The start of 2015 was a honeymoon period for startups. Especially, ecommerce and hyperlocal startups were enjoying their peak time with investors pumping money in figures no less than millions. Food tech startups, in aggregate, had raised a total of Rs 1138.4 crore since January last year, as reported by Tracxn.
As the year rolled by and it was time for a new year to set in, the winter months brought a moment of standstill and immobility for these startups as well. Food always seems to be a prodigious space and a downfall was hardly expected. After the clothing sector, it is food that generates the maximum profit.
Tiny Owl, the food-ordering startup, recently lay off more than 200 employees as it was going through a cash crunch. Moreover, it decided to shut down operations in major cities like Hyderabad, Delhi and Chennai limiting itself only to Bangalore and Mumbai. As of September 2015, it was processing more than 500 orders per day with an average traction of 25 rupees. Seems like a fair deal, right? Then how did they run out of money?
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Other startups like Zomato and Dazo also met with a similar fate. While Zomato had to fire more than 300 employees globally, Dazo had to seize its operations completely due to lack of capital. Another food delivery startup, SpoonJoy had to roll up its operations from several cities. One thing to notice is they were all heavily funded and were enjoying their prime time in burning investor’s cash.
So, what went wrong that despite such heavy cash flows, most of the major startups fell flat on their face while some others were left shaking?
There may be different explanations to this but it was either the model or the startup ecosystem that went wrong.
Most of the startups failed to manage the money properly that was entrusted on them by the VCs. Either they were burning it profusely or were spending it at wrong places. High coupon discounts mislead them to acquire customers and hence, they could not sustain for long as the margins were nominal. With more cash in hand and competitors troubling all around, the trend of giving away discounts just escalated until they faced a heavy and sudden downfall.
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Problem retaining the right talent
Many startups even failed to retain the right talents in their companies. One of the employees of TinyOwl said, ”They hired really experienced people and they deserved to lead the team and eventually most of them left. Retaining good talent has always been a problem in the company.” The employees either sighted the stumbling of the startups due to tight competition or started leaving in search of better offers.
Targeted audience
Most of the food-tech startups aimed to earn money at unit level and not at an aggregate level. Although transaction was big enough, it was limited only to certain regions across the country which ultimately resulted in customer saturation. Even if they wanted, they could not expand rapidly as margin was always low. Also, most of the startups met with the fate of closing down operations.
Daily Meals
Many startups started providing homemade food and came up with the concept of daily meals. Now, not only daily meals mean low cost, it also means a variety of taste and that too in large numbers. This became a daunting challenge with limited kitchens and chefs in hand.
Delivery time played a major role for food startups to remain alive. While e-commerce sites get 2-3 days for delivery, food startups only had 2 hours in hand. So from placing order to cooking to delivery, all the things had to be done in such a short span of time and that too keeping uniformity in taste and quality. A challenge quite big! Right? All of these demanded efficient managing skills which became a big challenge for the newbies who jumped into the start up space without any prior knowledge.
Focus on Tech
Prior to food tech startups, it was the “dabbawalas” and “mummies” who delivered homemade food to their customers. Profits were also good enough. So what was the reason? They focused only and only on quality and were not influenced by external factors. The food-tech startups started focusing more on building websites, apps, meeting venture capitalists etc. All these were extra elements that started driving their attention which was hardly required. Moreover, some startups like Swiggy started calling themselves as food tech. But is it more than a logistic company operating in the food space? Hence, the term “food-tech” became very overrated which even became a reason to laugh at!
Good quality, less rates
Indians want good quality at cheap rates. So to acquire customers, these startups started throwing discounts profusely. Profits were as low as Rupees 15 per order for a plate size of rupees 100. Changing consumers’ habits is no easy job and it is going to take at least 10-15 years for these startups to settle well. Moreover, customer acquisition cost went as high as Rs 300. So, basically they were moving in the wrong direction.
Ultimately, it is the survival of the fittest. If one can find a right strategy and learn from its mistakes and correct them soon, then only a startup stands chances to survive in this highly competitive market. After all, the investors are investing in thousands of similar king of startups knowing that only few of them will sustain and make it big by capturing the whole scenario.
