Can food-tech startups rustle up a comeback?

When meal-ordering startup Yumist shut shop last month, it joined a long list of food-tech ventures that have gone belly up despite attracting sizeable venture capital. Except Yumist was different—unlike most of its peers, it had eventually figured out a profitably scalable model.

Announcing the decision to end its three-year journey, Yumist co-founder Alok Jain had said: “If we had another nine months of survival money, we would have gone back to the market and found enough support to survive.”

The high growth and high burn path that Yumist chose under pressure from prospective investors, and a failure to raise fresh capital did it in.

When small but fundamentally sound businesses start falling by the wayside due to their inability to raise funds, it's clear that investors are being risk-averse and sticking to proven, big names. Stats from VCCEdge, the data research arm of VCCircle, corroborate this—the food-tech space saw 83 deals worth a whopping $483.72 million in 2015. The number of deals fell to 51 next year, amounting to a mere $74.1 million. So far, this year has seen 29 funding deals cumulating to $145.16 million.

In this backdrop, what does the future hold for the sector? Which models are likely to emerge victorious in the long term? What do the smaller players need to do to stay afloat, and not perish? Is yet another wave of consolidation on the anvil?

But a little bit of background first.

Food-tech's evolution

Food-tech is a rather loosely defined term in India. All Internet-based food businesses, ranging from aggregators to ordering platforms to delivery-only players to cloud kitchens, are clubbed under the umbrella.

Its origins can be traced back to the late 2000s when online restaurant discovery platforms Burrp (2006) and Zomato (2008) came into existence. The discovery game slowly expanded to include review-based listings as more users went online to search for restaurants. Revenue sources were largely limited to premium listings, advertisements and email/SMS marketing.

In early 2010s, these companies began to look beyond listings and ads for sustainable revenue, and ventured into online food ordering. This triggered a rush of companies jumping on to the bandwagon. Rough estimates suggest that as many as 300 consumer Internet startups raised funding in early 2015, with investors throwing caution to the wind.

Come 2015, and the bloodbath began. Players across the spectrum, from pioneers of unique models to me-too startups, faltered and eventually shut down. A wave of consolidation hit the space, with as many as 24 mergers and acquisitions happening over 2015 and 2016.

Two models—restaurant marketplaces and cloud kitchens—evolved following the upheaval.

A marketplace is more of a tech business that aggregates and advertises restaurants, besides deploying a tech-driven logistics infrastructure to deliver food. On the other hand, a cloud kitchen is a rather complex mechanism where the operators attempt to build three components of food business—brand, tech infrastructure, and an entire logistics engine—to control the whole process in order to achieve profitability. Zomato, Swiggy and Foodpanda are dominant marketplaces in India while FreshMenu, Box8, Faasos and HolaChef are pure-play cloud kitchens.

Winners in long term

Most industry experts feel that the days of betting entire money on a singular monetisation model are over.

Satish Meena, senior forecast analyst at Forrester Research, says the low ticket size of transactions, and high delivery, customer acquisition and operational costs make it very expensive to run a pure play food-tech business where you focus on just one layer. He expects companies to move towards an integrated model where they have multiple monetisation channels. “A combination of content, delivery and cloud kitchens is required... At some point in 2018, we can expect more category consolidation where companies would offer multiple products and services to customers and restaurants. Standalone food delivery will be very difficult to operate without continuous access to funding,” he adds.

Anup Jain, managing director of retail consulting firm Redback Advisory Services, feels Zomato's proven model of content plus delivery is here to stay, and so are cloud kitchens.

Food-tech startup FreshMenu is a case in point. The cloud kitchen operator broke into the top-five club of online food-ordering companies in May, thanks to an impressive increase in revenues during financial year 2015-16. It got a fix on the cloud kitchen model much before most other food-tech startups, and stuck to it.

Meena also sees more and more companies transitioning from food-tech to packaged foods, including ready-to-eat, frozen food, which will enable them to sell through different channels.

Category creation is way forward

To survive and prosper, analysts feel smaller players need to find their niche and create new categories. For instance, business-to-business catering is a promising space that’s not yet tapped, says Jain. “B2B catering, such as office parties and festival/special occasion parties, is not really explored. All these are done offline now... there’s no marketplace,” he explains.

And the faster they find their niche, the better—it's a matter of time before large players start experimenting because they have the resources and capital to do so.

Funding, consolidation

According to a recent TechSci Research report, India’s food-tech market is estimated to grow at a compound annual rate of over 12% during 2016-21.

Despite the steep growth forecast, Meena doesn’t see a lot of investments in food delivery. However, he is bullish on cloud kitchens, and feels startups running the model are likely to attract funding. Meena also expects action in the health food category, besides packaged food items.

Jain shares Meena's optimism on cloud kitchens. He sees the model proliferating in 2018. “You can’t think of a food brand in India or abroad that achieved national scale in just a few years. Investor sentiment and market scenario evolve over time.. The investors and entrepreneurs are learning together,” he adds.

The uneven spread of funding is probably a leading indicator of consolidation in the space. While top players like Zomato and Swiggy have developed large, scalable, models, smaller ones will find it hard to raise funds. Growth-stage and seed-stage investments will be few and far between. "Investors will now place their bets on large players so that they can have sustainable businesses models by growing within and outside India,” Jain explains.