This startup turns restaurant kitchen chaos into ballet
CAPVEE's pick of the week is SousZen
Summary:
Company: SousZen
Sector: SaaS (Restaurant management software)
Platform: Wefunder
Minimum Investment: $100
Investment Structure: Convertible Note ($5 million valuation cap)
Funding Status: <$0.1 million ($0.4 million target)
CAPVEE Call: Buy (>14x Return Potential)
Overview
SousZen is a back-of-restaurant tech startup. The company created a real-time decision-making engine that applies software, automation, and analytics to support the chefs in creating menus, controlling kitchen costs, and managing kitchen staff.
The company was founded in 2019 by Stephen King, a serial software entrepreneur with three exits under his belt. The company is backed by Xinova Labs, a leading incubator, and PepsiCo, which serves as an investor and strategic partner.
SousZen recently signed a contract with PepsiCo to roll out a paid trial at 2,500 Tosticentro food trucks in Mexico.
The Problem SousZen Solves
The restaurant industry is under pressure to come up with innovative solutions to increase sales, improve margins and find a way to survive in a post-COVID world. The industry is coming off a year that saw $120+ billion in lost sales.
Though the industry is typically slow to adopt technology, one potential solution is to apply artificial intelligence and machine learning to improve decision-making. SousZen is using next-generation technology to orchestrate kitchen operations.
The Team
Stephen King, Founder & CEO: Stephen is a serial software entrepreneur who previously started and turned around several software businesses, resulting in three exits. Before founding SousZen in 2019, Stephen was the President & CEO at DeployHub, a microservice platform that he grew to 100,000 users with no external funding. Previously, he was President & CEO at Marqui, a marketing automation and content management company that sold to a group of private investors. He is also the co-owner of three organic restaurants in Oregon.
Stephen holds a BS in Economics and Statistics from the London School of Economics and has attended an Executive Education Program at the Wharton School of Business.
Josh Groves, CTO: Josh’s career in tech spans start-ups, private equity and Fortune 100 companies. He is a three-time CTO and has two exits under his belt, most recently at Oilgear, a manufacturer of pumps and valves that sold to Texas Hydraulics.
Josh holds a BS in Applied Physics from Columbia University where he also played NCAA football.
What We Like
- SousZen’s SAM is large and growing: According to Grand View Research, the global restaurant management software market is projected to grow at a 15% CAGR (compound annual growth rate) from $3.6 billion in 2020 to $6.9 billion in 2025 driven by a soaring need for restaurant-specific software such as billing and payment processing, inventory, table and menu management.
- High need for innovative solutions, but no one has hit a home run yet: Over the past few years, the industry has experienced a flurry of innovations in artificial intelligence and machine learning to carry out back-end operations efficiently, such as sales prediction, inventory management, staff scheduling, and payroll tools. According to Hospitality Technology, although the industry is curious and sees the potential in AI/ML, no software provider has found product-market fit.
- Strategic partnership with PepsiCo: SousZen signed a contract with PepsiCo to roll out a paid trial at 2,500 Tosticentro food trucks in Mexico. This gives the company immediate and material scale to generate sufficient data to optimize its algorithms and improve its user experience. It also serves as a world-class reference to acquire additional customers.
- Team and business model have been properly vetted: Stephen and Josh are a five-star team with a combined 30+ years of data, software, and hardware experience in start-ups, private equity, and Fortune 100 companies, including five exits. They are backed by well-known and respected investors, which suggests that the team and the business model have been properly vetted.
What Makes Us Nervous
- Hotbed of competition: Competition is always an issue, but this is a particularly crowded space. According to G2, there are 100+ providers of restaurant management software, both from established companies as well as a slew of start-ups with large aspirations. Many of which offer similar features to SousZen.
- No clear USP and go-to-market strategy: While we have a strong conviction in the team, we still believe that the company needs to articulate a clear(er) USP and go-to-market strategy to stand out in the crowd. The partnership with PepsiCo opens doors, but what’s the pitch once Stephen and Josh are at the table? Based on our research, two issues come up frequently. For one, there is an issue of integrating new software with existing, and often antiquated, systems. Also, outside of the major chains, restaurants are all different. A “one-size-fits-all” software solution is possible (like OpenTable, for instance), but more difficult for multiple use cases, as is the case in back-of-house operations. Based on these data points, we believe that there might be a potentially profitable niche for a highly customizable solution, though that can also present its own challenges in on-going servicing. We’ll reach out to the team to address this point and learn more.
- All or nothing investment:, Network effects, economies of scale and scope are dominant forces in this sector, as with all SaaS investments. As a result, the company will either emerge as an industry leader (a stepping stone to an IPO or acquisition) or the company may find itself the target of an acqui-hire or, worse yet, shuttered. Like most startups, investors should view this as a high risk/high reward opportunity and only invest what they can afford to lose.
The Investment
The company offers investors a convertible loan with a valuation cap of $5 million.
We arrive at a max valuation of $5.1 million, suggesting that the company’s valuation is reasonable. Assuming that SousZen reaches $36 million in sales in year 5 (equates to a 1.0% market share of SAM) and an EBITDA margin of 30% (7%-points less than the industry average), a >15x return is possible.
Following its raise on Wefunder, we estimate that SousZen will have a cash runway of 12 to 18 months. So, anyone investing here should assume additional financing rounds with associated dilution.
Please refer to our valuation model for a more in-depth explanation.
As always, if you have any questions or comments regarding the valuation model, please feel free to reach out to our valuation guru Olof on Twitter.
The CAPVEE Call
We view SousZen as a buy with >15x Return Potential.
Hit us up on Twitter and let us know what you think! We are always happy to hear from you and discuss your questions and concerns.
Disclosure: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.