By Jennifer Goggin, Food Tech Advisor
Start-ups in the food industry, and the food tech sector in particular, have seen quite a bit of turmoil in the past year. Prominent, well-funded companies like Good Eggs, Kitchensurfing, Dinner Lab, and most recently Farmigo have either shuttered altogether or significantly scaled back their operations. As a food tech entrepreneur and advisor to other growing food companies, I have been asked this question many times: Is the food sector unwinnable?
I don’t believe so. The food industry is an old school behemoth that desperately needs innovation to feed our exploding population in a world of dwindling resources, and to help people eat the real, nutritious meals they crave even when their busy schedules don’t allow it. However, when start-ups view the food industry like any other ripe for disruption, and don’t fully appreciate the unique challenges it poses, problems arise.
The biggest one, of course, is logistics. Food is a physical and perishable product, and our current system is built to move large amounts of it across the globe. For start-ups working on a local or regional level, or who necessarily begin with small volumes, distribution requires more capital than anticipated. Food tech start-ups fundamentally depend on a transaction that moves food from point A to point B; if that system is not properly efficient or economical, the companies will have a hard time scaling rapidly.
Logistics challenges are not insurmountable. Traditional food distribution companies have been warehousing and successfully moving perishable goods for decades. UPS and FedEx have mastered far-ranging and inexpensive distribution systems for all other products. The knowledge of logistics exists. The key for any food start-up is to understand whether it is a logistics company at its core (hint: it probably is), and then to bring on partners and employees who possess that expertise. Those experts can figure out ways to work within the system to get new innovations off the ground. (Read about Farmigo's logistics problem here)
The other unique factor for food start-ups is how multifaceted our relationship is to the food we purchase and consume. On one hand, food is deeply tied to our culture and traditions, our identity and social interactions, and our comfort and enjoyment. Quality and stories matter. On the other hand, thanks to last century’s modernization of our food system, we are now accustomed to having food be fast, cheap, consistent, and always available. Any company entering the food industry must perform a balancing act between those two extremes. This is a tough mandate, and to make things tougher still, food purchases are most often decisions made out of habit and within a consumer’s comfort zone—this is why consumer adoption of new food technologies and products tends to be slow.
To combat this slow adoption, many food start-ups fall prey to the land grab mentality of enticing as many consumers as possible with heavy discounting. This leads to overly high customer acquisition costs and negative gross margins, which are impossible to sustain in the long run. It also creates a temptation for the consumer to jump from competitor to competitor without forming an emotional or habitual connection to any of them. Rather than focusing on amassing as many customers as possible in the shortest time frame, food start-ups in particular need to focus on turning those customers into repeat users. One way to do this might be to focus on a constrained region where the company can tap into a community’s particular traditions and connections. Growth will be slower but stickier and more profitable in the short run.
Ultimately, everything boils down to speed: changing the food system is going to be a long, slow process. That tends to be at odds with the current funding atmosphere and venture capital in particular. The “move fast and break things” mantra doesn’t work here, and achieving sky high returns within a fund’s typical horizon of 5 to 10 years is nearly impossible when you’re dealing with food.
So to any entrepreneur considering a food start-up, I would pose two questions. First, are you providing a product or service that answers a real need for consumers without fully upsetting their emotional relationship to food? And are you and your investors prepared for the long haul both mentally and financially? The start-up that answers yes to both of those questions has a good shot at not only disrupting food, but sticking around to reap the rewards.
Jennifer Goggin has been an entrepreneur and advisor in the food-tech space since 2011 when she co-founded FarmersWeb to help farms, food hubs. and food artisans streamline processes. Jennifer has been a featured panelist and moderator for conferences on entrepreneurship and the food technology industry, as well as a guest columnist for Food Tech Connect and Huffington Post Food. Jennifer is a board member of Slow Food NYC where she to recognize restaurants, bars, and markets that contribute to the quality of the New York City food supply.