Food tech whets its appetite for growth amid flurry of investment activity

The flurry of investment activity is reminiscent of the build-up in the sector in 2015 before it went bust. But this time, there is no sign of trouble

Swiggy seems to be on the brink of raising $500 million from various investors including Tencent. It is also reportedly rejecting a $250 million cheque from Google. Reports indicate that Zomato is talking to Ant Financial for another round of funding. Paytm, sources say, has been talking to Domino’s and McDonald’s and coaxing them on its app. The plan, say sector experts, is to get the two companies on as tiles on the app. Ola is pumping money into Foodpanda and the Bhavish Aggarwal founded company plans to move people within the organisation so Foodpanda has more on-the-ground support. Uber Eats is throwing around discounts to snag customers. Meanwhile, Bengaluru-based cloud kitchen company Freshmenu is reportedly on the brink of closing another round of funding. There is a lot of action happening in the sector. It is almost breathless.

Now, let’s take a quick look at the funding rounds. In 2018, according to data gathering company Tracxn, the sector raised over $483 million. Compare that to 2016 and 2017, when the ecosystem managed to raise just about $131 million and $133 million respectively. Take another step back. In 2015, considered the heydays of foodtech, the entire sector managed to raise $270 million. 

2018, and it isn’t done yet, is on track to raise cash that is more than what was raised in 2015, 2016 and 2017 put together. That’s a lot of capital. The last time food tech raised astounding cash was 2015 and what followed was shutdowns and no-cash acquisitions. Food tech went into the consolidation mode. Before capital dried up, customer acquisition cost (CAC) was high, discount was the only way to convince a customer to get on board and there was no mention of a business model. In effect, it was a land grab. The bubble popped; the conversation turned to profitability. But that seems to be changing again. 

Foodpanda is offering desserts for single digits, Uber Eats unloads discounts and offers ever so often. Zomato and Swiggy are both burning through cash to compete with each other when it comes to the number of deliveries and are offering cash incentives to the delivery personnel to stay loyal. The conversation about profitability seems to have died down, CAC is high again. 

The question is: Is there another bubble forming? Are there changes from what happened in 2015? Have people learnt? 

Yes. And not really. 

Is there a bubble forming? Business Standard put this question to food tech entrepreneurs and investors. They all said things may be getting hot, but there is no bubble. So, let’s look at the data once again. 

According to Tracxn, there have been just 13 transactions until year-to-date. Transactions here refer to a company raising money from an investor. Some companies may have raised multiple rounds. Compare this to 2015, which saw 66 transactions. 

This is a time to pause. Why? What has changed? According to Revant Bhate, partner, KStart, a lot. “Companies, which have a proven business model, which can function at scale have raised money,” he says. There is a distinct difference from the last time around when cash was easily available but there was very little focus on the business model. There were companies that raised cash, he explains, with little to no addition to the business model. The moats were weak or non-existent. “Now, companies are being built on need,” he adds. Be it Swiggy or Zomato, the two big boys of the food tech ecosystem, both have managed to solidify one part of the food experience. Swiggy did it through its logistics network and Zomato through restaurant aggregation (and now also through logistics). And Swiggy is evolving. It is trying to be much more than just food delivery. Zomato, too, has evolved. The ones raising cash are also cloud kitchens like Faasos and Freshmenu. Both rely on their own logistics services. “There is also a change in the type of investor. Back in 2015, the capital was not as patient as it is now,” Bhate adds. 

The metrics within companies have changed too. It isn’t just about customer acquisition anymore; it is about retention. “In 2015, the discounts were to entice the customers online. Now, it is to make them use it over and over again,” says Saurabh Kochhar, once a founder of Foodpanda. And there is a granular difference between these two behaviours. One is the simple act of ordering, the other is habit formation. “If our super user orders twice a week, we are very happy,” says Rashmi Daga, founder, FreshMenu. And there are much more of them.

“It is good to look at 2018 food tech as e-commerce from 2015,” adds Kochhar. The big companies have settled on the business models and now it is up to them to prove it can work for a prolonged period of time on massive scale. 

But just like 2015, e-commerce repeat users were driven just by discounts. These discounts did nothing but bleed the company. When the discounts were removed, the customers went away. The companies struggled and many faded into irrelevance. But the argument is that food tech will do better. According to people at Swiggy and Zomato, the number of orders a month is primarily generated by existing users. These companies are adding new customers every day but those who stick on order much more often. And if the discounts were removed one day, they would be so used to not cooking, they would keep ordering. Food, they say, is much more habit forming than buying a phone.