Zomato's Devaluation is Just Another Warning to Ailing Food Tech Space
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The markdown of food services portal Zomato is just another warning to the food technology industry, however the industry came in support of the company and appreciated founder Deepinder Goyal’s fearless contradiction of HSBC’s theory.
Experts feel that the markdown will not have any earth shattering impact on the industry, as this space has already been witnessing a dry spell for quite some time.
Food tech startups have been struggling to impress the investor community, as the latter seem to be more concerned about the domain’s capacity of generating unit economics, scalable and sustainable models. Over the last few months, investors have shown the red signal to food tech companies which are attempting to merely gain customers at the cost of margins.
To add to the ongoing troubles, on Monday, HSBC’s brokerage arm halved the valuation of Zomato to $500 million, citing concerns surrounding the company’s advertisement-heavy business model, growing competition in the food ordering space and money-losing international operations.
Zomato CEO Deepinder Goyal, who according to his tweets, was expecting this report since Friday, strongly reverted to HSBC’s theory saying that the brokerage arm “does not understand the space.”
It’s been bad for a while now, this is another add on
“Food tech has been seeing challenges including lack of new funding, failures and consolidation and more of that will continue. However the primary challenge to me has been inability to scale and lack of focus on unit economics,” Ash Lilani, Cofounder and Managing Partner of Saama Capital said.
“Even before the Zomato markdown, a blog from 500 Startups that said food delivery businesses would struggle to gain funding, and I agree with that sentiment. I was approached earlier this week by the founder of a food delivery startup who asked me if we were interested in participating in a funding round, after a potential investor removed their support. We declined,” Brett Stevens, Vice President Jaarvis Accelerator said.
“The inflated valuations of some food technology companies have been based on hype rather than business fundamentals including unit economics, revenue and profit,” Brett added.
The food tech space saw a lot of capital flow in early days and saw a number of new investors. It’s only now that companies are taking a step back to sharpen its focus on important metrics rather than just amassing huge amounts of capital. Year-to-date funding in the food tech business stood close to $64 million this year. 2015 saw about $230 million in funds in this domain, according to Tracxn data.
The data also revealed that 40 food tech startups were founded so far this year versus 541 in 2015 and 232 in 2014.
“One fact we all know that this industry was lacking on confidence on low unit economy and the feedback was well received and everyone started focusing on unit economy by downsizing or cutting down non-revenue business,” Anil Joshi, Managing Partner of Unicorn India Ventures said.
Some of the major acquisitions in the food-tech space according to Tracxn
Company Status Details
ACQUIRED (sattviko.com, 18 Nov- 2015)
ACQUIRED (monocept.com, 10 Sep- 2015)
ACQUIRED (hellocurry.com, 28 Apr- 2015)
ACQUIRED (hellocurry.com, 27 Apr- 2016)
ACQUIRED (foodpanda.com, 7 Feb- 2015)
ACQUIRED (antfarm.in, -, 13 Nov- 2014)
Place of Origin
ACQUIRED (craftsvilla.com, 24 Feb- 2016)
ACQUIRED (timescity.com, Jul, 2013)
ACQUIRED (innerchef.com, 08 Mar- 2016)
ACQUIRED (grofers.com, 24 Oct- 2015)
ACQUIRED (bigbasket.com, 12 Jun- 2015)
ACQUIRED (foodpanda.in, 17 Nov- 2014)
ACQUIRED (timesinternet.in, -, 16 Apr- 2014)
Industry seen cheering Deepinder Goyal, more or less
The overall industry, baring a few, came out in Deepinder’s support and appreciated him on addressing the concerns openly. Investors Sequoia Capital and Info Edge publically restated their faith in the company’s business model.
Co-founder and CEO of WebEngage Avlesh Singh tweeted saying, “Screw the valuation, we need more Deepinders building more Zomatos!.”
Ex-Flipkart CPO Punit Soni tweeted saying, “Zomato will be fine. It has a great product, and has legs. Best consumer product among the current crop.” Comparisons have also been drawn to markdowns faced this year by another Indian unicorn Flipkart.
The startup also saw support on Twitter from its customer base across the globe who said that they used Zomato’s services for its services and not valuations.
@joeonnet- I live in Dubai & super proud that @Zomato kicked everyone out here & doing well. First Indian startup to do so. HSBC downgrade is bullshit.
Unicorn India Ventures’ Anil Joshi told Entrepreneur that HSBC’s facts are yet to be validated. The valuation might have a short impact on food tech startups but the impact will fade as numbers will speak .
Investors of other food services portals remain strong
Despite an overall scepticism surrounding this space, there are startups that have managed to garner investor attention over the last six months, such as Swiggy, Faasos and Fresh Menu.
“This (Zomato’s markdown) is not a reflection of food tech space, the opportunity is still there for a team with the right business model and ability to execute,” Mohan Kumar, Partner at Norwest Venture Partners said in an email. NVP is an investor in Swiggy.
“Things like valuations go up and down and people are prone to short term memory. It’s difficult to tell if these are based on any fundamental reasons. Our view on our portfolio is to stay focused on your operations and keep your head down,” Prashant Mehta, Partner at Lightbox, which has Faasos as one of its portfolio companies.
Many startups in food tech space are now resorting to cost cutting, pivoting and layoffs to avert financial pressure. On top of it, a sense of caution in investors is hurting the sector that is still trying to find its feet.