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Application of InnovationGrowthStrategy & Innovation

The Rise (and Fall?) of Food Startups

By February 12, 2016 No Comments

Raise a hand if in the last two days you have been exposed to advertising of a food related startup of some sort. As I thought… lots of hands shooting up.

Food startups have been thriving over the past years, both in numbers of new companies and in valuation. So, what allowed for this sudden boom, how has this industry evolved and what lies ahead?

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The Many Types of Food Startups

Still in 2011, Bloomberg reported about the new food startup industry in terms of new products, drinks, types of food to cater to specific tastes and needs (i.e. gluten free products) or specialty restaurants (mentioning The Melt, a grilled-cheese restaurant concept). The identified drivers for this development are found on a human, less technical dimension. An overall trend towards health consciousness was picking up, and medical research focused more on issues like child obesity, allergies and diabetes. The challenges were still those of any regular restaurant, like health inspections and tax regulations. But the battle for users was not far.

The smartphone penetration, allowed for a new kind of development. Unlike Uber, where anyone could become a driver, now anyone with a smartphone could become a food courier. Delivery fleets have never been cheaper. From now on, the king within the food startup industry took power: Food delivery. Mobile native apps such as Deliveroo, JustEat and Delivery Hero have taken over the streets with the branded couriers on their scooters. Users immediately adopted this kind of service, pushing growth massively. The idea of being able to order at any restaurant, even different ones for the same order, was perfectly in line with the quest for convenience for the customers. Virtually limitless options to choose from, restaurant quality food delivered to your door.

A second category of food startups enters the scene. Adapting the business model of the fashion subscription boxes, startups like Blue Apron, HelloFresh and din cater to the health conscious consumers, who enjoy their relationship with food and cooking. Prepared groceries, portioned to fit a suggested recipe, are delivered periodically, so you can feel like a chef and get in touch with the produce. Regional suppliers and organic ingredients are key to the success in this case. The consciousness of the consumer goes beyond the own, and the reduced waste and local sourcing of the products are important success factors.

Instacart, CartFresh, Good Eggs and supermercato24 managed to combine these first two models, to some extent. The delivery service upon request (with delivery promised even within the hour), together with the full selection of groceries you can find at the supermarket give you the freedom to go beyond the recipes suggested by the subscription services.

The Shadow of the Bubble

Now that we have a picture of the different actors and theaters they play in, let’s look at what the numbers have to say.

VC backed Food Tech Deals 2011–2015 — CB Insights

According to CB Insights an impressive 49% YoY growth of VC backed funding over the last five years going to Food Tech startups, one struggles to find any industry that keep up. The average size of the deals has gone up from $3.9M in 2013 to $23.6M in 2015, probably a sign of a number of players battling to become the dominant force.

And still, more and more you come across articles prophesying the beginning of the end of the food startup trend. In particular, many point at this sector as the next bubble in the startup scene. Indeed, the concern seems to be justified by for example looking at Instacart, who in 2014 had a $220M Series C Round at a $2B valuation with $100M revenues for the year. It is hard to understand the real growth potential in the market. Deliveroo closed a Series D Round of $100M three months ago bringing its valuation to $600M. Revenues are not disclosed, but are rumored to be in the triple digit millions. If the fear is justified, only time will tell. For now, we can only hope that these valuations are not built on shaky foundations (and trust the decisions of the great teams working in the different VC firms).

More curious, are the strategic moves of Rocket Internet. With a significant stake in Delivery Hero and a majority ownership in Foodpanda, Rocket Internet pushed its Global Online Takeaway Group to global leadership. In its Business Update of March 2015, the Group included also La Nevera Roja in Spain, Pizzabo in Italy and Yemeksepeti in Turkey. The result was a presence in 71 countries, 58 of which as industry leader and the Global Online Takeaway Group as the largest company in the sector (in comparison to JustEat and grubHub, in terms of countries of operation, takeaway restaurants and orders). Interestingly enough, not even one year later, Rocket Internet sold its food startups in Spain, Italy, Brazil and Mexico to JustEat. At a price tag of $140M, the suspicion is big that the sale was at a loss (considering that Pizzabo is rumored to have been originally acquired for €55M, and La Nevera Roja for €80M).

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Technology Innovation Will Show the Path

Strategic moves and bubbles aside, what is sure, is that there is much more to come. With Walmart, Amazon and other giants entering the food delivery business the trend is not driven anymore only by young startups and their business models will be put to the test. With technologies like driverless vehicles and drones around the corner, one can only imagine what kind of applications are feasible in this industry. The Amazon Prime Air service and the Starship delivery robot are just a hint to what’s to come.
On the other side, delivery startups with their logistics know-how could make a move along the value chain and and take on more supply management functions.

The development of the delivery service industry remains highly interesting and we will have to discover how we will all get our food in the future, one meal at a time.

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