not know. It was like studying for Chemistry in High School — I had no chance of understanding the movie because I could not even grasp the fundamental concept at the heart of it. I watched two different YouTube videos that promised to “Reveal the Secrets of Tenet” or offered me a serving of “Tenet — Explained!” These videos did very little to help me understand the film or the concept of time inversion. I researched these concepts further, and I was able to develop a working understanding of their meaning. However, when I think back to the movie, I am still utterly lost about how that helps me decipher what the hell was going on.

That said, I did what Nolan asked while watching the movie. I stopped trying to understand the mechanics at work concerning time inversion, and instead, I just surrendered myself to the sights and the sounds and the performances. For me, this was enough, and it ultimately provided a wildly entertaining piece of escapism for over two and a half hours. I wish that I could have seen this movie in Imax, as I am sure the experience would have been that much more potent and enjoyable. Nolan has once again bulldozed through the boundaries of what a cinematic experience can be.

Brad Feld has described Tenet as “one big hot mess of a movie,” and I don’t think he is entirely wrong. I honestly wonder if anyone could understand what was happening throughout most of this movie in real-time. I have seen the movie twice now and I will likely need to continue to watch YouTube videos in order to better understand certain plot points, scenes, and character arcs. The performances were great, if not exceptional. Robert Pattinson was the MVP, and part of me wonders what he could have done with the leading role.

But the action set pieces were the best I have seen in a very long time, maybe since the hallway scene in Inception. The scale of the movie also mesmerized me and kept me engaged throughout the entire runtime. Nolan has gone on record in the past saying he would be interested in directing a James Bond movie, but only if he was able to do it “his way.” Someone must have told him that was not a possibility — so he made this move instead. I wound up loving this movie because it felt like the product of love (and wish-fulfillment) from one of the greatest filmmakers in history.

I will admit that I have a reverence and a bias for Nolan, and I am not original when I say that. But it is hard not to feel that way about the director who directed The Dark Knight. I vividly remember walking out of the Northbrook Court AMC theater on a warm July night in 2008, with a massive smile across my face. Nolan was able to fully transport my imagination to a world of his creation. Since then, I have never been disappointed by any of his films. They all seem to achieve a similar reaction from me. Tenet was no different. It just made my brain feel like scrambled eggs in the process.

That’s all for 2020, folks. Thank you to everyone who has subscribed or taken the time to read Venture Scenes. As always, if there is a startup or piece of VC news that you find interesting, comment below, or message me on LinkedIn or Twitter! Also, see below for my favorite New Years' Eve movie scene of all time (and possibly my favorite movie scene of all time). Cheers!