In mid-October, replenishments for the coffee machines in restaurant aggregator TinyOwl's Gurgaon office stopped flowing. Payments to milk vendors had been held back. On October 31, the general managers of the company were asked to rush to the Mumbai headquarters for a meeting. A town hall was announced on November 2 and then called off just two hours before its scheduled start at five in the evening. If that was not enough to raise suspicions among employees, that very night they received a mail from the HR head announcing that Saurabh Goyal, the 25-year old co-founder of the 21-month old company, would visit the office on the following day - it was to be a dark Diwali for about 40 of TinyOwl's workforce.
"Everyone around the office was getting Diwali bonuses. We got post-dated severance cheques. 'It was nice working with you; move on!' - that was the tone of the message," a former employee told Business Today. TinyOwl started its operations in the National Capital Region (NCR) in May 2015 and, soon after, hired 80 people. It took just three months for things to spiral out of control. On August 31, the start-up fired half its workforce. The rest were asked to go on November 3. Goyal cited "tough decisions that had to be taken".
- TinyOwl scales down operations in four cities; fires staff
- Zomato fires 300; says its revenue hasnt kept up with the growth in its sales team
- Bangalore-based food tech firm Dazo shuts operations
- SpoonJoy merged with grocery and fresh food delivery company Grofers
- Foodpanda runs into execution issues; customers take advantage of its refund policy
- Many small food start-ups are closing down or pivoting to new business models
- Investors on a wait-and-watch mode; may not fund food tech start-ups for next six months
On the same day in Pune, where the company was scaling down operations, things took a nasty turn when around 23 employees held Gaurav Choudhary, another co-founder, hostage for 48 hours demanding settlements. Long after he was freed, Choudhary kept mumbling, "Mujhe ghar jana hai" (I want to go home), a staff said. He had to be administered sedatives and may have to undergo counselling for stress and anxiety. The company said the demands made by the agitating employees exceeded the commitments mentioned in the appointment letter.
Gurgaon was surprisingly genteel - something that was not very common in this part of the world where a Maruti executive was killed in 2012 during a labour flare-up in Manesar. "We pressed Goyal to answer questions. But it looked like he would cry," another employee said. "The founders are kids (TinyOwl has four founders aged 23-26 years). They had no clue, no professional experience.
They were running the company like an IIT project," he added.
The layoffs, however, left a sour aftertaste. Not just for the employees, but also for the entire food tech community - a young industry that is trying to revolutionise the way India eats and orders food, primarily through mobile apps. This also exposed a soft underbelly; some of capitalism's worst disease at a micro level - investor pressure, wild business projections, numbers-at-any-cost, a hire-and-fire culture, and broken promises.To be fair, TinyOwl is not the only company in trouble. The sector is now rife with stories of start-ups which burnt venture money way too fast, but was unable to raise funds any further. Bangalore-based food tech company Dazo shut operations recently. According to Apra-meya Radhakrishna, an investor, the team will venture into a new business. SpoonJoy, another Bangalore start-up with star investors, such as Sachin Bansal and the backing of SAIF Partners, merged into hyper-local grocery and fresh food delivery company, Grofers. The takeover appeared to be a case of 'aqui-hire' - an acquisition primarily done for the skills rather than the products and services the company offered. Grofers absorbed 40 SpoonJoy employees on its rolls, but did not pay anything apart from dolling out ESOPs, said Grofers co-founder Albinder Dhindsa.
Smaller start-ups, such as Mealme, Tumm Tumm (Gurgaon), and PotJoy (Mumbai), have either downed shutters, or are experimenting with a new model. Even established players such as Zomato, which had revenues of nearly Rs 100 crore in 2014/15, and Germany-headquartered Foodpanda, backed by e-commerce incubator Rocket Internet, have run into rough weather. Zomato fired 300 employees, mostly in the US, shut down its cashless business in Dubai, and restructured its markets into two - full stack (high traffic and monetisation through ads) and enterprise (low traffic and monetisation through new approaches such as table reservations). In a blog post on October 16, Zomato CEO Deepinder Goyal wrote: "The next few months are going to be hard for all of us. But we'll stick together, hustle, and not spend time over-thinking things or being unnecessarily creative, so that we can get to where we want to be." A leaked mail from Goyal talked about the underperformance of its sales teams. "We have grown tremendously over the past few months and our sales team has more than quadrupled in 2015. The hard reality of this growth, however, is that our revenue hasn't kept up with the growth in our sales team." In e-mail responses to a Business Today questionnaire, Goyal, however, played down the letter saying what leaked to the media was one dimensional and was taken out of context. "Every sales team needs pressure to work and the email that I sent out was an internal email that is part of regular conversation that we all have with our teams. There was a lot of context behind that email which was missing in what people read. Internally, people got it. They were actually quite kicked at reading that email and there have been a lot of positive conversations around that email," he said.
The loss of jobs was not about cost restructuring, said Goyal. "We are getting smarter with the effort that we have been putting into our content operations. Almost 40 per cent of the restaurants on Zomato account for over 90 per cent of our traffic. In that light, we have had to rethink our processes to make sure that the frequency of our data updates goes up in multiples for the top 40 per cent of restaurants. This led to a cut in about 60 per cent of our content teams across the world," he said. (Click for the full interview).
Zomato's "tremendous growth" over the past two years illustrate the food tech sector's rise. The company quickly ascended to the top of the world's restaurant discovery platforms, making nine acquisitions between July 2014 and April 2015 - US-based NexTable, Indian firm MaplePOS, Turkey-based Mekanist, Urbanspoon in the US, MenuMania in New Zealand, Lunchtime.cz in the Czech Republic, Obedovat.sk in Slovakia, Gastronauci in Poland, and Cibando in Italy. This frantic bout of inorganic activity ensured Zomato's presence in 23 countries. Zomato's restructuring could be strategic, but that is not the case with most other start-ups.
Now, all of a sudden, one of the hottest sectors of 2015, where marquee investors, such as Temasek, Vy Capital, Sequoia Capital, Accel India, DST Global, Matrix Partners and Kalaari Capital, among others, poured in $177 million till October-end, appears to be heading for the freezer section.
Are the current woes a precursor to the pricking of the food tech bubble? Or, is it a mere correction? Are the problems more company-specific rather than generic? Possibly, the woes of food tech are a mere symptom of a much larger rot; something that market watchers have been warning of for several months now - a valuation bubble in the Indian tech start-up world, particularly in e-commerce. But, is the current implosion in food tech start-ups the beginning of an end-game?In 2015, India has seen a surge in investments. According to lobby body Nasscom, there has been 100 per cent growth in the number of private equity, venture capitalists and angel investors in the country. Together, they have pumped in nearly $5 billion in India-based start-ups, a growth of 125 per cent over 2014. This translates into almost $100 million of money flowing in every week into start-ups. Today, India has nine unicorns - start-ups with valuations of $1 billion or more - including Zomato. All this is good news, but market watchers feel most of the investments were guided by the principle of momentum investing, which is leading to flawed valuations. A momentum investor bets on the prolongation of an existing trend and buys stocks that are rising.
In a report, valuation and investment banking firm, RBSA Advisors, said that momentum investing is hexing the demand supply curve. "India is experiencing a wave of prefix investing, which involves a market bias for companies with an 'e-' as a prefix or '.com' as a suffix. To keep up with the growth experienced, there is a need for endless innovation to engage and exploit the market. Still, drawing comparisons between the present-day valuation boom and the dot-com bubble infers notable similarities: extraordinary rates of cash burn, colossal losses, ambitious assurances of steep growth trajectory and feeble due diligence by investors under the fear of missing out (FOMO)," the report said.
1. BUSINESS MODEL: Zomato
Listing of restaurants with details of menu, addresses, phone numbers and user reviews.
RBSA's report 'The Great e-Commerce Valuation Crash of 2018' drew up possible endgame scenarios between 2015 and 2018. It predicted that by 2017, investors will start exiting small players, who will run out of cash and be forced to down shutters. By 2018, "upon going for an IPO, a company's listed price shall not match its valuation at the last round of funding. This is going to cause a major crash where early exits will be lauded and a lot of investors are going to be an unhappy lot". If the food tech quagmire is any indicator, such a catastrophe could occur earlier.
A Holiday in Afghanistan?
Investors are losing appetite. According to a report by YourStory.com, a media platform for entrepreneurs, seven food tech deals worth $74 million materialised in April this year. In August, the numbers had dipped to five totalling $19 million. The following month saw only two deals.
Fahad Moti Khan started a food tech company called Khana, a marketplace for daily meals, two months ago in Delhi. Between puffs of cigarette, he recollected a meeting with a prospective investor. The question-and-answer session was short but not so sweet: "Would you explore investments in food tech?" he asked. The answer was brisk and piercing: "You are asking me for a holiday in Afghanistan?"
Even in half-jest the statement touches a raw nerve. The stakes are already very high. According to data from Venture Intelligence, only $177 million was invested in the food tech sector in 2015, the cumulative investments are far higher. Zomato has raised $225 million thus far. And, if you add Foodpanda's investments (the company does not disclose India investment figures, but globally it has raised $310 million), the overall fund flow in food tech would be over half a billion dollars. Besides, Venture Intelligence data does not include angel investments - there could easily be over 100 food tech start-ups in the country, many funded through angel money. Half a billion is not a small amount. Globally, food tech companies have raised only about $3 billion in 2015, according to research firm Tracxn.
2. BUSINESS MODEL: EazyDiner
Discovery, Restaurant Bookings, Deals
Listing of restaurants with booking and deal discovery; focussed on wooing consumers to restaurants.
To add to the confusion, the market is crowded with too many "me-too" companies. Everyone wants a pie because of two reasons: the entry barrier is low and, two, the food services market is a salivating proposition. Sample this: A National Restaurant Association of India (NRAI)-Technopack report pegged the size of the total Indian food services market at $48 billion in 2013. It is projected to grow to $78 billion by 2018. The report goes on to list many reasons for this growth: increasing disposable income of the consumer, a larger population of younger people, growth of consumers in Socioeconomic Classifications A and B, widening exposure to new cultures and cuisines, increased propensity of eating outside, growing popularity of delivery services and the emergence of brands.
There is another reason. The biggest disruption, according to some, is happening in the kitchen. Working moms have a guilt that they are not being able to feed their children well. There is pressure on time. That makes it a good time to be in the food tech game - by serving meals at different price points, at the touch of a button. However, food tech is beyond just an app, a kitchen or a bunch of restaurant listings. It is the food business, after all. Scaling up is proving to be an uphill task for most start-ups. Once in the game, it is all about operational excellence. Techie founders who think technology first, and not food, often miss the wood for the trees, and stumble. Of course, there is a significant tech play and it can be more complicated than one imagines before starting up.
"It is about the complexity of operations at multiple levels. If I have to re-order, it should not take more than 30 seconds. What's the optimum level to do this? All this needs time, research and analytics. Yes, it is complexity, but not only of the last-mile. There is complexity of technology and of partnerships since we are a marketplace. Partners have to be coached in the right way, and hand-held to manage the scale," said Saurabh Kochhar, CEO India, Foodpanda. The company was itself in the news recently for faltering on execution. Among other things, some consumers started taking advantage of its refund policy. "We will keep finding more issues. We have been solving them one by one," he added. There were, however, no signs of a war-torn Afghanistan the day this reporter landed up at the Foodpanda office in Gurgaon. The floor was decked up in orange and white balloons and buzzed with employees in ethnic wear. A Diwali party would begin in a few hours; music was in the air, so was the aroma of food.
3. BUSINESS MODEL: Foodpanda
Restaurant Aggregation and Food Ordering
Companies not only aggregate restaurants on their platforms but take orders for home delivery.
Currently, there are many flavours to food tech and every business model has its pros and cons. Those who are part of the aggregator model, aggregate restaurants on their platforms and take orders through apps or websites (Foodpanda, Swiggy, TinyOwl, Zomato). Here, delivery is often outsourced. Then there is a chef/home-chef marketplace model where start-ups aggregate home chefs (Holachef, Bite Club, CyberChef). The 'kitchen-in-the-cloud' model does not have a physical store. The menu is limited and orders are taken online and delivered from a centralised or distributed kitchen network (InnerChef, Yumist, Eatonomist). Yet another model is 'ready-to-cook', where raw ingredients for a recipe are neatly packed and despatched for a consumer to cook (Cook Gourmet). While most food tech start-ups have focussed on delivering food at the customer's doorstep, EazyDiner, which opened its doors to Delhi in January 2015, does just the opposite. It helps people select and book tables at restaurants.
Among all the business models we have seen so far, the Indian market may not be ready for the ready-to-cook model, while others have their own limitations. The kitchen-in-the-cloud model is capex-intensive because every new neighbourhood the company seeks to serve may need a new kitchen for the food to be served fresh and hot. Many companies are already struggling with the home-chef model, because it involves higher delivery costs - food has to be first picked up from the home chef, brought to a central warehouse, and then finally dispatched to the consumer. Home-chefs are also inconsistent. "Unlike e-hailing or e-commerce, we are dealing with commodities. It is perishable," said Alok Jain, co-founder of Yumist, and the former head of marketing at Zomato.
The conversation at Starbucks over a cup of double espresso goes on about the culinary habits and its effects on the food tech business. "Every person has his own taste. The dal will differ from every home you pick up. There are issues with food science. Then, if the food is between five degrees and 60 degrees for more than two hours, it will lead to bacteria formation. So, it (home chef aggregator model) is scalable from an excel sheet perspective."
4. BUSINESS MODEL: Eatonomist/ InnerChef/ Yumist
Companies don't have a physical store; orders are taken online and delivered at home.
The restaurant aggregator model has the big guys, who are well capitalised. Apart from Zomato that raised $110 million in 2015, TinyOwl pocketed $24 million and Swiggy got $16.5 million. Aggregator models do appear scalable but is rife with cut-throat competition. Here, there is a Darwinian fight to the finish.
Survive six months. Be a stud!
That brings us back to TinyOwl. The start-up operated in six cities: Mumbai, Bangalore, Delhi NCR, Chennai, Hyderabad and Pune. But the company decided to scale back operations in four of these cities. In a response to a questionnaire mailed by Business Today, TinyOwl said that the scaling back was "in line with the current organisational focus" and that the focus was "optimisation of resources across verticals". "This development has been made on a strategic level as a step towards sustainability and growth for the brand in the current challenging market scenario. While TinyOwl will continue to operate in six cities, the new model will be initially tested in Mumbai and Bangalore," it said. However, there is little clarity on the new model. Nevertheless, the "challenging scenario" can be illustrated by how it lost the battle for NCR.
TinyOwl's May launch coincided with Zomato's entry into the online ordering space. But the company, according to Rohan Diwan, co-founder of hyper-local delivery company Quickli, had another "Waterloo moment". Rival and bigger restaurant aggregator Foodpanda started heavy discounting, which included discounts of Rs 250 for a minimum order of Rs 400. TinyOwl couldn't keep up. "We were packed with Foodpanda boxes. TinyOwl was killed," said Diwan, whose company was engaged by many restaurants for delivery services. Foodpanda is now in 200 Indian cities and, according to its CEO, is growing 30-40 per cent every month. TinyOwl, on the other hand, was perhaps cash-strapped and couldn't discount unlike the super-rich Foodpanda. It raised $16.25 million in February 2015 and another $ 7.75 million in October. This implies that it may have burnt $16 million in seven months. That is Rs 100 crore, or enough money to provide for 12.5 crore Akshaya Patra mid-day meals to children.
5. BUSINESS MODEL: Bite Club
Start-ups promote home-chefs and professional chefs on their platforms.
Now, investors have realised the limitations of the aggregator model and is on a wait-and-watch mode. "Anyone who can survive the next six months to one year will be a stud," said Avinash Victor, Founder and CEO of start-up MealHopper, adding: "VCs now want to see if we can survive the next six months before funding."
According to Revant Bhate, Head of Marketing at Pune-based food tech company, Faasos, one needs a bigger heart and an even bigger pocket to look at aggregators. "The excitement around the aggregation model has reduced. Funding in food tech will dry up for aggregators." Aggregators operate at a very low margin. Restaurants, typically, don't agree to commissions of more than 8-10 per cent. So on an order of Rs 300, for instance, an aggregator like TinyOwl can earn only Rs 30. "Then there is discounting to woo the customer. This makes the unit economics per order difficult," added Bhate.
Bubble or Froth?
There is no better person to explain the crisis in unit economics for food tech start-ups than Rajesh Sawhney, founder of a tech start-up accelerator and angel investor to 50 companies. Two of his investments saw star exists - Viki, a video start-up, was acquired by Japanese Internet giant Rakuten for $225 million in 2013, while Little Eye Labs, a company that built performance tools for app developers, was taken over by Facebook in 2014.
In early 2015, when the delicate aromas of food tech were getting stronger, Sawhney co-founded Inner-Chef with a hybrid model of kitchen-in-the-cloud and home-chef aggregation. His colourful office in Gurgaon has a poster that defines 'Hangry' - anger fuelled by hunger.
6. BUSINESS MODEL: Cook Gourmet
Raw ingredients for a recipe are packed and despatched for a consumer who wants to cook.
Right now, he is hungry for growth. InnerChef operates in four cities - Gurgaon, Delhi, Noida and Bangalore. He runs three kitchens and, with the $1.7 million he recently raised, seven more kitchens are expected to go live. Today, he serves between 500 and 700 meals a day, a number he is sure will go up because much of his competition will bite the dust. "Inevitably, consolidation will happen in this market. We shouldn't worry about it. This is the nature of the venture industry, the nature of Internet markets. So companies will pivot, change and merge," he said, adding that the current climate is "not a bubble, but just froth".
The froth is about the poor mathematics by some of the food tech companies. The salt and pepper haired Sawhney, snatched this reporter's notepad to draw up a chart. "What happens when people sell meals for Rs 50-100? They will bleed because of negative margins." His premise: assuming that food cost is Rs 30, packaging Rs 20 and delivery Rs 50, there is no way any company can make money. Besides, there are kitchen staff, kitchen rent, technology expenses, as well as marketing costs.
"The companies that are struggling the most are the ones that have gone for the lowest hanging fruit - Rs 50-60 for food. The mindset was to get the numbers, and VCs will fund. That mindset will take them to bankruptcy," said Sawhney . His rivals such as Yumist, however, do not agree. The company targets the daily meal segment with price points ranging between Rs 65 and Rs 95. Co-founder Alok Jain thinks that at scale, he can reduce delivery costs per order to below Rs 20. They are coming up with a secret sauce - "control of the entire supply-chain and use of technology in smart ways" is all they would comment as of now.
But, if companies with bad unit economics are getting funded, shouldn't venture capitalists be held responsible? Market watchers feel that many VCs have pumped in too much money into too young companies and too early. "Think of TinyOwl and Swiggy. They are two years old," pointed out Sawhney. "VCs believe in a winner-take-all market, so they pump in money fast and say 'download lao' (get the app downloads). But, how will the entrepreneur get downloads? He will employ more people, go to 30 markets instead of three, and incentivise consumers with discounts." In short, start the whole cycle of over hiring and cash-burn.
Many blame investors for FOMO which drives them to invest too soon. But Mukul Singhal, Principal at SAIF Partners, defended the approach. "The job of risk capital is to take risks and invest early. Five years back, people used to say VCs are risk-averse. Now, we are investing and people say they are in a rush to invest. Some investments will work, others won't," he said. Singhal is, however, absolutely certain of what he is up to. When he was asked about what went wrong with SAIF's investments in SpoonJoy, which went sour, pat came the reply: "It didn't work out. Everything does not need to be an issue. One thousand people will start, 100 will get funded and one company will make it to the IPO phase." He also rubbished the idea that the food tech sector can be written off, and drew an analogy from the e-commerce world. "In e-commerce, 2008/09 saw a lot of investments. In 2011/12, nobody was willing to write a cheque to these companies. It was a time for consolidation. But big cheques were back in 2013/14. These are cycles in any investment journey," he explained, adding: "Food is a very big sector. If you bring efficiencies to the table, why will you not make money?"
A consolidation, nevertheless, will not be a bad thing. According to Jain of Yumist, a consolidation will "bring sanity". Vanity metrics will take a back seat - the sort that prioritises number of downloads, growth of 100 per cent every week, a hockey stick curve. "2016 will be the year when we will see founders building real businesses with a focus on the basics, rather than scaling up for the next round of funding," he said. Basics would mean deeper metrics, including user retention, gross margins and the parallel lines of business one can get into. That should work for both entrepreneurs and their employees. Once the spilling froth is sponged off, you can sip in real beer. Perhaps, many more would drink to a happier Diwali next year.