Rajesh Sawhney, the co-founder of food tech start-up InnerChef, is also the founder of GSF Accelerator - one that provides tech start-ups mentorship, capital and exposure. Recently, he raised $1.7 million to expand his food empire ambitions. Sawhney, in an interview, talks about his business, the different models, and where investors are going wrong.
Q. Is there a bubble in the food tech sector?
A. Not a bubble; just froth. There are two models - one is the marketplaces or aggregators. A marketplace inevitably becomes a winner takes all market. This is the VC assumption about marketplaces. You cannot have five-six marketplaces. Consumers will inevitably use one or two. What we are seeing is consolidation - initially 10 angel rounds happened. Six will go to Series A, which has happened. Two or three will survive and that will happen at Series B and C levels. Venture Capitalists have put in too much money into too young companies, too early. Think of TinyOwl and Swiggy. They are two years old. VCs pump money fast and say 'Download lao'. How can the founder get downloads? He will employ more people, go to 30 markets instead of three, starts incentivising consumers with discounts. Inevitably, in this market, consolidation will happen. We shouldn't worry about it. This is the nature of venture industry; the nature of Internet markets. So companies will pivot, change, merge. The other model is the 'Kitchen-in-the cloud'. I think it is a deeper disruptive model which people have not understood yet. If you go out and eat today, the bill is Rs 1,500. InnerChef can give you the same food at Rs 500. Why? Because we do not have real estate costs. Then restaurants have capacity constraints. If there is 1,000 sq ft. space, 800 goes to seating people; 200 for kitchen. For me, 1,000 sq ft. is all kitchen. I have far more capacity to serve from that kitchen. The restaurant's per unit realisation is higher but kitchen-in-the cloud model will have a long life. It has worked out all across the world.
Q. Is the 'kitchen-in-the-cloud' model scalable?
A. Hugely scalable. You replicate the kitchen. Every kitchen has a catchment area - if the catchment area is too big, food will be delayed. This model is working across the world - Munchery and Sprig are examples.
Q. Why will this model work in India?
A. In the West, everything is franchised and branded. When Americans think of eating, they go to branded shops. Everything is a chain. India doesn't have chains. There are a few. This is what happened in e-commerce. E-commerce came at the same time when India was taking to branded retail. The same thing is happening in food. India is just about getting its chains. But if you plan 100 restaurants, you will grow old - the real estate costs are so high. I can set up 100 restaurants faster at one-tenth the cost. In food-tech, India can create 10 gigantic companies. Why? The market is large. It is a $50 billion food market. Grocery is bigger but they are doomed. Their margin is 3 per cent. Food gross margin is 70-75 per cent. So grocery needs a bigger scale and that can take 10-20 years.
Q. What do you think of the 'home-chef' model where a start-up aggregates chefs on its platform?
A. They are doomed if its food - apart from desserts. It is not scalable. It all fails at the delivery. It is a double delivery cost. Food needs to be delivered fresh. It cannot be brought in, stored, and forwarded. It is a nightmarish model to scale. Then the other issue is that the home-chefs are inconsistent. Everyone is struggling with this model.
Q. But InnerChef does incorporate a home-chef model…
A. We have a hybrid model. In Home-chef, we only do desserts. They have a shelf life of two days. We also do ready-to-cook. We created an ingredient box and said you can cook a meal in 15 minutes. This trend is becoming mainstream in the U.S. Of course, we have the kitchen-in-the cloud model too. We are going after the Rs 100-300 price point market. I'm not interested in Rs 100 and below. InnerChef has the highest per order value at Rs 500 in the industry. That's a great model. If you take out 30 per cent food cost and 10 per cent packaging cost, I have 60 per cent gross margins.
Q. What would be the repercussions of the TinyOwl incident on food tech?
A. In the last three years, investors have started funding young people. I celebrate that. We should be age agnostic. Will one of the repercussions be on young founders? I hope not. But food is a more complex business - it is not an app business. If you fund the company ahead of its maturity curve, that's the problem. I think food will attract massive capital in 2016-17 across the world. Don't write off the sector.