Food-Delivery Startups Head for Shakeout as Venture Money Slows

As entrepreneurs around the world founded technology startups in the past few years to deliver food to diners’ doors, perhaps no market grew quite as riotously as India. Customers could order entrees, main dishes and desserts from different startups, none of which required a minimum order. Discounts were plentiful and delivery was free.

Now the all-you-can-eat buffet is over. Venture capital is drying up and startups are disappearing. TinyOwl, a pioneering Mumbai-based food-delivery app that raised $23 million from investors including Sequoia Capital, has run through most of its money and will merge with a smaller delivery firm, Runnr. PepperTap, a grocery service backed by Sequoia and Snapdeal.com, shut down in April, following the closure last year of Dazo, a startup with financing from executives at Google and Amazon. Even the country’s only food tech unicorn, Gurgaon-based Zomato, saw its billion-dollar valuation slashed in half this month by analysts at HSBC Securities and Capital Markets (India).

Gone are the endless discounts and giddy marketing budgets. The new normal is perhaps best illustrated by an Accel Partners-backed restaurant aggregator called Swiggy, which instituted surge-pricing this month. It now increases delivery fees in some cities on rainy days and festival days.

“Many well-funded startups started off quite nicely but failed to take it to the next level,” said Ajay Kakra, director of food and agriculture at consultant PricewaterhouseCoopers India.

Food tech companies around the world are besieged as well. In Europe, venture funding for food delivery startups fell more than 90 percent in the first quarter. Britain's publicly-traded Just Eat Plc is scooping up competitors that lack the financing to continue. In the U.S., once-celebrated companies are closing. Meal-delivery service SpoonRocket, from Berkeley, Calif., ran through $13 million in venture capital and shut down in March. San Francisco's Kitchit raised $9 million to connect people with private chefs but closed its doors in recent weeks, citing a lack of capital to continue.

A food delivery employee at TinyOwl's head office in Mumbai.
A food delivery employee at TinyOwl's head office in Mumbai.
Photographer: Dhiraj Singh/Bloomberg

Not so long ago, India seemed the model market for food technology — startups that let hungry diners use a smartphone app to connect with restaurants, grocery stores and backstreet kitchens. Culturally, food is at the heart of family and social gatherings. The labor to make the food and ferry it to doorsteps is plentiful and cheap. Large delivery players like Domino’s Pizza, which entered India in 1996, had already shown the way by successfully using technology to personalize offerings and expand.

Yet lately, India has begun to exemplify the excess of the movement. Venture investors poured $229 million into 431 food-tech startups in the country last year, four times the amount of money and number of businesses as in 2013, according to research firm Tracxn. Seventy startups sprouted in the last few years just to deliver groceries, compared with only a few such players in China.

In the food-ordering sector, entrepreneurs spent millions of dollars trying to assemble massive menus from hundreds of restaurants that could satisfy anyone. Apps would offer thousands of items - from cottage cheese-stuffed Indian bread called paneer paratha to biryani seasoned rice to chole bhature, a fried bread with spicy chickpea curry and onion rings. Customers could have their favorites couriered to their doorstep for around 100 rupees ($1.50), delivery included.

“There were 80 startups a year ago, all “Hum bhi kar sakte hain” (We can do it too) players who raised funds and started discounting in order to overtake the rest,” said Harshvardhan Mandad, 26, co-founder of TinyOwl a brand name that will soon cease to exist. “Now there are hardly 10 left standing.”

It is a clear case of too many cooks in an overcrowded kitchen. The competition from “two or more players going after the same set of customers and offering discounts” hurt profits, according to an April report by Kotak Institutional Equities. When they stopped offering discounts, customers disappeared.

Many startups didn’t get enough revenue per order to cover the cost of food, much less delivery expenses. For instance, if a food-delivery service incurred a charge of 50 rupees to pick up food from a restaurant and deliver it, the company often charged the diner nothing and sometimes even offered a discount on the food, all in the name of customer acquisition. Grocery startups’ delivery boys would frequently show up at supermarkets to shop: They would buy at full price, then deliver the produce to customers at a discount. “Some companies have blown away money on highly unprofitable models,” said Deepinder Goyal, founder and chief executive officer of Zomato, a restaurant search and delivery service that he says will move into the black this year.

Investors are now demanding that startups stanch losses and formulate a recipe for profitability. “They have to leverage technology to unlock value in the cost structure and innovate to pull ahead,” said Alok Goel, managing director in Bangalore of venture capital firm, SAIF Partners, one of the investors in Swiggy.

Some entrepreneurs see reason for optimism. “The game hasn’t even started,” said Rajesh Sawhney, co-founder of Gurgaon-based InnerChef, which recently received $1.9 million from Japanese investors and the founders of digital payments service Paytm and mobile-advertising provider InMobi. He calls his startup a kitchen-in-the-cloud, with multiple kitchens in low-rent areas that serve diners in surrounding neighborhoods. It currently fulfills 1,000 daily orders with an average meal priced between $8 and $9.

A sample dish from InnerChef
A sample dish from InnerChef
Source: InnerChef

Despite the shakeout in food technology companies, e-commerce in India has a solid foundation. Smartphone penetration is rocketing along with the overall online population. Indians are buying more on the Internet and their purchasing will soon be facilitated by faster broadband speeds. Morgan Stanley Research recently increased its estimate of the country’s Internet commerce market to $119 billion in 2020 from the earlier $102 billion.

“Like it hurtled from landlines to mobiles, brick and mortar to e-commerce, India will leapfrog from dining out to food delivery,” said Sawhney of InnerChef. He predicts the $10 billion food delivery market will grow at 20 percent annual rates and overtake the restaurant business in a decade.

The current contraction may be an inevitable part of the market’s growth. "This is how it is supposed to work. Nine out of 10 will fail,” said Goyal of Zomato. “But the one that thrives will be a spectacular success.”

 --With assistance from Jeremy Kahn and Ellen Huet.

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