Death & Co (July 2018)

Deal Abstract

https://www.seedinvest.com/death.co/series.a

Experiential bars with a strong reputation, based out of NYC’s East Village. This is a retroactive deal memo. Sought to raise $1.5MM at a valuation of $13MM. Remarkable in that this is an example of a boring business using a unconventional method of fundraising.

Decision

No.

Why Investing/Passing

  1. Restaurant/bar businesses doesn’t scale well.
  2. Brick and mortar businesses don’t scale fast.
  3. It took 12 years to grow to an estimated valuation of $13MM.

The 11 Calacanis Characteristics

Passed on 5/11.

CheckPass/Fail
1. Syndicate lead has >5 years investing and >1 unicorn investmentFail
2. A startup that is based in SVFail: (New York, NY)
3. Has at least 2 founders Pass: though the team was a bit unusually structured.
4. Has product in the market Pass
5. 6 months of continuous user growth or 6 months of revenue.Pass
6. Notable investors?Fail
7. Post-funding, will have 18 months of runway Pass: this business is raising money to expand, not because it’s not profitable/sustainable.
8. Proprietary technology?Fail
9. Network effects?
Fail
10. Economies of scale?
Fail
11. Great branding?
Pass: very trendy brand

The 7 Thiel Questions

  1. The Engineering question:
    • Bad: this company is not 10x-ing anything. That said, they never purported to be.
  2. The Timing question
    • Bad: no reasons why this is a particularly good or bad time to start a boutique experiential bar.
  3. The monopoly question
    • Bad: nope. The beverage and alcohol scene is probably like real estate e.g. very hard to monopolize. Not sure who the McDonald’s of experiential bars would be, or what that would even look like.
  4. The people question: 
    • Good: the founders seem well positioned to execute on this. Lots of industry experience.
  5. The distribution question
    • Bad: Sales is still brick and mortar, and despite the cocktail book,
  6. The durability question
    • Good: although establishments like this are hard to start and run sustainably, I’m not sure why given more time this would not be defensible.
  7. The secret question: 
    • Bad: it’s the era of experiential, craft, insert-normal-food-beverage here?

What has to go right for the startup to return money on investment:

  1. Death & Co can rinse, lather and repeat this business to multiple cities.
  2. There needs to be a liquidity event, either by acquisition or shareholder cash-out. It would have to be many decades of growth till this is large enough to go public a la Chipotle.
  3. Further culture cachet a la Momofuku, Ippudo, etc.

What the Risks Are

  1. There is no urgency to giving investors an exit because the business is self sustaining, but also not able to grow fast enough for a return on a reasonable time frame.
  2. General competition in the upscale food and drink space.
  3. Truthfully, the risks in this business are much lower than in software startups, but that also comes at a lack of meaning upside.

“Whereas restaurants are generally regarded as bad investments with rising rents and labor costs, bars are considered a safer bet with high profit margins, thanks in part to alcohol, which is nonperishable and easy to mark up. But whether this style of fundraising will take off with other bars remains to be seen.”

Bloomberg, Jul 2018, https://www.bloomberg.com/news/articles/2018-07-27/ever-wanted-to-own-a-bar-you-can-now-buy-shares-of-death-co

Updates

Raised $2.1MM for the business, exceeding expectations. Demonstrates that there is a demand for ownership in normal, non-venture backable businesses via equity crowdfunding.

What’s also interesting to note about Death & Co is that, while the business is not a good fit for venture capital, it is still a solid business and fulfills the aims of the founders and operators just fine. In other words, most businesses don’t need venture capital, nor do most entrepreneurs need to start venture back-able businesses to have a great business and lifestyle.

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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