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Food-tech startups get gastric trouble

Until a few months ago food-technology startups were the darlings of investors and attracted millions of dollars in funding. They expanded rapidly and burnt cash in marketing and advertising as they chased customers and market share. And then they got more funding to do the same thing all over again.

Reality is now sinking in.

Several food-tech startups are reeling under financial pressure to control costs and sustain investor interest; some are shutting shop, tweaking their businesses, pausing operations or reducing their staff count.

So what went wrong?

According to some estimates, about half of the food-tech firms operating in India started in the past year. As per VCCEdge, the data research platform of VCCircle, 19 food-tech startups have raised about $160 million in venture capital funding so far in 2015. Only five companies managed to raise money twice (see chart).

Food_tech

New startups are still emerging every now and then, trying their luck in an already crowded market. But not many can differentiate themselves in a market where the margins are low. Flawed business models and lack of innovative revenue strategies have taken a toll on many food-tech startups, which pin their hopes of survival almost entirely on external funding.

Consolidation has already started in the nascent sector. Rocket Internet-backed Foodpanda, for instance, acquired rival Just Eat India early this year. Last month, hyper-local grocery and fresh food delivery platform Grofers acqui-hired financially struggling food delivery app SpoonJoy.

“The food-tech hype was created due to low entry barriers. There are almost 250 food startups trying to validate slightly different models and attract investors,” says Udit Saran, CEO and co-founder of Bangalore-based online food-delivery startup EatonGo. “In such a crowded space, market corrections were meant to happen.”

Alok Jain, co-founder and CEO at Yumist, says there are many reasons for the difficulties food-tech startups are facing. “A singular focus on raising money, random pivots, high burn owing to uncalled-for advertising and hiring are the major reasons,” says Jain, who took a dig at SpoonJoy when it halted operations with a tweet that read, “Let us be the ‘spoon’ to feed you with some real ‘joy’”.

Business models
The online food ordering business in India is estimated at Rs 5,000-6,000 crore, growing about 30 per cent month-on-month, according to a report by India Brand Equity Foundation. The sector includes aggregators, food-ordering platforms, delivery-only players, proprietary meal sellers and cloud kitchens.

Broadly, startups in the sector can be categorised on the basis of the three main business models. The first set comprises ventures such as TinyOwl,which provide software-only marketplaces that act as selling points for restaurants. The second group includes hyper-local food delivery services like Foodpanda and Swiggy, which bring the traffic and manage the logistics. Finally, there are full-stack food businesses like Food Vista and Brekkie.

Of these, restaurant aggregators seem to be facing the most problems. So much so that many of them are starting in-house delivery services.

For marketplaces, the average transaction size is small and the commission they get on each order is rather thin. As a result, revenue often falls short of meeting the capital spend on customer acquisition. Moreover, it’s difficult for such marketplaces to build a strong brand image for themselves as they cannot control the quality of the food or quicken the pace of delivery.

Online food ordering business in India is estimated at Rs 5,000-6,000 crore

Online food ordering business in India is estimated at Rs 5,000-6,000 crore

Foodpanda’s struggles as a food-ordering marketplace were well documented in several media reports recently. In fact, Foodpanda and Zomato have started food delivery services in select cities.

For hyper-local food delivery startups, the average ticket sizes are smaller when compared to e-commerce companies. With a commission that varies from 5 per cent to 15 per cent on each order and long-distance delivery requirements, they fail to get the unit economics right. And the flow of orders is not uniform throughout the day, lowering productivity of delivery executives.

Many of these companies raised funding from angel investors or venture capital firms such as Sequoia Capital and SAIF Partners over the past few months. Some of them are now in troubled waters.

Cracks begin to show
In early October, mobile-only food ordering startup TapCibo Online Solutions Pvt Ltd, which operated under the brand Dazo, shut shop just as it completed a year of operations. It had raised seed funding from investors including CommonFloor co-founder Sumit Jain and Google India MD Rajan Anandan.

Mumbai-based food ordering app TinyOwl has laid off more than 200 employees within two months and is also scaling down its operations. The company had raised Rs 100 crore in its Series B round in February and, after the first wave of layoffs, secured another $7.5 million (Rs 50 crore).

Foodpanda, one of the biggest names in the Indian food-tech space, is looking to sell its Indian arm. Its German investor, Rocket Internet, has reached out to at least three of Foodpanda’s peers in India for a possible deal, according to a Mint report.

The latest sign of trouble comes from restaurant listings and food delivery firm Zomato. Last week, its CEO and co-founder Deepinder Goyal warned the company may miss its revenue target for 2015-16. The company is also laying off nearly 10 per cent of its workforce. Zomato raised $60 million in its last round of funding that propelled it into the club of ‘Unicorns’, a tag meant for startups valued above $1 billion.

Nagaraja Prakasam, a member of the Indian Angel Network, says there is a bit of hype around the ‘digital consumer’ segment. He draws a parallel with the dot-com era. “Since many e-commerce companies are getting good valuation, there is a similar expectation on every segment,” he says.

Prakasam explains the problem with the help of an example. “One of the reason companies like Webvan failed in the US is the delivery cost, even though the delivery boys were paid very less. I recently saw a job ad calling delivery boys with a paycheck of Rs 20,000 a month. This is great news for the country in terms of employment, but not so good news for these ventures as their business model cannot support this,” he says.

Sanjay Mehta, also a member of the Indian Angel Network, says most food-tech companies are run by technology experts, so their focus is on building technology first and business later. “It doesn’t work in this sector,” he says.

But while some startups are struggling, some others have lured investors over the past month. Vadodara-based food ordering marketplace Boibanit has raised $150,000 in angel funding while Gurgaon-based Twigly got $200,000 in angel funding. MealHopper secured $100,000 in seed funding, gourmet meals portal iChef.in raised an undisclosed amount and on-demand meal provider Frsh.com raised a bridge funding round.

What next?
Industry observers say the fundamental success mantra for startups in this sector is the quality of food. Innovative business models and creative marketing efforts will also help startups survive the test of time.

“Hyper-growth models may not work in food delivery where the quality of food is the only key to consumers’ decision,” says Saran of EatonGo. He says startups should focus on getting repeat clients as discounts can lure customers only once. “The food market can’t be compared with e-commerce or the taxi business; you can’t have similar strategies. Drop in repeat sales is when you will start struggling and burn more,” he adds.

Both Saran and Jain of Yumist see a bright future for the industry. They feel investors will keep pouring funds but say only companies focusing on solving the industry’s pain points while sticking to business fundamentals will attract investment.

Angel investor Mehta feels quick-service restaurants (QSR) could eventually take the lead in the food-tech sector. “The QSR industry is growing by leaps and bounds. There is an opportunity to fix the broken supply chain with technology solutions but only a handful of startups will be able to do it.”

However, entrepreneur-turned-angel investor Ajeet Khurana is pessimistic about the sector in the near term. But he says this is not just a case of food-tech startups failing. “Instead, I think several startups were actually failures from day one,” he says.

Khurana feels exuberant investors failed to see that many startups created little value. Many startups across sectors will fail to raise follow-on funding, he says. “And that is a good thing as it brings back some rationality into the early-stage ecosystem, thereby preventing a bubble.”

8 Comments

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BizWiz November 5, 2015 8:13

Technology can only be an enabler. Traditional businesses when faced with efficiency/productivity issues, technology can help reduce or eliminate inefficiencies but cannot replace the fundamental business model. Most technology start-ups seem to forget this and unfortunately investors seem to sideline this fact, hence the bubble.

Technology has played a major role in transportation industry (taxi, buses, mini trucks etc.) and hence has been reasonably successful. The business models are yet to be fully validated even there in many cases. The day business model stands exposed, everything will crumble there too.

Niranjan November 5, 2015 8:50

Exuberant investors. That is the right phrase to explain for the umpteen food tech companies mushrooming in India with minimal differentiation in their offer. It was the flavour of the season, and many vc’s felt they should have one in their portfolio.

Amit Pamnani November 5, 2015 14:04

Funded Startups become over-ambitious and wish to expand (burst) rapidly (Rabbitly) then peers and in this race they start failing. Instead, Startups can go slow (Tortoisely) & keep their financials in green always. Its all about management control system and long term vision.

Rajat Pandhi November 5, 2015 21:32

This makes it clear that all the investors investing have not at all applied their minds to the business model and will loose money.This is throwing away a 1000 crores into businesses which are clearly going to flop. No business can survive if its only going to follow the Bigger fool theory for raising funds.Well some have found these suckers!!!

Income can never be by dole outs from excited but clearly ill informed investors blowing their money or someone else s. That’s silly.. They are supposed to be the brains!!! What happened to their intelligence?

There should be a seed capital, fine, to get it going based upon a reasonable business plan of expenses duly agreed before hand. Not a buck more!!! Then revenues have to come from operations. Not dole outs. Expected revenues also need to be realistically arrived at..All this burning of money is painful.Words like Cash burns are worse than abuses. Not a paisa should be burnt.

Brothers, we work so hard to save a buck , earn a buck and struggle for years to find an investor. Haven’t found one as yet. So how do these investors get fooled by these guys???? It beats me. How do they agree to Cash burns??? High cost hiring? Expenses? 1000 crores????? Lets always talk in Indian Rupees. Can we stop talking in $$$$$$$$$$$$$$$$$$$$$$!!!!!!!!!!!!!!!!!!!

All this gives a bad name to true businesses, struggling to raise funds.

Deepen Dhulla November 6, 2015 9:47

I totally agree with BizWiz comment.
We as technology solutions provider do try our best to pass message; that in any e-business, e is one part while rest is business. So if you need to gear up business for long run and e components.

Himanshu Tyagi November 6, 2015 11:17

It is important for every startup to build repeat customers for its product and service. The cost of acquisition is always high in any industry. In fact businesses are “Ok” with the high acquisition cost of new customer on the assumption that the customer will stick to the business without any further investment (read discounts and coupons).

With multiple startups coming up, ready to throw in their investor’s money to acquire new customers, the customer loyalty is just skin deep. One better offer and the customer would switch the vendor. With better phones, people do not mind having 4-5 similar apps just to get the best deals available in the market.

So repeat customer is the key and maybe that is one area startups are yet to figure out a solution for.

Saurabh November 7, 2015 15:45

As an entrepreneur myself, I never understood these e-businesses where you dont have control on the key elements of your business and you are operating on thin margins. These businesses were never meant to be sustainable. How long can you be funded repeatedly. There has to be a day when business has to generate enough profit to keep going.

Jayadev Chakravarty November 17, 2015 0:45

I guess, Investors fell into the “herd mentality’ trap. They failed to see the ‘food’ consumer mentality and whether such companies were addressing them or not.

The food ordering companies have not added any real value for the customer to stick. Each one came up with a slightly different model and hoped to succeed. Swiggy came up with two compelling models – no minimum order limit and faster delivery. Was working great for a while. But the delivery costs started to pinch and they introduced a min order – as expected, orders started to dwindle. Food curators like Dazo failed too. Same menu, same restaurant – all apps carried the same content with no real value add. There is no difference between a Zomato ordering, TinyOwl and FoodPanda app, except for the discount values, maybe.

As a Technologist cum Restaurateur, I feel each of these e-businesses will probably be better if the apps were to have different menus on their platforms. They should probably talk to the restaurants and create their own mix of menu items – for example create combos and get some kind of exclusivity on them. Or maybe, try to bring group meals to their customers – order for 2 or more people at a discounted price and get an exclusive mix of menu items. I am sure such steps will make more customers order on their app.

There are more than 100k restaurants in the A and B cities only. I am sure that there is a lot of scope and Investors needn’t worry.

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