Why VCs are betting on technology-enabled startup restaurants

Why VCs are betting on technology-enabled startup restaurants

Food lovers in India have never had it better; the recent times have seen an explosion in the variety of cuisine, experiments with formats that meet convenient and luxurious needs and an infusion of technology to better logistics on all levels. While entrepreneurs are vying with each other to come up with the next big idea, investors too, seem excited about this space as food businesses have begun to show lasting power by achieving scale

Lemon mojito; Paneer Do Pyaza with Parathas; Methi Malai Matar with Ginger Garlic Rice; Mocha Walnut Mousse.

Now that I’ve caught your attention, let’s step in to the “business kitchen.”

The world of food has gone beyond quick service restaurants and fine-dining bistros. We now have entrepreneurs, experience designers and technologists foraying into the sector and innovating at a business model level alongside chefs. For instance, a startup venture, Holachef, aggregates and curates home chefs and uses technology as an enabler to manage supply chain operations such as order management, customer acquisition and last mile delivery.  Similarly, Salad Days, a Gurgaon-based startup has setup its own fruits and vegetables garden, and delivers a variety of salads to homes and offices. And, Flavour Labs operates a mobile truck, which serves freshly prepared food at multiple prime locations in Gurgaon.


Even if the food startups are not making the profit margin that IT services businesses are making, the valuation is higher simply because they have created a brand which will help sustain its marketing strength for a longer period of time.” – Madhukar Sinha, Partner, India Quotient


While these are just some examples, today food entrepreneurs are whipping up several innovative and unique business models which hold a strong potential of becoming a national brand.  They understand the emphasis on taste, comfort and hygiene. More importantly, they realise the role, technology can play in business model disruption. “Food is one of the last sectors to use next generation technology. Now that it has opened up, the headroom for new models to evolve is phenomenal, especially when you compare it with other sectors like IT services or banking, where technology is already present,” comments Krishnan Ganesh, serial entrepreneur and founder of Growthstory.in, who has made several investments in food technology startups.

Today, web and mobile technology enables everything. It helps older business models become more efficient and allows newer business models to emerge. For instance, for offline food businesses, adoption of technology has enhanced their ability to better identify consumer requirements and supply chain. In the case of online food businesses, technology has played a much deeper role in managing the end-to-end process.

These changes have not missed the sharp eyes of venture capital investors in the country.

While traditionally, food businesses did not see much angel capital, venture capital or private equity investment, evidently, this is changing. Take a look at these numbers: According to data from Venture Intelligence, a private equity and venture capital transactions database company, 2014 saw a whopping U.S. $133 million enter the restaurants business up from U.S. $73 million in the previous calendar year. During the same period, U.S. $63 million entered the food technology / online space up from U.S. $39 million. So far, only in the first two months of 2015, about U.S. $17.77 million has entered the food technology business and this sector continues to garner more attention.

From being a purely localised business, the food sector has established the proof of concept to scale, through the success of Jubilant Foodworks (Dominos) and Speciality Restaurants (Mainland China). Vishal Sood, managing director, SAIF Partners, which has invested in Speciality Restaurants adds, “These companies have created the belief that with a quality supply chain and world class processes, it may be possible to profitably scale restaurant chains with Indian cuisine too. That is when more PE interest developed in the space.” As he rightly says, while considering an investment in a business, one of the factors that PEs and VCs look for is its capability to grow big.


“Companies such as Jubilant Foodworks (Dominos) and Speciality Restaurants (Mainland China) have created the belief that with a quality supply chain and world class processes, it may be possible to profitably scale restaurant chains with Indian cuisine too. That is when more PE interest developed in the space.” – Vishal Sood, managing director, SAIF Partners


Keeping these trends in mind, in this story we speak to food entrepreneurs and investors to bring to light some of the new business models that have emerged, while also trying to gather a deeper perspective of their expectations from venture investors.

The business models that food entrepreneurs are exploring

The hybrid model 

When quick service restaurant Faaso’s raised funds from Sequoia Capital a few years back, it used the funds to set up more outlets. But, soon it realised that such a strategy is slowing down its growth process, because expansion takes place one outlet at a time and it was a linear process.  So, it shifted its focus to technology and enabled demand generation through a mobile application, ensuring that business could further scale around the same outlet. In fact, Faaso’s went to extent of launching even a Twitter campaign, where you just Tweet and order a wrap. This resulted in good traction for Faaso’s, which currently records 60 per cent of its orders for delivery and 70 percent orders through its mobile apps.

Similarly, Mumbai-based Goli Vada Pav is also working on a mobile strategy to aid its home delivery model in Bengaluru and Mumbai.

The model adopted by both these restaurants is a hybrid one – business scaled to a certain level through the QSR format and then further enhanced through a mobile-driven home/office delivery strategy.

Internet-first restaurants 

“Good food will make us great and technology will make us achieve our goal faster,” says Badal Goel, co-founder of FRSH. Technology has entered the food business and the benefit of running this business in the virtual space is just unleashing. Apart from skipping the rental cost, which forms a major chunk of a restaurant’s operational cost, technology facilitates a faster scaling option and as a result, a number of innovative businesses have mushroomed.

For example, India Quotient-backed Holachef aggregates and curates home chefs who create dishes on a daily basis from their home kitchen. This startup uses technology as an enabler to manage back-end processes such as order management, customer acquisition and most importantly, last mile delivery. Of course, technology is also crucial to scale up its network of chefs (or a marketplace of chefs as venture investors like to call it)

Another company operating in a similar space is Mealme. Founded in 2014 by Ninisha Bajpaie, Mealme partners with home chefs and offers a curated list of meals for customers on a daily basis. To scale further, Mealme is actively on the lookout for seed funding.

Another India Quotient-backed company is FRSH. Founded by IIT graduates, Badal Goel and Sumit Kumar in January 2014, FRSH works as a centralised kitchen model and does last mile delivery to customers in densely populated areas. Post it’s fund raising, FRSH has moved to a larger kitchen, which has the capacity to cater to 8,000 orders per day. The company is now in the process of converting it into a SMART kitchen where technology controls a large portion of its operations. According to Madhukar Sinha, Partner, India Quotient, “FRSH has delivery time slots and hence manages to distribute the logistics costs as well. As a result it is able to deliver small ticket items which one cannot get delivered otherwise.”

Additionally, Krishnan Ganesh’s Freshmenu is an online restaurant, which provides wholesome fresh food every day and delivers it within 30 minutes of placing the order. It has currently piloted in Bengaluru and will expand to three more cities within six months and go pan-India by the end of the year.

While these entrepreneurs enjoy the cost advantage of operating on the virtual space, they do cater to a different crowd of consumers; consumers who are on the lookout for convenience and regular consumption. “Our service is more specifically targeted at customers who live away from home and want to source healthy, homemade food,” Bajpaie

The Food truck model 

Food trucks are a fairly popular concept in the West; however, in India it is still at a nascent stage. Nandita Shetty founded Flavour Labs is one such company that offers food on the go. These trucks serve freshly prepared food at multiple prime locations without incurring real estate costs in any of these locations.

“Currently, there are only a handful of food trucks in India, most of which have launched very recently. Each one is adopting various approaches to differentiate themselves and soon, this space will very likely see multiple ventures flourishing,” believes Shetty.

Scaling up with the traditional model 

Even as these new models are springing up, a few entrepreneurs have managed to scale up their restaurant businesses. After scaling up within the country, some of them are even eyeing international markets.

“Dominos defined Italian cuisine in India. Similarly, if a Biriyani chain is famous and large in India and has survived a good part of the market, then it can enter the global markets where there is a good Indian population,” opines Sinha.

That is exactly what quick service restaurant Mast Kalandar aims to do. “We plan to enter markets where there are large pockets of Indian population, where there is void for such food, easy acceptability, demand and awareness about this kind of food,” says Gaurav Jain, founder, Mast Kalandar. He has his eyes set on the Middle-East, Kuala Lumpur, Hong Kong, Dubai and the U.S.

Typically, brick and mortar restaurants restrict technology usage to making operations more efficient in a move to aid growth.

Within the traditional model, there are many approaches at play. Unlike Mast Kalandar, which is a single-brand chain, chef-entrepreneur Riyaaz Amlani is working on scaling up through a multi-format model that includes fine dining, cafes and casual dining and even pub-restaurants. Today he runs brands like Smoke House Deli, Social, Salt Water Café and has expanded to 33 outlets across 11 cities and touched Rs. 82 crore in annual revenue last fiscal. Amlani believes investors expect ventures like his to grow 30 per cent year-on-year, a number he believes is realistic.

What is attracting VC investors? 

Opportunity to build a brand 

Good business is not about the initial traction, but the ability to convert that into a habit. For that to happen, brand stature plays a very important role as it helps in defining the future potential of the business.  As Ganesh rightly states, “Valuation for a lot of these food brands is about repetitive purchase and long life time value.”

So what should a brand signify? Considering the fact that one thinks of food for either convenience or for a fine dining experience, building a strong trust in the brand is very important. Quiet obviously, it must be reliable, signify hygiene, offer good experience and of course, provide a tasty and healthy cuisine. Dominos, whose success is probably a handbook for many food entrepreneurs, is able to deliver consistently within 30 minutes (a standard set across the country). “Though nutrition wise it is bad, there is no other company that you can trust for delivery, quality and consistency,” believes Ganesh.  This leaves the field open for other players to create their own brand and fill this open void.

Look at the statistics. There are more than 50 food brands in just one state in the U.S. but there are not more than 10 to 15 in India, which includes players like Dominos, Mainland China, Mast Kalandar and Faaso’s.  Sinha believes that there is scope to build close to 200 to 300 brands out of India over the next few years.

From an investor perspective, all these factors add to their valuation expectations. Sinha believes that such companies get valued at much higher multiples of revenue compared to other businesses such as IT Services, even though revenue and profitability is probably lower.  “Even if they are not making the profit margin that IT services businesses are making, the valuation is higher simply because they have created a brand which will help sustain its marketing strength for a longer period of time,” he explains.

Good deal flow from quality entrepreneurs 

The founders of FRSH are hardcore technology professionals. But they are also food lovers. One wonders if it is important for prior experience in this field to be in this business? Not really, says India Quotient’s Sinha. “In any emerging market, if you are looking at modern businesses, it will be difficult to find people with experience in that business.” According to him, while investing in a restaurant business, they will definitely look for entrepreneurs who are passionate about food, who like to eat the best food, expect quality, are taste conscious and have a desire to become a domain expert over time. Of course, the key metrics to ensure success goes beyond food, and investors are gauging an entrepreneur’s ability to manage technology, logistics, supply chain, cold storage and so on.

A general observation is that the capability of those entering this business is very different from what it used to be a few years back. “Now the entrepreneurs are young and capable and get into a business with the sole intention of scaling it,” comments Sinha. They speak the investor lingo and are prepared to build their business like a corporate with an open and transparent culture. The kick comes through the excitement of building something scalable.

The success of Dominos 

The investment community is always on the look out for a proof of concept. And that is what Dominos offered them. Multinationals like McDonalds, Domino’s and Pizza Hut invested significantly in supply chain and logistics. “They set up and taught most of us the importance of supply chain and brought global quality processes into India. They showed us that it is possible to offer consistent quality all over India,” says Sood.  Eventually, Jubilant tapped the capital market and slowly the sector’s capability to scale and be profitable was evident.

Domino’s last mile delivery concept within 30 minutes through telecalling made other restaurants understand that delivery is a large market segment. “They started doing a significant part of business through home delivery,” says Sinha. Eventually, technology started adding to the efficiency of operations and it became easier to order and track the order.

Long, patient capital 

“This business requires patient private equity capital as it takes a lot of time to scale,” opines Ganesh.  He cautions that it is not an angel or seed fund play unless they are able to lock in a huge amount of capital. This is because it will be difficult to invest in technology, logistics and analytics to be able to scale and hence, one will not get an exit. “Or, it will be so small that there is no M&A possibility,” he adds. So it is very different from the technology space and it has to be played by a different set of people with different time horizons.

Exit path is yet to pan out 

Clearly, it is still early days. New models are panning out and many companies are coming up with innovative business models that deliver. However, Ganesh believes that it is an extremely tough sector. Unlike in technology, where returns are quicker with a strong potential for consolidation, food requires more capital.

Consolidation takes place when the industry evolves with novel business models. Sinha believes that a lot of larger brands will come to India at some point of time and they are likely to acquire these brands in India, as these are active brands.  Yet, Ganesh believes that when it comes to restaurants, it may not make sense for people to acquire smaller players given that cuisines are different. Sinha also opines that if a business becomes large enough, then they could IPO.

To put it in a nutshell, those who are able to scale to a large level, who are able to raise a lot of capital and deploy technology substantially are the people who are likely to win, atleast from a venture capital perspective.

The final say 

It is evident that there is scope for food businesses to grow into a large market given the growing population and their changing needs. There will be many new formats, which would cater to various food categories and target different income groups. They would revolve around technology, mobile application, quality and wholesome meals at an affordable price for daily consumption. Of course, you will also have the super specialty restaurants for celebrations. Clearly, a gastronomical delight is waiting to greet you, just around the corner. And, in all this, the space is just right for entrepreneurs and investors who have the right attitude and resources to match, to cash in.

So eat well. Stay healthy. Stay happy.


A venture capital view of food businesses

There is potential to build long-lasting brands in this business and that is something that excites food entrepreneurs. Can you create another Domino’s in another cuisine?  

Like in any other sector, technology is becoming paramount across processes – supply chain, logistics, demand generation, order taking, kitchen operations and so on. 

Investors want to bet on entrepreneurs who can manage the art of scaling up big. 

The scalability and exit ability of new business models are yet to pan out. But some of these models are setup for scale. For example, a marketplace for home chefs model can scale simply by adding chefs, a comparatively capital efficient model for scaling versus opening more retail outlets.

As in any other investment opportunity, growth, differentiation and people remain the key. 


THE EVER-CHANGING CONSUMER

Food consumption is a repetitive activity and an individual thinks about it at least three times a day. It is common knowledge that consumer behavior is changing and the concept of eating out has increased and there is more to go. According to Riyaaz Amlaani, the CEO and managing director of Impresario Entertainment and Hospitality, “Today, the average Indian consumer eats out 1.8 times a month as compared to a consumer in Singapore who eats out 55 times a month. Thus, if this trend (in customer maturity in Indian market) continues, the average of eating out can reach 10 to 15 times in a few years.” 

This change is aided by increased spending power and rise in double income families. This apart, today’s consumer is also widely travelled and exposed to multiple cuisines across the globe. And hence, eating out is considered a form of entertainment and socialising today. It is no more a mere physiological need but is a more deep rooted and emotional need that brings people together. While this is at one end of the spectrum, the other end presents a more practical problem; the dilemma being faced by working professionals. For them, cooking a fresh meal every single day is a tough task but they cannot eat at a restaurant daily.


EDITOR’S TAKE – AN IDEA FOR INTERNET-FIRST RESTAURANTS 

With investor’s willing to bet on Internet-first restaurants, some of these brands would do well to setup one or two brick-and-mortar restaurants in some key locations. The idea behind setting up these retail restaurant outlets must focus on offering a stellar customer experience, taken to another level. Such customer experiences can have a catapulting effect for online ordering. For example, a brand like HolaChef, can create outlets where one of their home chefs become the guest chef for a week and gives an experience to customers like no other. Of course, this strategy will fall apart if the customer experience is not extraordinary. But if it is, it’ll play a key role in shaping up the brand even further. In short, the suggestion here is to setup retail restaurants from a pure brand building and customer experience perspective, after scaling up to a certain level. 

Faasos Flavour Labs FRSH Goli Vada Pav Growthstory.in Hola Chef India Quotient Jubilant Foodworks (Dominos) Krishnan Ganesh Mealme QSR Saif Partners Salad Days Sequoia Capital Speciality Restaurants

Poornima Kavlekar has been associated with The Smart CEO since the time of launch and is the Consulting Editor of the magazine. She has been writing for almost 20 years on a cross section of topics including stocks and personal finance and now, on entrepreneurship and growth enterprises. She is a trained Yoga Teacher, an avid endurance Cyclist and a Veena player.