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Is The Food Bubble About To Burst?

Has Venture Capital got room for seconds?

20May

Venture capitalists in Silicon Valley want to change the way the world eats. The've spent the last several years making some big bets on food start-ups, investing $48 billion in the sector during 2014 alone. These start-ups are utilizing technology to transform the food industry, from web services like GoodEggs, which is linking artisan producers with consumers, to the more R&D focused firms like Hampton Creek Foods, which is leading innovations in synthetic foods.

There is sound logic behind the investments. Everybody has to eat, most people want to eat, and this is likely to continue in perpetuity. We are also increasingly concerned with eating both healthily and well. Interestingly, sales at specialty food stores continued to grow throughout the last recession.

There are also a number of social ills perpetrated by the food industry that these start-ups are attempting to solve. The environmental damage it causes is widespread, it drains the earth’s natural resources on a daily basis, and it creates numerous health issues. However, laudable though the motivations behind the investments may be, we are rapidly heading into bubble territory.

The food industry is growing within a general tech bubble - an industry with which it is now intrinsically linked. Many companies, such as Plated, are seeing growth far more similar to that of tech firms than traditional food companies. They are also prone to many of the same bubble-like traits, the most potentially damaging being the same delusional valuations. It has seen some spectacular investments from venture capital firms with seemingly little connection to revenue coming in, or where revenue may come from in future. In the UK, start-ups like food delivery firm Deliveroo have been valued at $100m, taking investment of $25m. This is despite bringing in revenue of only $1m.

The food industry is, however, a very different animal to tech. While profit margins among food start-ups are often surprisingly high, as Plated CEO Nick Taranto, among others, has noted, the nature of the business means that many firms are difficult to scale up, and there are a multitude of issues that could arise and cause the failure of a company. Efficiency is one of the biggest challenges for the industry to overcome, with an extremely complicated supply chain and large scope for human error. People have an emotional connection with their food, and it is so intrinsically linked to health, that the slightest transgression is far harder to forgive than with normal tech start-ups.

Many food start-ups have already gone bust. Pop-up Pantry famously closed its doors after five months in business, despite having 1300 subscribers and $1.3 million in venture backing. Buried within the tech bubble, it is difficult to see whether it is overhyped technology driving such vast sums or the quality of the food service itself, making it difficult to assess the risk of an investment. The convergence of technology and food has never happened on this scale before, and with such vast amounts of capital floating around, the future is extremely hard to predict for those that remain in the arena, and the ever growing number that are coming in.

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