VCs hope to take away strong returns from food delivery services

Investor appetite for the food sector is strong. The number of private equity deals in the restaurant and bars sector this year has already exceeded those recorded across the whole of 2012. High-profile deals include the buyout of Côte Restaurant by CBPE and Graphite's purchase of Hawksmoor. And with this year's aggregate value just €15m below that banked last year, 2013 is the year of wining and dining.

In the venture space, VC players are hungry for the sector too. But appetite has been focused on a tighter niche: online food delivery platforms. Though international in their outlook, Germany is home to DeliveryHero, Foodpanda and Lieferando, with Just Eat operating out of the UK. A quick walk down any European high street is enough to reveal the prevalence of such firms, with numerous stickers in restaurant windows advertising their services. And competition is reaching its peak.

unquote" data reveals these four examples have raised around €250m between them. While the figure itself may be nothing out of the ordinary, the sheer number of follow-on funding rounds is.

Earlier this month, Foodpanda received a further $8m. Backed by Rocket Internet, Investment AB Kinnevik and Phenomen Ventures, the company plans to expand into the Middle East, where it already operates in Saudi Arabia. But Rocket Internet's offering only launched in 2013 with a funding round in excess of $20m. Despite being so late to the party, more established competitors are loath to dismiss Foodpanda, with its arsenal of follow-on funding options.

"Regardless of market size and how many competitors already exist in the market, these guys can really make a significant impact because of their funding structure," said Philipp Hartmann, managing partner of Rheingau Founders, an investor in Lieferando. "There's a big question mark over what Foodpanda will do next. But it's a sleeping giant, and you should never wake a sleeping giant."

Spot the difference
The most capitalised of the online food delivery platforms is DeliveryHero, which has raised around €103m in a two-year period across five rounds of funding, according to unquote" data. Backers include Holtzbrinck Ventures, Point Nine Ventures and Phenomen Ventures. The latter is also an investor in Foodpanda, hedging its own portfolio. But why do these platforms require so much capital?

"In the early stages, the money went into the development of the platform, IT development, a process build-up and so on," explains Rainer Maerkle, partner at Holtzbrinck – a DeliveryHero backer. "But then in the second stage, it went more towards internationalisation. Then they could take the ready-made platform to the markets, and the investment mainly translated into marketing. As of today, that's the main use of proceeds," he says.

Fractionally behind DeliveryHero in terms of funds raised is Just Eat. The only UK offering, Just Eat has raised roughly €97m from three funding rounds. Index Ventures led the firm's £10.5m series-A round in 2009, completing the first investment from the €350m Index Ventures V Fund. The firm then waited until April 2011 for its series-B round, led by Greylock Partners and Redpoint Ventures. The $48m round was designed to boost international expansion. The following year, Vitruvian Partners led a $64m round for the firm, with co-investment from existing investors.

The battle for loyalty
Each company has highlighted the need to support marketing efforts with VC funding. The seemingly insatiable requirement for follow-on funding appears to be a direct result of the crowded marketplace. "It's pretty difficult to differentiate [between the platforms]," admits Maerkle.

"There are slight differentiations, but it really comes down to how to use the platform of online marketing most efficiently. We think this is the main differentiator for building a strong brand in the local market place," he explains. "This is clearly a customer lifetime business; you acquire the customer on a cost that you do not recuperate in the first transaction. So you have to keep customers for a long time."

The leanest of the quartet is Lieferando, which is understood to have raised around a quarter of that enjoyed by DeliveryHero. "We've been very efficient in our online marketing spending and overall company strategy," says Hartmann. "With much less financing, we've reached the same success as DeliveryHero on a domestic level. In terms of market positioning, we're neck and neck on several parameters."

And with DeliveryHero, Foodpanda and Lieferando all based in Berlin, competition for customer loyalty is particularly rife in the local market. But the acute hyper-local competition isn't all bad; it played a part in catalysing the development of the Berlin start-up scene around 2009.

Says Hartmann: "It's interesting that it all happened within Germany. It was clear that this would take place in Berlin, because it was also a time when the city was trying to establish itself as a European hub. A lot of people were coming back from London and Rocket Internet was growing heavily. A couple of guys had joined a Rocket entity abroad, and decided they wanted to take the next career step. So they moved to Lieferando. It was something that really heated up the whole ecosystem in Berlin."

Which way out?
Though the battle for market share may rage, VCs may soon start to look to exit. Just Eat is rumoured to be gearing up for an IPO, with the newly appointed CEO David Buttress confirming the possibility of flotation to The Financial Times earlier this year. The company operates in 13 countries (though interestingly, not in Germany). But would the public markets bite?

"I think all these firms are still rather young," says Maerkle. "Clearly their hypotheses are built on efficient customer acquisition and translation into high customer lifetime values. Although cohort data is really strong at least in the case of DeliveryHero, overall lifetimes might still be a bit short to allow public markets to share our opinion on this being a long-term very profitable business."

Given the crowded nature of the market, consolidation seems the most logical next step. In the States, online food delivery competitors GrubHub and Seamless merged earlier this year in order to take on larger rivals. Consolidation in the European market seems a possibility, up to a point. "I don't believe it's a monopolistic market. A couple of players can be present in the market," says Hartmann. "But whether that's two or four is under discussion at the moment."

Though with VC heavyweights backing these platforms, the prospect of consolidation begs the question of who would sell, for fear of perception of throwing in the towel. "Consolidation is definitely a generic possibility," says Maerkle. "But if you look at the companies and their backers, all of them are very self-confident. That translates into naturally difficult merger discussions, so this isn't something that seems overly realistic as of today."

Whatever the exit route, several VCs look poised for success. With the multitude of follow-on rounds and an army of backers, each VC has an individual return perspective. "Some of them entered the market recently and want to make 3, 4 or 5 times money at least. So they're playing hardball now," says Hartmann. "They're in a pretty good position, realising the company is developing nicely and doesn't need further follow-on financing. It's a game of waiting for growth and positioning yourself well in the market. Yes, consolidation will happen. It's absolutely just a question of time."

 

All data is sourced from unquote" data, the unquote" proprietary database. To conduct your own searches on pan-European private equity trends, visit unquotedata.com

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