Investors Poured Millions Into These MBA Startups. Will They Crash & Burn?

AMERICANS SPENT MORE ON EATING OUT THAN GROCERIES FOR FIRST TIME EVER IN 2014 

Investors took notice. “They know more people are eating prepared food or almost fully prepared food now instead of using grocery stores,” says Greenberger. “So they are seeing that all of these consumer habits are changing and the generations coming up with a lot of buying power and influence on the food industry are very comfortable with technology and convenience. And they see a market opportunity.”

Lisa Sebesta, a founder and managing parter at Boston-based food investment firm, Fresh Source Capital, echoes the sentiments. “More and more people, particularly among the millennial generation, are simply eating out more,” she says. “There are just more consumer dollars flowing into those restaurants and businesses. I think that the retail grocery stores are hurting a lot. Even grocery stores that are now popping up have pre-made food like burritos, sandwiches, and salads.”

Fresh Source Capital invests in companies that are rebuilding local and regional food systems. and Sebesta admits to be watching food delivery “peripherally.” But what she is seeing is continued growth and interest. “That is where the consumers are going,” Sebesta says of prepared food. “And investors are trying to capitalize on that trend and more and more businesses are popping up.”

‘YOU’RE DEALING WITH SOMETHING THAT IS IN THE PROCESS OF ROTTING’

But, according to Greenberger, there is one significant problem with placing food in the same broad category of “goods and services.”

“Tech is not usually put in the same sentence as perishable,” she points out. “Things are made out of durable substances or at least out of something that has shelf stability and longevity. And when you’re dealing with food, you’re dealing with something that is in the process of rotting.”

Of course, as Greenberger was quick to point out, food delivery is a broad category. For example, while DoorDash and Deliveroo focus on delivering prepared food from restaurants, Grofers delivers groceries in India. Blue Apron, a Harvard Business School-founded food delivery venture and a bonafide unicorn with a $2 billion valuation, sends ingredients and recipes to subscribers wanting to cook at home.

DELIVEROO’S RAPID RISE STARTED IN A WHARTON CLASSROOM

To be sure, Deliveroo was one of the early movers in the space. When Deliveroo founder William Shu began his time at Wharton, he already had a frustration. The former Morgan Stanley investment banker, like pretty much all investment bankers, worked long hours and didn’t have much time to eat. In New York City, his options were limited to takeout and fast food. That wouldn’t do. So Shu set out to find a solution during his time at Wharton. It was in Patrick Fitzgerald’s Venture Implementation course when Shu’s plan came into formation.

“By the time Will was out of our class, he had a good road map to take to London,” Fitzgerald says, noting Venmo was also conceived in his course in 2010. “He didn’t have every question answered.”

After graduating from Wharton, Shu moved to London and started testing the road map. And by testing, he delivered pizza and other food by himself on a scooter. Now the company boasts roughly 1,000 full-time employees, not including deliverers, and is operating in more than 130 cities in 12 countries across Europe and Asia. Just last month, the company announced plans to create 300 tech jobs in the U.K. According to a Forbes report, Shu claims revenue has grown at a clip of 20% to 25% a month over the past three years.

“I remember when Will was getting started in 2012, the competition was insanely light,” Fitzgerald says. “He had a very big marketplace in the U.K., a very easy entry point, and very limited competition. And when I say the competition was fax machines, I mean that sincerely. People used to fax their orders into restaurants and have to go and manually pick them up.”

MISSING CUSTOMER LOYALTY

Drones could be the answer to what Greenberger describes as one of the toughest logistical issues that have been giving food deliverers headaches for decades. “Even in the traditional grocery industry, making money on distribution is very, very tricky,” she says. “And now you’re not talking about pallets upon pallets of food to one particular Whole Foods Market in downtown Manhattan. You’re talking about this last mile delivery where you are going to people’s doors.”

Another issue that is leading to the growth in amounts of food delivery ventures is customer loyalty. “If I’m a household, and I really want food from a certain restaurant, I’m craving the food from that restaurant. I don’t have any loyalty to you as Deliveroo,” Greenberger says. “I’m going to find the service that is going to bring me food from that restaurant.”

And as much buying power as millennials might have, they are equally finicky, Greenberger maintains. “Who is going to give me the next deal? Who is going to give me something for free? Many millennials don’t feel loyalty to a company,” she says. “The customer retention and getting people into a rhythm — making this a part of the way they eat all of the time — this is a huge challenge.”

Sebesta concurs. “We see a lot of experimentation. People will try five different meal kits over the course of a couple months and then decide on one or none,” Sebesta explains. “With the proliferation of options, it just makes that customer loyalty piece much harder and much more important.”

THREE FOOD DELIVERY FAILURES IN 2016

Of course, one way around this is subscription services. Deliveroo has a subscription service of £8.99 per month or £89 per year. The standard rate is currently £2.50 ($3.14) per order as long as the orders are over £15. At $5.99, DoorDash’s delivery fee is steeper. Last March, DoorDash was also chastised by the media for hiding added item costs from what the prices on restaurant menus. Restaurants and customers alike were unaware of the additional costs, leading to lawsuits from Legal Sea Foods in Boston and the In-N-Out Burger chain.

“At some point there is going to have to be some consolidation,” Sebesta says. “And I think investors are still trying to figure out who’s going to be that winner and what’s the best model. There are a lot of experiments going on and willingness to take some chances.”

Indeed, there have already been some casualties. Berkeley, California-based SpoonRocket was the first major player to go under last year. After Square snatched up Caviar in 2014 for $90, they desperately tried to sell it last year. Square reportedly approached Uber, GrubHub, and Yelp — owners of Eat24 — to sell their money pit of a food delivery business. No takers. According to CB Insights, more food delivery ventures might be in for a lesson in entrepreneurial Darwinanian survival of the fittest. Since 2011, 39 private companies with at least $5 million in investment-backing and “the same basic business model” have been launched in the U.S., the report says. DoorDash, Blue Apron, and Georgetown McDonough-founded Maple are all on the list. Square’s acquisition of Caviar in 2014 started a trend of six other businesses being acquired or going kaput.

WHEN YOUR STARTUP NAME BECOMES A VERB

Greenberger says companies like Yelp’s Eat24 and others are missing an important point. “They’re saying, we don’t want you to ever have to put your pants on to eat,” Greenberger says, referencing Eat24’s marketing slogan. “Which is cute, I guess, but it overlooks something key, which is that food is a sensual experience. It is one of the last bastions of the unplugged, fully sensory experience of our lives.”

Still, Wharton’s Fitzgerald says, there is a level of legend-status akin to tech giants these ventures are trying to reach.

“They want to become verbs,” Fitzgerald says. “Do you Venmo? When people start referencing your company name as a verb, it is big. And to some degree, Deliveroo has already become that. It sounds small, but it is a very big thing.”

Well, not if Amazon, Google, Uber and other larger players have something to do with it.

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