Blue Apron is betting that subscription meal kits can whet the appetite of public investors, even as the market has soured in recent months.

The New York startup, which delivers pre-portioned ingredients and recipe cards to customers each week, laid out plans to go public on Thursday. It aims to raise $100 million in the public offering, according to the S-1 it filed with the U.S. Securities and Exchange Commission. Though it's unclear what valuation Blue Apron is targeting, the company was most recently valued at $2 billion in 2015, when it raised $135 million from investors including Fidelity and Bessemer Venture Partners.

CEO Matt Salzberg came up with the idea for the business, along with co-founders Matt Wadiak and Ilia Papas, back in 2012. In the beginning, "the three of us were packing boxes ourselves in a small kitchen in Long Island City," Salzberg told Inc. No task was too small, he added, from negotiating contracts to sweeping the floors and hiring early employees. But the model soon gained traction: In less than three years, Blue Apron ballooned to 2,500 employees and raised nearly $200 million in venture capital. In 2016, the company more than doubled sales, to $795 million.

Direct-to-consumer's appeal

Analysts point out that investors have been increasingly bullish on direct-to-consumer e-commerce businesses, such as Blue Apron, Dollar Shave Club, and Warby Parker, because they don't rely on actual storefronts. "These companies are not threatened by the decline in brick and mortar retail," explains Linda Bolton Weiser, an analyst with equity research firm D.A. Davidson. "Investors in the consumer products sector are looking for alternatives to retail, and this [Blue Apron] is very appealing," she adds.

Still, the on-demand food delivery industry faces a number of challenges, and that could deter investors from snapping up Blue Apron stock. In recent months, competitors such as Sprig, SpoonRocket, and Maple have shut down, citing the cost of customer acquisition amid mounting losses. At one point, Maple was bleeding money to the tune of $5 million a month, according to leaked financial documents obtained by Recode. In 2016, even as Blue Apron doubled revenues, it lost a staggering $54 million, up from $47 million the year before, the S-1 filing revealed.

Indeed, Blue Apron says it may never be able to turn a profit. "We have a history of losses, and we may be unable to achieve or sustain profitability," the company noted in the document. It listed a number of other risk factors for investors, including food safety, fluctuations in the cost of food over time, as well as increased competition from businesses such as Hello Fresh, Sun Basket, and, of course, Amazon.

A challenging sector

While it's not uncommon for venture-backed companies to prioritize revenue growth over profit, that attitude may not be able to sustain them over time. Consider that Blue Apron spent more than $140 million on marketing last year, up from $51 million in 2015, according to the S-1. Meanwhile, research finds that only 50 percent of Blue Apron customers stick with the company after two weeks, while only 10 percent are still using these types of services after six months. That's a lot of money for not a lot of payoff.

As these challenges have become more apparent, venture capital investment in the sector has slowed. In the first quarter of last year, global food tech deals dropped to 27, from a record high of 78 in the fourth quarter of 2015, according to venture capital research firm CB Insights.

In this climate, it can become something of a race to the bottom just to keep going. Last year, a BuzzFeed investigation revealed unsafe and hostile conditions at one of Blue Apron's workhouses. It's worth noting that the company lists the possibility of "unionization activities"--i.e., factory workers joining unions as protection--as having the potential to harm its bottom line.

Still, analysts such as D.A. Davidson's Weiser are optimistic. "They are the market leader, and that means a lot," Weiser tells Inc., explaining that the company sells more than a mere product. "Blue Apron has a unique proposition in terms of what it's offering: Customers are buying an experience [cooking with their families]. They are unprofitable, yes, but those things can be worked on. The hard part is rapid growth."

Published on: Jun 2, 2017