Why are Indian VCs salivating over food-tech startups?

It's piping hot, and it seems to be the in thing to do. Yes, start a food tech business and invariably you will grab the attention of investors and media? What’s driving this frenzy? Why is food-tech suddenly so hot?

Indians are passionate about food, and eating out is almost a ritual (even more so now). Even home delivery of food has increased. Something has changed in the last few years. The whole business of variety in food, process and delivery has changed.

The rise in consumerism, strong economic background, and relatively better incomes are encouraging Indians to eat out like never before. The surge in the new age food-tech startup is because of all the above reasons plus the strong fundamentals it presents to the investor community.

Food services are touted to be a $50b market growing at 16-20% year on year.

Anshoo Sharma from LightSpeed Ventures attributes the growing investor interest to the following reasons-

- Massive market, everyone eats food multiple times a day

- High repeat ordering behavior leading to the brand creation and strong lifetime value of a customer

- High margins creating room for a fundamentally strong business

- Lack of large national brands in the space and thus room to disrupt by creating such food brands and infrastructure

Kunal Walia from Khetal Advisors says, “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. First there were the cab companies (Ola, Taxi4sure), the service-listing companies (LocalOye, Near.in), the hyper-local delivery firms (Grofers, TinyOwl) 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 though I suspect would be the most challenging amongst the whole lot of such segments. First, you have a product (food) that people are extremely passionate about. Second, price may not be the ultimate winner (unlike cab companies). 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.”

Says Alok Goel, CEO, New Businesses, Freecharge and Advisor & Investor in TapCibo,

Every few years a new problem becomes a keystone area for the startup ecosystem. It grabs everyone's attention, and many teams start solving that problem with different innovative approaches. Remember, 2007 (roughly) was the year of e-commerce in India. 2010 was the year of cabs. It looks like 2015 is turning out to be the year of food tech in India. There are about a dozen companies. Some are Internet restaurants; some are curated food marketplace and others are trying to be logistics arm for restaurants.

Alok continues, “As technology evolves, things that couldn't be done in the past become feasible. Today, smartphones + maps + cloud + innovation are making various logistics heavy businesses feasible for the first time. Notice how e-commerce is logistics heavy compared to OTA (which originally was 90% of e-commerce in India). E-commerce evolved much later than OTA industry. Then cabs came out which were more logistics heavy than e-commerce. In the same way, food is even more real time and logistics heavy compared to cabs. Given the combination of smartphones and maps these problems are now solvable. And hence many companies are coming up.”

It might not be surprising if we see Flipkart enter the food space with its well-oiled logistics infrastructure in place.

Food-tech investment in the US has seen a massive growth. An article in ‘TechCrunch’ last year stated, “Investments in food-related startups, from delivery services to new restaurant chains to new types of foods and additives, have raised unprecedented amounts of cash in the most recent quarter, as investors dug into the food business.”

Alok adds, “There has been a lot of investment/action in the food space in the US such as GrubHub, Sprig, and Munchery etc. VCs in India typically tend to fund copy-cat models much more easily than novel ideas. Given excessive heat in this space in the US, a lot of VCs are trying to place their bets in India before it gets too late. At this time, VCs are not sure of what will work. Hence, they are adopting spray & pray approach. They will put small amounts of money in many startups. Over time, they will decide which team to back long term. It means many food tech startups will go out of business in the next few quarters.”

The former Business Head & Chief Product Officer of burrp! and now CPO at Newshunt, Vishal Anand, though is of the opinion that the market is still fragmented, and it will require time and effort to build scale.

The market is still very fragmented and consequently the information available more so. Restaurants tend to be dynamic entities: in the way they come and go, the items that they serve, and the quality of the place. Collecting all this information is not trivial.

He further adds, “India is still not in the self-serve mode. It comes into play when you want restaurants to be part of a dynamic advertising ecosystem. What this means is that you need a sales force to go sign the restaurants up to advertise. The advertising market is still not there for you to make money purely on advertising.” The very same challenges, Vishal continues, "pose opportunities for entrepreneurs willing to build their businesses in this space."

“A fragmented market is also an opportunity to build a business ground up. As 'up to date' information (Zomato), food delivery (lots of startups have entered this space), which also answers the GMV question for the investors.”

Kunal adds, “However, like every other startup if you have enough passion and a good deal of differentiation then you have a right to win as much as the more established players. Think of organic foods, international cuisines, health/diet food, exactly packed quantities of raw material required for a fancy weekend chef to cook up something amazing. Basically, anything that is part of an aspiring middle class macro and you have enough of a base to build upon then you have a right to the investment in dollars.”

“How the space as a whole will shape up no one really knows but I suspect if you are delivering ‘Butter Chicken’ from a home chef and competing with Zomato delivering the same dish through, let’s say, a Moti Mahal you may have a chance to beat them (Zomato) but not such a large probability that I would want to bet on it. Then again, this market can make everyone look like a fool in the short to medium term,” says Kunal.

The way startups are getting funded in this space we might soon start seeing consolidation like in the e-commerce space. As Kunal pointed out, what the market will unfold is yet to see, but one clear leader in this space, Zomato, however, is pushing all the boundaries to build a high-value business.

And why not? As, Co-founder of Zomato, Deepinder Goyal, had recently mentioned to us,

I want to do things differently. A lot of us, including Pankaj (co-founder) are like that in Zomato. Even if the path is defined and right we would like to go somewhere else and create our own path.

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