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Serving it wrong?
THE UGLY SIDE

TinyOwl and Zomato are proof that something is rotten in India’s food tech startups

By Itika Sharma Punit

At the beginning of 2015, many investors had predicted that food technology startups would be the new stars of the Indian ecosystem. The prophecy stood true for most part of the year, but now the world seems to be falling apart for two of the biggest food startups in the country.

Gaurav Choudhary, co-founder of food-ordering startup TinyOwl, spent two days held hostage inside the company’s Pune office by employees who were laid off earlier this week. And Deepinder Goyal, founder of restaurant search portal Zomato, shot off an angry email to his sales staff about the company missing its sales targets, which got leaked to the media and made headlines. This comes less than a month after Zomato laid off roughly 10% of its workforce—around 300 employees—in order to focus on areas that are more profitable.

“It’s hard for us to comment on what is happening at other startups within this space or otherwise. Our restructuring was a business call,” the Zomato spokesperson told Quartz. But it is unlikely that they have missed the writing on the wall.

“Food technology is a perfect example of how bubbles had started coming up in the Indian startup ecosystem, but they are now getting self-corrected,” Pankaj Jain, partner at venture capital firm 500 Startups, told Quartz.

“In the first half of the year, every day there were food delivery or grocery delivery companies that were getting funded, and in many cases they were raising very large amounts of money. I think everyone has now come to realise that those are fundamentally flawed businesses,” he added.

Jain recollects a “mad rush” to invest in the food technology space earlier this year. “It was like ‘hey, they invested in a food tech company; we don’t have one in our portfolio, we must get one in our portfolio, too.'”

Since January this year, food technology startups in India have raised a total of $172.9 million (Rs1,138.4 crore), according to research firm Tracxn. This includes Rs100 crore raised by TinyOwl in February, and $60 million (Rs395 crore) raised by Zomato in September. Bengaluru-based Swiggy also raised $16.5 million in a series B round in June—just five months after it had snapped up $2 million in series A funding.

The table below shows a monthly breakup of funds raised by food technology startups during 2015, according to Tracxn:

Month Funding ($ million)
January 0.26
February 17.9
March 0.5
April 53
May 1.5
June 19.9
July 0.77
August 4.3
September 63.2
October 11
November* 0.35

* As of Nov. 5.

Besides overfunding, another reason that is causing trouble in the food technology space in India is overcrowding, Anand Sanwal, CEO of New York-based research firm CB Insights, told Quartz.

“It is one of those sexy spaces where people think ‘everybody needs to eat and so this must be a trillion-dollar market’. But they don’t realise how difficult it is to crack the code here,” Sanwal said. “You and I could put up a website; somebody will order and we can run around and make the first deliveries ourselves if need be. In the beginning, it can be a technology-light business but eventually it needs to be pretty rigorous and significant.”

More bad news

Developments at larger companies—Zomato and TinyOwl—are making headlines now. But in early October, a small food technology firm, Dazo, had announced its plans to wind up operations less than a year after its inception. “We were scaling up and were looking to get into more cities, but were short on capital. At some point we felt we were lagging behind other players and decided to quit,” Shashaank Singhal, former CEO of Dazo, reportedly said.

And there will be more casualties. “There is going to be a lot of pain in this space, both in the US and in India,”  Sanwal of CB Insights said. “Most of the companies are going to fail.”

While the media celebrated a lot of these startups, most of them had no real business models, and investors will begin to take action soon.

“There is going to be consolidation, there are going to be shutdowns, and there are going to be layoffs,” 500 Startups’ Jain said. “The sector got overfunded and now it’s all getting pulled back.”

The saving grace, however,  could be that the downfall of the food technology startups is unlikely to spoil the party for the ecosystem at large, Jain said.

Quartz has written to TinyOwl. This post will be updated if and when we hear back.