A Sweetgreen location in Bethesda, Maryland.
Jeffrey MacMillan | Getty Images
Travis Kalanick may end being known more for supporting ghost kitchens than being CEO of Uber.
Kalanick joined the likes of DoorDash and GrubHub in shaking up the restaurant industry with third-party food delivery. After his ouster, he’s kept changing it through a controlling stake in City Storage Systems — the Los Angeles-based parent company to a ghost kitchen start-up called CloudKitchens.
The impact of Kalanick’s investment rippled across the United States to New York City, where another start-up was trying to get its feet off the ground.
“I think, at that time, Travis planting his stake in the space was a whole new proof of concept, of market validation,” Corey Manicone, the co-founder and CEO of Zuul Kitchens, said in an interview. “Every single VC that we had spoken to since then effectively circled back.”
Venture capitalists interested in food technology are now looking to ghost kitchens to cash in on the restaurant delivery trend.
Also known as virtual, cloud or dark kitchens, ghost kitchens are meant to address the demand for off-premise restaurant dining. In 2018, consumers spent $10.2 billion on orders through third-party delivery platforms like UberEats and GrubHub, according to Technomic.
That growth has left restaurants struggling to keep up with orders. The solution: ghost kitchens. These sites also help restaurants that want to expand to new neighborhoods. While some restaurants and third-party delivery platforms are running their own virtual kitchens, start-ups that house multiple restaurants under one roof are gaining steam with investors.
Dark kitchens are relatively new in the United States but have gained more traction overseas in densely packed cities because it makes delivery much more efficient and often these sites can be opened with less red tape than in the U.S.
The billionaire is reportedly funding the company through his own wealth instead of seeking outside investors. CloudKitchens did not respond to a request for comment from CNBC.
Kalanick’s interest in ghost kitchens — and disinterest in venture funding — is making it easier for others to find funding.
Zuul is in the process of closing its second funding round.
The value of restaurant experience
In September, Zuul opened its first location. Sweetgreen, the salad restaurant chain known for lines out the door during lunchtime, is its anchor tenant.
Gaurav Jain, the co-founder and managing partner of Afore Capital, invested in Zuul in late 2018, before the company had even signed a lease. After talking to several other ghost kitchen start-ups, Jain invested in Zuul because of Manicone’s background.
Kitchen United’s Pasadena facility
Source: Kitchen United
Manicone’s father was an IHOP franchisee and later owned an independent bar and grill restaurant, introducing his son to the challenges of the industry. Manicone became the first employee of Relay Delivery, a New York-based restaurant tech start-up that connects bike couriers to restaurants with delivery orders.
Jain said that Kalanick’s investments in ghost kitchens seem to have prompted more interest from the broader venture capital community, particularly with those who did not have experience in food delivery. Jain was on the board of Canada’s SkipTheDishes before its sale to Just Eat, a British online food order and delivery service.
For the last five years, Jain has been thinking about the potential opportunity of virtual kitchens. He uses the analogy of Amazon Web Services, the arm of the e-commerce giant that gives companies — both large and small — access to cloud computing. In his mind, Zuul will do the same for restaurants’ ability to meet delivery demand.
Zuul will soon face competition in its home market from Kitchen United, a Pasadena, California-based company that recently closed a $40 million Series B funding round.
GV, Alphabet’s independent venture arm, doubled down on Kitchen United by leading its Series A round and co-leading its Series B funding. The start-up has ghost kitchens open in Pasadena and Chicago and plans to open a third in Scottsdale, Arizona this week.
For GV general partner Adam Ghobarah, one area of increasing focus for him as an investor is the ecosystem that has developed on top of third-party delivery services. He said he believes that food delivery will displace people cooking in their homes. That belief led him to approach Kitchen United — several times.
Kitchen United CEO Jim Collins
Source: Kitchen United
Kitchen United CEO Jim Collins said that the start-up was initially conservative when it came to fundraising.
“Early on, we talked to a lot of investors who pushed hard for us to think about making KU look more like this company or that company, who were the darlings of the investment community at the time,” he said.
Collins had served as a chief executive for a number of venture-backed companies before switching gears and opening his own restaurant, Town Kitchen and Grill in Montrose, California.
Kitchen United’s Chief Operating Officer Meredith Sandland, also has restaurant experience. She served as the chief development officer for Yum Brands’ Taco Bell prior to joining the start-up.
“They’re not thinking small. They’re thinking big. And they have the restaurant background, they’re not a couple of tech people,” Ghobarah said.
Ghobarah said that Kitchen United also understands the necessity of attracting regional and national chains, in addition to new restaurant concepts that lack consumer awareness.
Source: REEF Technology
Another company looking to attract national chains is REEF Technology.
The primary business of REEF, formerly known as ParkJockey, is operating more than 4,500 parking facilities. That business helped the Miami-based company net funding from SoftBank, which has also backed delivery providers Uber and DoorDash. The deal, struck in December, reportedly valued the start-up at more than $1 billion.
In June, REEF announced its name change and plans to branch out into ghost kitchens, housed in its parking garages, that can host five or six restaurant concepts at a time.
“Ghost kitchens are an emerging area, so obviously capital from SoftBank means that we’re looking at very fast growth across the sector,” REEF co-founder and CEO Ari Ojalvo said in an interview.
The company has already opened more than 50 of those kitchens across 20 cities in the U.S. and plans to launch hundreds more by the end of the year.
‘Where trends are going right now’
To grow the virtual kitchen business, REEF needed an infusion of capital. Potential investors usually ask questions about the start-up’s sustainability, Ojalvo said. The preexisting parking business, with its healthy free cash flow, make such discussions easier.
“The types of investors that we work with are attracted to the hybrid nature of being both a profitable business and a hyper growth business,” Ojalvo said.
REEF’s pitch to investors also includes noting the proximity of its ghost kitchens to the consumers ordering food delivery.
S2G Ventures managing director and founder Chuck Templeton, who earlier founded OpenTable, has not invested in ghost kitchens. The food and agriculture venture fund’s investments include Beyond Meat and Sweetgreen.
“I think ghost kitchens fully fit in with where trends are going right now,” Templeton said.
He noted that there will likely be over-investment and investors who do not see their bets pay off, as is the nature of venture investing.
Some virtual kitchen start-ups have already failed. Pilotworks, a ghost kitchen company, ceased operations in late 2018, despite raising $13 million less than a year earlier. Its investors included Acre Venture Partners, a venture fund anchored by Campbell Soup.