Home / Opinion / Online-views /  Course correction in food tech sector

Newsroom talk is always more interesting than the news that actually gets published. Earlier this week, amid all the unhappy news that food-technology start-ups have been making lately, a colleague came up with an anecdote about a food technology company he knows quite well. He had recently received a text message from the company’s founder.

“Following Mint story on Foodpanda, media basically killed the food tech business (smiley)," said the first part of the message.

The second part of the message was a suggestion.

“Was wondering if you would be interested in writing how we have been able to grow significantly... while all this was going on? Just a thought (another smiley). So someone has to write that all is not doom and there is a bright future for the right model."

I happen to be fairly well acquainted with this particular founder. He runs a sizeable food-technology business, has been around longer than most others and has recently pivoted his business model from an offline quick service restaurant to food technology. The pivot has worked reasonably well so far.

But, like most rapidly expanding food technology start-ups, he needs more money and is currently in the market for a third funding round. The trouble is that valuations aren’t looking so great right now with the recent turn in fortunes in the food-technology sector.

That explains his petulant rant in the first part of the message. However, our unnamed food-technology entrepreneur friend does make a valid point in the second part of his message. While a number of food technology start-ups have recently run into trouble, the sector is far from imploding.

What we are seeing is early consolidation in the sector and that may not be a bad thing. Angel investors and venture capitalists have pumped a lot of money into the sector in a relatively short period. This year alone, so far, as many as 19 food-technology start-ups have raised about $160 million in venture capital, according to data compiled by Delhi-based VCCEdge.

The gaggle of food technology companies vying for investor attention include restaurant search and listings platforms such as Zomato, hyperlocal delivery services such as Foodpanda and Swiggy, app-based food ordering services such as TinyOwl, full-stack Internet-first restaurants such as FreshMenu and home chef marketplaces such as Holachef.

By some estimates, there are 250-300 food technology start-ups in the country at present. Only about 30-odd among those have raised some sort of early-stage funding. To say that the sector is overcrowded is putting things mildly.

The earliest signs of trouble in the sector became apparent when it was reported that Internet-first restaurant Spoonjoy, backed by angel investors including Flipkart founders Sachin Bansal and Binny Bansal, had suspended operations in Delhi and parts of Bengaluru due to a cash crunch.

Soon after, Dazo, which started out as an Internet-first restaurant and later pivoted to a restaurant aggregation model, shuttered operations. The company had been backed by angel investors including Google India chief Rajan Anandan and Commonfloor founder Sumit Jain.

The latest food-technology start-up in the eye of the storm is TinyOwl. The company, which is backed by venture capital firms Matrix Partners India, Sequoia Capital and Nexus Venture Partners, all top-rung investors, has laid off over 300 employees over two tranches as it struggles to manage costs. This comes soon after Zomato, the market leader in the sector, backed by Info Edge and Sequoia Capital, laid off 300 people—10% of its staff—as part of a cost rationalization exercise.

Lay-offs and cost cuts are hard on young companies and especially hard on their employees. The early consolidation underway in the sector is partly due to a correction in the country’s early-stage funding environment and partly because most companies are still discovering the right business model.

It is tough to predict what the right model is for the sector is at this stage. Neither founders nor venture capitalists have the answers. Some, like Zomato, are closer home and are taking incremental corrective action to stay on the road. Others, like TinyOwl, are still discovering the right model and need to take more drastic action.

However, the consolidation is important, even critical, in order to extend the runway for start-ups with the right business models and fundamentals in place.

When we get to that phase, which is more likely than not, we’ll happily report those stories too. Hopefully, our unnamed entrepreneur friend will be one of them.

Snigdha Sengupta is the founder of StartupCentral, a digital news and analytics platform focused on venture capital. She also periodically contributes stories on venture capital and private equity to Mint.

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