The Food-Tech Bubble??

Everyone knows about Plated after their Shark Tank debut a few years ago. Since then these “healthy” food delivery companies seem to be popping up everyday and they have been raising significant amount’s of capital because I can see the FB ad spend every time I log on to see whats trending.

The new start ups use Plated and Blue Apron($2B last I checked) as their valuation comparable and want a pre-money in the hundreds of millions. The justification more that once has been they have grown so big and the market is even bigger. Yes, I get it, people need food, it is a big market.. But are you the solution.. is there even a problem that needs a solution.

The problem is not the food its the last mile distribution logistic.

We are happy to stroll down to the grocery store if we want to cook or order in if we are lazy or tired when we get home.

So is it a great investment opportunity ?

All these companies are more or less the same and are burning through investor capital at a fast pace mainly because of all the 50% discounts that they keep on offering.

There are couple of companies that are currently crowding this space. Below is an infographic from CBInsight along with total capital raise by some of these companies form Crunchbase.

Plated — $56.4M

Blue Apron — $193M (wow)

HelloFresh — $363M (Srsly)

HomeChef — $57M

There are a few other smaller ones out there that have raised a couple of million dollars. All in, that about half a billion dollars worth of VC money..

The status quo is one of the biggest barriers to entry in this space, there is either a WholeFoods, Kroger or WalMart or all three in driving distance to everyone house. As VC funds pour millions of dollars in a companies that basically repackage and ship food, I see the status quo being the biggest threat.

Like I mentioned the problem is last mile distribution, so PostMates, GrubHub, TaskRabbit, Uber-Eats or Amazon Fresh are aiming to solve that issue. A simpler solution might just be if Kroger,WholeFoods and WalMart buy a delivery van and plug into the existing infrastructure in place to make all these companies obsolete if they see tremendous value in this space.

The biggest pain point that any of these companies face is warehousing and supply chain logistics. Each of them have about 3–4 facilities across the country that they ship out of. Now wouldn't it be an easy fix if existing grocery food chains see this as an untapped market and leverage the thousands of stores in each city to start acting as a delivery hub and basically crunching all these companies?

Taking a step back, and putting on my VC hat the problem that I see with such investments are:

  1. Delivery costs and new supply chain establishments are highly capital intensive
  2. WholeFoods can buy a few delivery vans
  3. Amazon uses its billions of dollars to take over the space and rolls out AmazonFresh everywhere
  4. Barriers to entry is just capital, any one can start up one of these companies as shown in the above picture
  5. On-demand logistic companies solve the problem

So unless great funds like Bessemer, Fidelity, Insight Ventures and O’Leary Ventures (even Mr Wonderful) are seeing something in this space I feel:

  • It will one of the above companies might get a lion share of this market but will be crushed if the existing grocery store chains enter the space.
  • Consolidation might not be a bad idea, there is nothing differentiating Plated from Blue Apron so why not merge and gain access to more suppliers and reduce shipping cost with a wide network of warehouses.

Feel free to let me know your thoughts on these companies and if they deserve the steep valuation or the crazy amounts of venture capital going to them. Wouldn't the fund do better with an investment in some other company?… Is the opportunity cost worth it?