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Foodtech startups with no control over the kitchen or the last-mile delivery are doomed to fail from the start, says entrepreneur Raj K Mitra

The malaise that runs deep in the Indian startup ecosystem has hyper-infected the online food delivery space. Yet, investor and media frenzy surrounding the foodtech startup space overshadows bitter reality. Most startup founders have no experience in distribution and only a handful know how to prepare food that tastes good. The shared vision rests solely on the ‘we all love to eat’ narrative.

Margins are non-existent, total order values are low, and customer acquisition is expensive, with no clear strategy for customer retention. The only differentiating factor so far has been their ability to outdo each other by the quantum of discounts.

And customers continue hopping from one platform to the other chasing the best deals…whether it’s an owl or a panda is simply inconsequential. It’s unfortunate but true that in a so-called smart world, it’s often difficult to identify the dumb!

Case study: TinyOwl

Indian foodtech startups are making headlines of late for all the wrong reasons.

Mumbai-based TinyOwl had to shrink operations and lay off over 100 employees. It’s the same TinyOwl that had raised US$15.4 million in February this year from Matrix Partners India, Sequoia Capital and Nexus Venture Partners. How could it have run out of money so fast? (The startup received a US$7.7 million lifeline in October from its existing backers).

Also Read: India’s TinyOwl raises US$7.7M amidst reports of massive layoff

The answer lies in the company’s financial statement for the year ending June 2015. TinyOwl reported a total revenue of INR4.4 million (US$66,170) and losses of INR250 million (US$3.85 million). The most interesting story behind these numbers is that only INR24,000 (US$361)  in revenue was generated from operations.

So, where did the rest of the money come from? Well, interest earned from VC money parked as deposits in banks!

Meanwhile, an internal email from Zomato’s Founder Deepinder Goyal reportedly talking about the company’s missed sales projections got leaked into the public domain.

A sharing economy is not necessarily a caring one

If most startups are indeed surviving on easy money, why aren’t the VCs forcing more discipline onto systems and processes? First, VCs usually take very little or no interest in daily operations and processes as long as their complex Excel sheet pops out dollops of rosy vanity metrics.

The fiasco at Housing.com is a classic case in point. Then, there’s this fear of missing out (FOMO) on the part of the VCs, which implies that these startups are escaping the usual rigor of due diligence.

On the other hand, most delivery-only startups have no control either over the supply chain or logistics, as such processes are largely outsourced. It’s a complex mess where the line between responsibility and accountability is dangerously blurred.

Simply put, if the buck stops everywhere, the buck doesn’t stop anywhere in reality.

Tech not a solution in food, but a mere enabler

Even in a market with a billion-plus mouths to feed, food demand isn’t infinitely elastic. A free lunch doesn’t buy you loyalty. People don’t order food just because of discounts. There is an emotional connect with food and not with the food service. We don’t care who delivers as long as it’s of top quality — served fresh and hot with packaging reflecting the overall hygiene.

Thus, operations play a key role. However, with a mindless expansion spree, operations suffer. When it comes to food, we pay for convenience, not necessarily because it’s cheap. Call them whatever you want – disruptive, game-changing, et al – the underlying math simply doesn’t add up for delivery-only food startups.

Also Read: Hits and misses in Asian startups in 2015

In India, foodtech startups clock an average order size of INR 200 (U$3)-INR 250 (US$3.5) while delivery costs could reach as high as INR 60 (US$0.90) per order.

What makes the situation even worse is the blindfolded chase of multi-city growth without focussing on customer experience, which is key to finding repeat customers.

The cold, hard truth

So, will the Indian foodtech space implode when this optimism ends? There’s no doubt that only a handful will survive the age of scrutiny — not because they have deep pockets, but because they have always focussed on the basics — improving distribution and gradually building scale operations.

For example, Yumist, which raised US$2 million last week from Uniblazer Ventures, seems to have a much better shot at optimising costs while scaling up, given its control over the entire chain from the kitchen to our doorstep.

Also Read: Indian foodtech still tasty as Yumist eats up US$2M funding

For food, building a high-quality label is key, instead of just operating as a marketplace with no unique business models. Another significant challenge is to manage delivery during peak hours in traffic-choked metro cities as, unlike consumer durables, food needs to be delivered within a stipulated time window and can’t be phased through the day.

Thus, foodtech startups with no control over the kitchen (which implies no control over quality) or the last-mile delivery (which implies no control over unit economics) are doomed to fail from the start. The faster the startup world realises this cold hard truth, the better.

Fear vs optimism: what will work

The biggest irony is that we never learn from history, often finding a convenient refuge in the much overused and often abused narrative of ‘this time it’s different.’ However, the irony is that the more things change, the more they remain the same.

Fear sometimes is more rational than hope and optimism. After all, fear is born out of the scars of the past. But hope and optimism are conniving things. They seduce you to believe in the absurd.

It’s true that the world didn’t see the repeat of the Dutch tulip bubble of 1636. Neither did we encounter a stock bubble similar to that of 1929. But bubbles appear in myriad shapes and forms, making the smartest appear dumb.

Even Isaac Newton could not escape the South Sea bubble of 1720: “I can calculate the motions of the heavenly bodies, but not the madness of people.”

Astronomical valuations, mushrooming of copycats, well-funded ridiculous ideas, and and easy money may not make a bubble. But this ‘madness of people’ does. Always.

Also Read: Once VCs’ favourite dish, has Indian foodtech bitten off more than it can chew?

The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, please send us an email at writers[at]e27[dot]co

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