The ups and downs of the food startup world

This story is brought to you by Lufthansa Runway to Success.

For a country that carries food as a badge of honour when it comes to its identity and culture, the food startup space is guaranteed to see a lot of action. And amazing stories. In a country where local cuisine is so dominant, and has successfully held its own against an onslaught from global chains, Food tech startups and others promise to ensure that change will happen, but will consumers play along? It is no surprise that some of the best stories of firms going beyond India (Zomato) in the space, shares news space with the toughest battles for survival too.

Over the past two years there has been no shortage of news around a host of food startups, their fund raisers and of course, their struggles with the reality of Indian markets. However, if you look at the sector it has seen a rise in activity right from 2007 onwards. The entry of Rocket-Internet backed FoodPanda in 2012 marked a shift to an all new level which is playing out now.

Food startups have not only made our life easier and simpler, for close to five years now they have been working towards transforming and changing consumer behaviour when it comes to looking beyond the home kitchen for food. Earlier, Kunal Walia from Khetal Advisors, told YourStory that food tech investments are a perfect follow-through to the recent theme of ‘habit forming companies’ that have been attracting significant rounds of capital in recent times.

A passion that translates to habit

First there were the cab companies like Ola and TaxiForSure, the service listing companies like LocalOye and Near.in, hyperlocal delivery firms and recently the food-tech firms. Basically, any service that allows frequent use (10-12 times in a month) per user seems to fit the major theme running at this time. Food-tech, Kunal suspects, will be the most challenging amongst the whole lot of such segments.

Food is one product that people are extremely passionate about. Second, price may not be the ultimate winner and third, local delivery/distribution has to be built from the ground up like hyper-local delivery companies. “Except, food companies will be catering either from their own kitchens or amalgamating home chefs, the logistics can be nightmarish,” said Kunal. Add to that the critical role of quality and the far more serious implications due to lapses, and you have a recipe made for only the most passionate, committed and well managed to survive.

Funding scenario

The growth and rise in funding momentum began towards the end of 2014, saw a peak in 2015, and dip in the end of last year and a steady rise again this year.

The first quarter of this year, we see that the space has seen a steady increase in investment, despite the grim situation last year. Also it is interesting to note that while the number of deals increased, the amounts drastically dropped.

If you look at the first quarter of this year, you will notice already 10 deals have been made, of these, two big deals have been of Series A funding by FreshMenu and Series C funding of $35 million by Swiggy. The food services market is touted to be a USD 50 billion market that’s growing at 16 to 20 per cent YOY.

The next big thing or bubble?

Despite the ups and downs in the space many sources retrospect that investors believed the space to be the next big thing. Many funds started placing parallel bets on the space. This not only meant that a lot of companies started getting funded in a short span of time, it also meant that there weren’t much funds left for the follow-up rounds.

Anand Lunia, Founder of IndiaQuotient, says, “If you look at it, every VC till date has invested in some form or the other in the space. Food business needs to self-sustain at least for a decade before the dynamics change. For that you need passion,” adds Anand.

Till recently, these organisations have been focussed on growth, customer acquisitions, increasing orders, and repeatability, but nobody was talking about profitability, scalability, and consistency. It is during this cycle that many will learn how to manage a business and sustain.

This means a company should be able to sustain and have investors with deep enough pockets. Sumer Juneja, Principal, Norwest Venture Partners, believes that unless you create a solution for a problem consumers face, they don’t buy into the product. “No amount of couponing and market acquisition strategies can gain customers for you,” he adds.

The game of numbers

Many believe that food brings that initial traction easily; the first 300 orders a day are easy to get. The trouble begins when the numbers go beyond 300 orders in a day. So while the angel investment rides in on the first 300 orders, subsequent rounds come from stability and sustainability as the number of orders increase.

For a food technology enabled business as we know it, the operations and backend processes need to be tightly managed and governed. Customer acquisition is an expensive affair in the food tech space, liable to trip up plans for a lot of firms, unless they find a better solution to meet their requirements. Sources claim that prominent food ordering platforms like Foodpanda spend anywhere between Rs 400 and Rs 500 for acquiring a single customer.

Seedfund venture partner and accomplished investor/mentor Sanjay Anandaram says that most of the technology-enabled food businesses are operations-intensive. “Most of these app-based food businesses gain the initial traction in certain pockets of a city, but the same cannot be expected from all parts of the country. Bringing in a consistent and habit-forming change in behaviour requires a minimum of one generation or 10 years of push,” Sanjay explains.

Working an ops intensive business

Being an operation-intensive business, there are several learning curves that young entrepreneurs in foodtech go through. Taking the example of Flipkart, Sanjay adds that the company has made several iterations of its management team because you need that experience to build scale. Sumer says, “While growth and market leadership is important, it has to be balanced with a decent path to unit economics and frugality.”

Clearly, the food services market, by the very nature of its size and nature, will always attract passionate entrepreneurs. The challenge will be to retain the passion while scaling up, profitably.

“I think that when it comes to creating an impact, it will soon be businesses that actually create food like a Freshmenu,” says Aruj Garg, Founder of Bhukkad. He adds that while several players are mushrooming in the market, with time, the ones that remain true to their brand proposition will remain.

The Startup Expo, a part of Lufthansa Runway to Success is all set to give entrepreneurs everything they need to succeed. It’s all happening in Gurgaon on April 23. This one-day event, organised by Lufthansa and TiE, will bring together startups, investors, corporates, professionals, embassies, students, support organizations, service providers and other stakeholders in the ecosystem looking to explore partnerships with a pool of entrepreneurial talent across various sectors. 

Applications to the Lufthansa Runway to Success close on April 30, 2016. Apply today!