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Food tech startup woes: From an investor's lens (Part 1)

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Venture capitalists are always on the lookout for the next big idea. After placing their bets in the e-comm sector in India, the next one that excited them was food tech . As investors opened their purse strings for such startups, more and more entrepreneurs launched food companies.
But all of them have come up as me-too copycats and we haven’t yet come across a company, which has a differentiation, and can disrupt the space or create niche in the space. So first let’s explore what’s actually happening in the food tech space and what investors are thinking.
Currently, food tech companies have developed their business models around the service component, which is not so commercially viable. Their whole objective is to serve the customer without considering the unit economics. The reason that many food tech companies like FoodPanda and TinyOwl — in spite of growth — saw turbulence because of high costs for the kind of service being rendered, was mainly because of lower margins and higher operational outflows coupled with high customer acquisition cost in a bid to acquire market share.
Home delivery model
Delivery cost is a big component in order to make the home delivery model work. And it doesn’t come cheap. Companies have been delivering food to customers at a higher cost in a hope that they will form a habit of ordering food and volumes will eventually makes enough business sense for them in long run. However, that went against food tech startups. They started out as Tech Company and transformed into a marketing model, which has different costs associated. Examples are for everyone to see. LocalBanya, a mobile app and an online tech enabled grocery retailer, in spite of having a large customer base, had to shut down because of higher operational costs.
Another problem area is that today nobody is talking about unique product offerings coupled with consistent quality/taste and variety, which would bring stickiness. Most startups which got funded, focused more on acquiring customers than working on preparing menus, which could have offered better varieties of food. If you see the menu options available, there is hardly any fusion food or even new food items being thought about; that’s because everyone is so focused on the package and delivery part of the business. Entrepreneurs have to realise that more food variety options, innovation in food offering will drive sales more with stickiness than fancy packaging.
Internet-first restaurants
Another popular model in the food tech space is Internet-first restaurants. They need to bring more variety in their menus otherwise over time customers will get bored and won’t come back for repeats. They also need to come up with a formula where they can achieve unit economics for every item that they are delivering or at least average unit economics. Unless they show a consistently growing revenue cycle, investors won’t show the money.
Another factor that has hurt the internet-first restaurant model is that it got too crowded too fast. Thus, they didn’t get a chance to build food habits or even a loyal customer base. A customer is now constantly ordering from various sites wherever the discount is the highest. This is also because the habits were built mainly on discounting rather than on creating niches or solving real problems. Most customers came because they were getting discounts; before the business could be built on a sustainable basis, companies ran out of money resulting in closure of business or truncated operations.

Operational efficiency

For food tech startups to survive, operational efficiency at every step of the way is important. The kitchen, where food is prepared, requires maximum investment in terms of equipment, ingredients, chefs and other related infrastructure. On top of that, there is the high real estate cost too to be factored in.
Omni channel platforms may not work as every customer has a limitation over the number of apps that a phone can download and support. One can’t expect them to download the apps of every food tech startup that is getting launched in the country.
Funding woes
Until six months ago, VCs were happily writing cheques to new-age food tech startups. But easy flow of cash into the sector disturbed the dynamics of the business. Companies started burning cash faster in a bid to acquire more customers without realising that there are multiple stakeholders in the system. Customer stickiness cannot be built on a discounting model. Companies who have been able to rectify this issue by changing their menu, pricing, etc were able to raise another round of funding.
Thankfully, investors are not allowing food tech companies to burn money mindlessly anymore. There is a clear shift in thinking, ‘Let’s get the pricing right’. If you are a food tech startup looking to raise funds, make sure your business is scalable and sustainable; unit economics should work in your favour, focus on revenue generation.
About the author: Anil Joshi is a managing partner at Unicorn India Ventures, an early stage startup focused fund.
(This is a two-part series on the current status of food tech startups in India. Part two of this analysis will address challenges and offer possible solutions. For the concluding part of this article, watch this space on Thursday, Dec 10, 2015.)

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