Is Food Unwinnable for Startups?

Startups in the food industry, and the food tech sector in particular, have seen quite a bit of turmoil over 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 am often asked: 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, as well as to help people eat the real, nutritious meals they crave even when their busy schedules don’t allow it. Innovation is not easy, but it’s possible. Problems arise when startups view the food industry like any other industry ripe for disruption, without fully appreciating the unique challenges it poses, particularly around logistics and customer acquisition.

The Food Distribution Logistics Challenge

The biggest problem startups consistently face 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 startups working on a local or regional level, or that necessarily begin with small food volumes, distribution often requires more capital than anticipated. Even marketplaces fundamentally depend on a transaction that moves food from point A to point B; if this distribution system is not efficient and economical, they have a hard time scaling rapidly.

Logistics challenges are not insurmountable with honest self-reflection and the right strategy. 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 startup is to understand whether it is a logistics company at its core (hint: it probably is), and then to bring on partners and employees early who possess the necessary expertise to build a logistics company. Those experts can figure out ways to work within the system to get new innovations off the ground.

The Customer Acquisition Challenge

The other unique factor for food startups is how multifaceted our relationship is to the food we purchase and consume. On the one hand, food is deeply tied to our culture and traditions, 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 and consistent, not to mention always available. Any company entering the food industry must perform a balancing act between these two extremes, which is a tough mandate. Further complicating things, food purchases are most often decisions made out of habit and within a consumer’s comfort zone, which why consumer adoption of new food technologies and products tends to be slow.

To combat this slow adoption, many food startups fall prey to the land grab mentality of enticing as many consumers as possible through 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 with any of them. Rather than focusing on amassing as many customers as possible in the shortest time frame, food startups, in particular, need to focus on turning their 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 may be slower, but it will be stickier and more profitable in the short run.

Changing The Food System Takes Time

Ultimately, everything boils down to speed: changing the food system is going to be a long, slow process. This reality 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 in food. Achieving sky high returns within a fund’s typical horizon of 5 to 10 years is near impossible when you’re dealing with food.

To any entrepreneur considering a food startup, 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? Second, are you and your investors prepared for the long haul both mentally and financially? The startup that answers yes to both of those questions has a good shot at not only disrupting food, but sticking around to reap the rewards.

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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 wholesale orders, deliveries and payments online. Prior to FarmersWeb, Jennifer was Director of Operations at Basis Farm to Chef, a local food distributor in New York. She 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 works on its Snail of Approval committee to recognize restaurants, bars, and markets that contribute to the quality, authenticity and sustainability of the New York City food supply.