Food tech: first warning signs as consolidation sets in

If there was any doubt that VC firms still have a ferocious appetite for food tech firms, Deliveroo's latest round of funding acted as a timely reminder: Bridgepoint led a $275m series-E round for the London-based food delivery startup in early August, reportedly valuing the company at between $800m-1bn. The funding round was co-led by existing investors DST Global and General Catalyst, while returning backer Greenoaks Capital also participated. And this all came less than six months after Deliveroo raised $100m in a series-D led by DST Global and Greenoaks Capital - including this latest series-E, Deliveroo has raised a whopping $475m in venture funding since June 2014.

Online food ordering and delivery services have historically been capital intensive in order to finance their aggressive early growth plans, but Deliveroo's fundraising efforts have dwarfed those of earlier pioneers including Germany's Foodpanda and the UK's Just Eat. The latter has nevertheless seen unabated investor interest since it listed in 2014; in the space of two years, its market cap has doubled to reach £3.9bn at the time of writing.

The heavy financing requirements and the intense competition in this sector are logically calling for more consolidation. Being able to attract financing in a geography where leaders are emerging and where you are not yet profitable is getting increasingly harder, if not impossible.

These escalating valuations are likely to raise a few eyebrows, but much of Deliveroo's success with the public and investors alike can be attributed to its different value proposition - unlike earlier entrants such as Just Eat or Delivery Hero, the business is not merely acting as an aggregator of food delivery businesses, but instead runs its own delivery service and works with restaurants that would not offer this option otherwise.

This is especially shrewd since elsewhere in the food tech space, consolidation certainly is the plat du jour as sector pioneers are beginning to reach critical mass. "The heavy financing requirements and the intense competition in this sector are logically calling for more consolidation," a technology-focused corporate finance professional tells unquote". "Being able to attract financing in a geography where leaders are emerging and where you are not yet profitable is getting increasingly harder, if not impossible."

Winner takes it all
Recent news does illustrate this state of play. In early August, Prime Ventures- and Macquarie Capital-backed Dutch online food delivery service Takeaway.com acquired the Benelux activities of rival group Just Eat for €22.5m. The acquisition, which includes Dutch platform Justeat.nl and Belgian platform Justeat.be, will enable local player Takeaway.com to strengthen its leadership position in the region. Just Eat, meanwhile, made no qualms of its need to focus on areas where it has a nearly unassailable hold on the market. When restaurants and customers alike strive for simplicity and a lower number of intermediaries, being number two clearly doesn't cut it anymore.

"We have always been clear that the competitive dynamics of our industry demand clear market leadership to drive sustainable profitability," Just Eat CEO David Buttress said in a statement following the divestment. "The disposal of our Benelux business, where we are number two, delivers on that strategy and comes at the right time for Just Eat. We are the clear leader in our remaining 12 markets and it is appropriate that our time and resources are focused on building on the strong growth we are seeing across those businesses in future."

Just a few months prior, Just Eat had indeed agreed the acquisition of four businesses from Rocket Internet in Spain and Italy, as well as from competitor Foodpanda in Brazil and Mexico, for a total of €125m from its balance sheet.

While Just Eat is hoping to benefit from this trade-off, smaller players might not have the luxury of being able to refocus elsewhere. Even though the food delivery service market is less established than online ordering platforms such as Just Eat or Delivery Hero, competition between the likes of Deliveroo, Allo Resto and more recently UberEats is heating up and has already claimed its first victim in the Benelux and France: in late July, Belgian food delivery service Take Eat Easy announced it had gone into receivership, having failed to secure a third round of funding. The start-up had previously managed to secure a total of €16m from Eight Roads, DN Capital, Piton Capital and Rocket Internet.

Perfecting the recipe
In a lengthy blog post explaining Take Eat Easy's decision to call it a day, co-founder and CEO Adrien Roose shared several enlightening insights into the challenges facing online takeaway businesses. First of all, Roose claimed that Deliveroo's head-turning funding rounds had directly hindered his own company's fundraising efforts, thereby acknowledging that competition for relatively limited pools of investor capital in the sector may have reached a tipping point. But more importantly, Roose did not shy away from the fact that Take Eat Easy was simply not yet profitable, before delving into the critical issue of courier utilisation as a main source of profitability in this business model.

This last point is a challenge facing even the market leaders and their VC backers. Deliveroo made headlines again in mid-August, but this time not for its ability to raise vast amounts of VC funding: the company was at the centre of a much publicised dispute with its delivery riders over pay in the UK, eventually prompting the government to step in and forcing CEO William Shu to apologise and insist that riders would continue to be paid more than the minimum wage.

The heady days of 2012-14, when scores of food tech businesses were popping up and attracting VC funding across Europe, are most likely over as consolidation plays and the search for more efficient business models are the order of the day

The detail of the proposed changes to the pay model - and the fact that Deliveroo will still trial it on a voluntary basis in some London areas - shows that, having successfully penetrated the market, the start-up will likely be forced to adapt its model if it is to properly monetise it. Under the new plan, Deliveroo would pay its riders £3.75 per delivery, instead of a guaranteed £7 per hour plus £1 per delivery currently - most likely in a bid to increase courier utilisation and therefore profitability. The backlash over the proposed change, amid wider concerns from the public and regulator alike over the ‘uberisation' of the economy, shows that consolidation is not the only challenge facing food tech businesses and their investors.

The heady days of 2012-14, when scores of food tech businesses were popping up and attracting VC funding across Europe, are most likely over as consolidation plays and the search for more efficient business models are the order of the day. Nevertheless, a handful of newcomers have managed to attract funding in recent months by attempting to carve their own niches. France's Frichti, for instance, secured €12m from Alven and Idinvest in March; the start-up not only delivers but also prepares meals itself with ingredients sourced directly from the producers. The market may be reaching maturity fast, but it looks as if venture capital firms are still ready to take a punt to find the next potential flavour of the month.

Further reading

• UK / Ireland

VCs hope to take away strong returns from food delivery services

• 19 Sep 2013

• Consumer

European venture houses hungry for food tech

• 14 Apr 2015

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