If you work in tech, startups or any adjacent industries, you've probably heard the phrase "software eats the world." It's short-hand that's meant to represent the promise that software can create new efficiencies, reduce costs, and provide better service, access and scalability across a variety of industries. Over the past few years, this same ideal is what's caused many investors and entrepreneurs alike to look at the food space and see an opportunity to bring massive efficiency to an inefficiency system.
With the recent stumbles in the foodtech space over the past 6-12 months (see: Munchery losing millions of dollars per month, Kitchensurfing closing, Sprig pulling back from Chicago, and the list goes on), it seems that software is finding food a bit hard to swallow. Tech entrepreneurs who ascribe to the notion that inefficiencies in food = dollar signs should be aware of three issues in the food space that make it unique. And that also make it so software may not solve all of our problems:
The economics of food are different than most pure-play tech/software companies. As an investor in foodtech, I've seen many startups that emphasize user growth over sound business metrics. We won't delve into that discussion as it's been rehashed so many times and it seems the industry as a whole is beginning to pay the price of focusing on massive scale over modest revenue traction. But, why has a strategy that worked so well for many early tech companies clearly failed many foodtech companies? I think this is because of the fundamental difference between food and software. The expectation with software/tech businesses is that there's a huge capex upfront to get something off the ground, but then those associated costs begin to wane and volume increases to drive greater margin. Taking that model and applying it to food really doesn't work though, as we've seen. This is in part because while a food company may have a large capex upfront, the ongoing COGs for a foodtech business won't change significantly enough to make up for the volume. It happened with Instacart, GoodEggs, Sprig, and many others (this is both for food delivery and the wider food space).
Food is physical. The day that food stops being a physical thing that we eat is a day I don't want to see. But, food as a physical good means that it's much more expensive than early business models might suggest to service the food space. This applies to food delivery companies, some of which have to contend with storing, packaging and shipping food; it also applies to software companies working with restaurants (for instance), where we find that the thin margins of food service means that there's much less to go towards paying for all this innovation. The physicality of food means we can only optimize so far...and in order to make the revenue models work on some of these businesses, that puts a lower limit on how low our costs can go (which leaves only two other options: 1) cut expenses in other places; 2) charge customers more*).
The food system is not uniform. Restaurants use different POS systems. Retailers have different back-end inventory management operations. Most farmers still use pen and paper to track orders. What feels like a one-size-fits-all software approach from many foodtech companies is being applied to a system where there could be hundreds of different approaches, workflows and operating systems. This not only drives up costs for startups that need to develop implementations for each new customer, but it also makes the job of selling innovation to operators a tougher one. Contrary to what we may want to believe, not all operators in the food space are eager to find a software solution to some problem they may or may not have. You only need to look to a recent National Restaurant Association survey as proof: half of all member restaurants reported that they felt technology made operations and customer service more complicated, not less.
What does this mean for new foodtech startups? First, entrepreneurs should value food industry insight and expertise as a core team skill. If you or someone on your team has worked in the core market that you are targeting, that will give you a leg up in terms of understanding market dynamics and likely having a ready network to call on. Second, spend time understanding the space you are operating in, whether that be restaurants, agtech, retail or ecommerce. Know who is out there, know what solutions are on the market and understand how your solution competes sustainability. Third, and perhaps most importantly, build relationships. Food has always been a relationship business, and startups that take time to understand key players in the market, ask questions of their prospective customers, and develop solutions to real problems will find that they build more reliable businesses with real revenue.
*There's a whole article that could be written on the systemic problem in the industry of undercharging customers to gain market share. The huge influx of investor dollars has allowed startups to subsidize this underpricing with outside investment, but the time has come where companies must reckon with providing a service that consumers will pay a sustainable price for. We see the inverse of this in the news that couriers in NYC are banding together against Uber and other on-demand services. These companies have cut costs to the bone to preserve low prices, often at the expense of the people powering the platform.