Five years ago, it seemed like every entrepreneur wanted a piece of the food tech pie. Once PostMates launched in 2011 and GrubHub and Seamless merged in 2013, thousands of food-focused technology companies were on the lookout for funding.
The future looked bright as many of these companies raised millions. Fast forward to 2016, several of these well-funded startups have been forced to throw in the towel.
But, why did these companies fail in the first place? Especially when many of which seemed to be on track to succeed?
This on-demand pre-made meal delivery startup announced in mid-march that it was closing up shop. Although the company had raised $13.5 million, it wasn’t enough to fund the costs to continue operating.
So, why couldn’t SpoonRocket stay afloat?
The Fierce Competition
By 2016, SpoonRocket was one of the many on-demand food delivery services on the market. DoorDash, PostMates, Caviar, GrubHub and even Amazon were rapidly spreading to different cities.
Investors interested in the third-party delivery sector had more options to choose from.
Not Establishing a Unique Selling Proposition
Once the market became saturated with competitors, SpoonRocket needed to make sure that their customers and potential new ones knew what made them different. Their claim to fame was cheap and fast and their meal quality was only sub-par.
If we have learned anything from the popularity of the fast casual segment, consumers are no longer willing to settle for poor quality food when the Panera down the road offers fresh ingredients and is at a reasonable price point.
SpoonRocket needed to be more than just cheap and fast. The product was the same quality as a quick-serve restaurant. The focus should have more on the food, after-all the company was a food-tech startup. The company should have adjusted to the feedback it received.
Greg Hong, CEO of Reserve, a restaurant reservations and payment app, has some advice pertaining to this often fatal mistake. "Listen to your customers and potential partners. Actively ask them for their feedback, criticism, praise and advice and make sure to really think about how to incorporate any changes into your business. There are a lot of smart people who can help you succeed, but you do have to ask and listen," said Hong.
Spending too Much Money on Customer Acquisition
Customer acquisition is expensive, yet necessary. The problem in SpoonRocket’s case is that the cost of the meals didn’t cover the delivery and operating costs. The company was also spending too much cash on getting new customers. This was in attempt to stay in business. There should have been more of a focus on profit margins and on building a repeat customer base.
Most of their customers would order from the service a few times before discarding the meals as low-quality and not worth the low cost. So, the company was constantly on the look-out for new customers to fill the void.
Not to mention, SpoonRocket’s last funding round was in May of 2014. So the company should have pushed for another funding round.
Another recently shut down food-focused startup is Dinner Lab. This company was much different than SpoonRocket and so are the reasons it failed.
In mid-April, the company announced on its website that it was going to halt operations. “We put every ounce of our energy into developing a product that you wanted to engage with regularly, but we weren't able to turn the corner on creating a profitable enough enterprise to support our ambitions,” according to the goodbye post on the dinnerlab.com.
Dinner Lab was a pop-up food event service. The company would throw weekly fine dining dinners featuring the food of up-and-coming chefs in different cities across the US.
The company raised roughly $9.1 million and the concept seemed like a social foodie’s dream event, so why didn’t the company survive?
It was a Logistical Nightmare
The dinners that were planned every week or at least every month would be in different cities. This meant the company had to have a solid event staff, many of which were full-time employees. Then, there were the contractors to also hire and manage.
But, the company also had to continue to develop new innovative concepts and new venues for every upcoming event. “We were trying to scale a business that was very logistically complicated and we were always screwing up. It was also really challenging to get solid, consistent margins. We stacked the deck against ourselves. There were a lot of variables that were difficult to manage. We had an ever-changing landscape of staff, sourcing ingredients and everything else. That’s also what made the product very cool,” said Brian Bordainick, founder of Dinner Lab to Forbes.com.
Investors Lost Interest
Dinner Lab had a successful first quarter of 2016, but the company didn’t make enough to profit or did it secure enough funding.
This was partially because similar concepts were dropping like flies. Kitchensurfing, where users could book a private chef for the evening, closed up shop in April. So did Storefront, where users could rent pop-up real estate, the month prior.
Investors then started to lose faith in these type of services. Although these concepts were innovative and cool, the logistical challenges led to their demise.
Unfortunately, SpoonRocket and Dinner Lab will not be the last. Other food-focused companies, like Spoonjoy, Swiggy, Good Eggs, Radish and TinyOwl have also been forced to shut down. So this begs the question, which startup will be next?
Nonetheless, food tech startups will have to step up their game.
"There is some consolidation in the marketplace as we see clear winners emerging who can take on entrenched incumbents. There has been a lot of interest in this space and a lot of great ideas, and we're starting to see some of the best really take root and persist," said Hong.