- VC interest in restaurant tech companies is on the wane, according to PitchBook.
- Food tech startups raised $5.6 billion in the second quarter, down 21.5% year over year.
- Restaurant-focused startups Nextbite, ChowNow, Lunchbox, Reef and Sunday have laid off dozens.
The rush to help restaurants survive the pandemic has put foodtech companies in the spotlight. Ranging from ghost kitchens to restaurant payment platforms, these startups caught the attention of venture capitalists and restaurants alike.
In November 2020, SoftBank-backed startups Nextbite and Reef Technology collectively raised $820 million. QR code payments startup Sunday raised more than $120 million in less than a year in 2021. Dubbed the anti-grubhub for digital ordering solutions, New York’s Lunchbox snagged $50 million in early 2022.
But tech companies face a reckoning as the days of rapid growth and limitless capital are over. Layoffs are sweeping all sectors, and companies like Spotify, Netflix and Gopuff have not been spared. The foodtech sector in particular is booming as diners’ habits continue to change as the pandemic abates. Hundreds of workers have lost their jobs at Nextbite, Sunday, ChowNow, Lunchbox, Gopuff and Reef. Online grocery startups are taking a hit, if not collapse. Getir and Gorillas are also laying off employees, while Fridge No More, Buyk, Jokr and 1520 have suspended US operations.
Chris Webb, the CEO of online ordering company ChowNow, said the tech industry has been “addicted to venture capital” for a decade. After laying off nearly 100 employees in late July, he told Insider it was time to “go cold turkey” by “trying to break a bad habit.”
It won’t be hard to break the VC habit. New quarterly data from PitchBook shows venture capital in the food tech industry has declined for a fourth straight quarter.
In the second quarter of this year, food tech startups raised $5.6 billion across 275 deals worldwide. The number of deals fell by about 33% and the amount of funding fell by 21.5% compared to the same period last year.
“It’s becoming increasingly clear that foodtech is undergoing a market correction,” according to the PitchBook report. “Public market volatility has essentially closed the IPO window and limited exit opportunities, while inflation concerns and a tightening monetary environment are giving investors pause.”
“Everyone was playing the same game: growth at any price”
For the past two years, CEOs have taken their venture capital-backed war chests, hiring like crazy, expanding restaurant tech services and forecasting growth based on pandemic-driven e-commerce trends.
“We’re all drunk on VC capital,” Lunchbox CEO Nabeel Alamgir told Insider after laying off 33% of his employees last month. “Everyone was playing the same game, namely growth at any price.”
Analysts say cheap money has evaporated, particularly for companies considered pandemic tech. Bloated startups are now correcting course by shedding staff and streamlining operations amid record high inflation and flattening online buying trends.
“It’s clear that many companies have overinvested in recent years, particularly those that have benefited greatly from the benign demand environment created by the pandemic,” said Arun Sundaram, senior equity analyst at CFRA Research.
Jim Balis, a managing director at restaurant investment firm CapitalSpring, said investors are now “taking a closer look at burn-up rates, realistic models and the competition and how they differentiate.”
To make matters worse, restaurant visits have declined. The NPD Group said traffic at stores and online restaurants was down 2% year over year in the second quarter and down 6% over the same period in 2019. Foodtech companies often generate revenue per digital transaction.
Even savvy, tech-advanced companies like Chipotle are seeing a drop in online orders. In late July, the Newport Beach, Calif.-headquartered chain said digital sales accounted for 39% of its revenue in the second quarter, up from 48.5% for the same period in 2021.
Still, foodtech founders and advisors told Insider that the recent spate of layoffs doesn’t mean digitization is dead.
ChowNow’s Webb said a slowdown in digital ordering wasn’t the reason his company was downsizing. June is the company’s best month of 2022 in terms of adding new restaurants, he said.
But the company incorrectly forecast 2022 growth based on a bull market in 2021.
“That era is behind us now,” he said.
Preparing for the upcoming storm
“I don’t think there’s anything fundamentally wrong with these companies,” said Carl Orsbourn, foodtech consultant and co-author of Delivering the Digital Restaurant.
Corporate layoffs and operational cutbacks, Orsbourn said, are more associated with runway preservation as founders deal with runaway burn rates.
“Companies that are perceived as pandemic tech, meaning whose models have been accidentally or intentionally adapted to unique consumer behaviors or conditions during the pandemic, have fallen out of favor,” Zolidis said.
And many of these companies offered the same services to restaurants. Sunday, which cut staff and withdrew from four of its seven global markets, offered QR code payment technology. But this service has also been found at Toast, a popular point-of-sale provider, and Thanx, a loyalty-focused restaurant tech startup. Fast-delivery groceries suppliers, including Gopuff, Buyk, and Getir, have a similar list of products with a similar promise of 30 minutes or less. Many of these startups have closed in certain cities, laid off staff or closed stores.
But this isn’t all bad news for Foodtech. Some are growing, hiring new employees, and finding investors, including ghost kitchen startup Kitchen United and SoftBank-backed EzCater.
Recently, Kitchen United raised an additional $100 million to fuel growth to 500 locations over the next five years. Backers include Simon malls owner Circle K and parent company Burger King.
Stefania Mallett, CEO of EzCater, said business with the corporate catering app is “stronger than ever” as demand for workplace dining continues to grow.
“Our business in June was 101% higher than in January. We hit an all-time high the week of July 11,” she told Insider. The company hired 140 people in the second quarter and plans to go public in 2023.
But for struggling companies, industry analysts expect consolidation.
Tim Powell, a restaurant consultant, said consolidation makes sense for companies that don’t have a “competitive advantage” or thought they might be “bait” for takeovers during last year’s IPO boom.
“A lot of these startups go into business with the hope that they’ll be bought by a larger company,” said Powell, managing director of consulting firm Foodservice IP.
In its Food Tech report, PitchBook said mega deals in the second quarter — like DoorDash’s $3.5 billion acquisition of third-party delivery app Wolt and its $93 million acquisition of ultra-fast rival Flink — Cajoo – could mean more mergers are likely in the near future.
“A concentration of fewer but larger deals could indicate an opportunity for category consolidation in the short to medium term,” PitchBook said.
In an editorial column published in Nation’s Restaurant News last week, Orsbourn and his book co-author Meredith Sandland said some delivery-focused startups might not make it. “Many are acquired by the powerful few. Many more will close their doors,” they wrote.
Now crouch down.
ChowNow’s Webb said if he’s wrong about the coming “storm,” he’ll call back those he’s had to lay off.
“That would be a fantastic scenario. But let’s see how the next few months and the next six months go before we make that decision.”
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