A Tour of the Food E-Commerce Graveyard: Are Investors Losing Their Appetite?

Food e-commerce startups have taken the VC world by storm, representing some of the largest agrifood tech rounds worldwide. But an emerging trend may be forecasting that ample funding has a weak correlation with success in this demanding space, with a number of startups shutting down after just a few years.

Within the range of different types of food e-commerce startups, which include restaurant marketplaces (where companies provide an online platform for consumers to order delivered food from existing restaurants), online restaurants (where the consumer experience is almost identical to a restaurant marketplace, but the restaurant has no brick and mortar location open to the public), meal kits, and eGrocery – online restaurants seems to have struggled the most.

Though they provide a similar customer experience to restaurants marketplace companies like Caviar, Postmates, Seamless, Grubhub and Eat24, online restaurants take on the responsibility and expense of sourcing and preparing the food as well as delivering it within an hour of receiving an order. 

These companies often start with densely populated places like  New York City, London, and the Bay Area, on the theory that expansion will be easier once critical mass is reached in small areas. But, the number of high-raising food delivery startups that have shuttered in the last two years suggests that even with millions of potential customers within a few miles, online restaurants are a hard nut to crack.

Sprig Tries for Good Food and Good Pay

“The demand for Sprig’s convenient, high-quality food was always incredibly high, but the complexity of owning meal production through delivery at scale was a challenge.” said CEO and cofounder Gagan Biyani in the statement announcing the company’s shut-down in May.

Sprig was an online restaurant, delivering chef-created meals that promised quality sourcing and offering some deliveries in the Bay Area within 15 minutes.

The company raised $56.7 million in its four years of life in four rounds. After two small seed rounds, the San Francisco-based company raised a $10 million Series A from Silicon Valley VCs Accel Partners, Greylock Partners, and other investors. Sprig followed up with a $45 million Series B round in 2015 with Greylock Partners following on along with six other venture firms from New York and Silicon Valley. Just two years later the company announced that it would shut down.

Sprig received accolades for its “progressive” employment practices in the notoriously contractor-heavy on-demand job market, paying $14.50 per hour as of January as well as offering healthcare and benefits to employees that worked 35 hours per week. The company also added tipping to its app in January. The meals cost around $13.

Near the end, monthly losses reached $850,000 and the company was seeking a buyer that it never found, according to Bloomberg.

Sprig online restaurant competitor SpoonRocket was reportedly able to sell food for more than cost successfully, but additional expenses and an inability to raise additional funds led to the shut-down. The company had a quick-serve restaurant set up to acquire the company, but cofounder Steven Hsiao told Tech Crunch that the acquirer pulled out and SpoonRocket announced its final deliveries.

SpoonRocket raised $13.5 million in two rounds. Seed round investors included Y Combinator,  Base Ventures, Reddit found Alexis Ohanian, and other angel investors. The company’s $11 million Series A round included three California VCs: Foundation Capital, Base Capital, and follow-on investor Base Ventures. SpoonRocket was generally viewed as a cheaper, faster, and lower quality version of Sprig, which Hsiao named as one of the competitors that made survival tougher since the similar service had raised four times the capital.

Maple Sells Tech For Second Act

With famed Momofuku chef David Chang attached and investing, online restaurant Maple was highly-anticipated by New Yorkers when it began deliveries in 2014 with meals priced at $9-13.

Maple raised $29 million in two rounds, mostly from New York investors including Thrive Capital, Primary Venture Partners, and Andy Dunn of men’s clothier Bonobos. The company was acquired by the UK’s Deliveroo in May.

“As a result, some members of the Maple team will join Deliveroo operations in London, and our technology will be used to help accelerate growth and efficiency across the platform,” wrote the cofounders in a statement about the acquisition on the company’s blog.

Consolidation has played a large part in these shut-downs in all corners of the food delivery space, with 18 reported M&A deals in the last two years leading to a market map that looks more like a spider’s web.

Though cooking and delivering food has proven particularly difficult, no matter the level of funding, such startups are able to amass, other delivery configurations have proven to have a high mortality rate as well.

Indian grocery delivery startup Peppertap lasted less than two years, shuttering in April 2016, despite raising a total of $51.2 million. Postmates look-a-like Jinn, which purchased and delivered almost anything customers requested in London and surrounding areas, ceased deliveries just last month after raising $20 million including a $10 million Series B round in May led by family office STE Capital with Spanish VC Samaipata Ventures among others.

More Signs of Hardship While New Players Enter the Space

In January, New York-based online restaurant company Munchery cut 30% of the company’s staff amid the publication of some worrying details about the national startup’s operations. The company is reportedly losing $5 million per month and early backers got a raw deal as the company has raised survival capital, reported Bloomberg, though Munchery has disputed this.

Though many modern food ecommerce configurations, especially meal kit companies, make claims that their schemes reduce food waste, Munchery reportedly wasted $1.9 million in food from September 2014 to July 2016, according to Bloomberg.

Munchery has raised more than $120 million: its largest round an $85 million Series C in 2015 including Menlo Ventures, Greycroft Partners and five other venture firm in California and New York. The former CEO of Simply Hired was brought in to replace co-founder Tri Tran last year, who was in the CEO role at the time, and Tran and cofounder Conrad Chu have since left the business.

Deliver-anything company Postmates has found that competing with every other on-demand service is a tough business,  missing profitability benchmarks two years in a row.

There is some evidence that investors are taking heed of these cautionary tales. In the first half of this year deal activity contracted by 46% year-over-year in online restaurants and meal-kits, but new players continue to enter the space.

One of the largest agrifood tech rounds in the first half of 2017 was a $118 Series D round for Austin, TX-based Snap Kitchen, a fast-casual restaurant chain with an app-based delivery platform for cold meals to be heated later.

Additionally, DoorDash, a Silicon-valley delivery startup providing delivery services to existing restaurants,  announced last month that it would open a commissary kitchen in the Bay Area where restaurants can rent space at prices based on a percentage of their sales in yet another iteration of food delivery that seems to be working for Deliveroo in the UK. As the rest of this space has shown, no matter how long the funding runway, how coveted the culinary talent, or how massive the potential customer base, a sure-fire recipe for success has yet to emerge.