Food-tech start-ups get gastric trouble

Until a few months ago food-technology start-ups 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 start-ups 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.

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 start-ups have raised about
$160 million in venture capital funding so far in 2015. Only five companies managed to raise money
twice (see chart).

New start-ups 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 start-ups,
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 acquihired financially struggling food delivery app SpoonJoy.

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

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, start-ups 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.

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.
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 start-up 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 start-ups 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.
But while some start-ups 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.

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.

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 start-ups failing. “Instead, I think several
start-ups were actually failures from day one,” he says. Khurana feels exuberant investors failed to
see that many start-ups created little value. Many start-ups 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.”
Questions
1. Define “product” from the perspective of different kinds of food-tech start-ups.
2. Why did most of food-tech start-ups fail? Evaluate with regard to different concepts of marketing.
3. Assume you are the ‘CEO’ of a food-tech start-up. How would you ensure success of your
company?