A queasy mix of excitement, hope and cash have for some years now been mixing together in the food delivery sector and that rarely proves to be a recipe for success
Investors are showing little sign of losing their appetite for low-margin food delivery businesses even though there is now plenty to suggest it would be well worth pausing for breath before tucking into yet another helping. Writing about Bitcoin recently, we warned of the dangers of investing in exciting but poorly understood technologies yet deceptively simple ideas people think they have grasped can be just as risky.
That goes for supposed experts too as venture capitalist investors seem to find food delivery start-ups curiously hard to resist. According to data from CB Insights, for example, food delivery start-ups backed by the top 25 venture capital firms raised $815m (£629m) in 2016 – up a third on the year before. In the first five months of 2017, meanwhile, the equivalent figure was already approaching $450m.
The food delivery sector is "imploding"
And yet, as the FT’s Lex column puts it in Food delivery: Chow down, the sector is “imploding”. Noting the travails of a string of colourfully named businesses – DoorDash, Maple, Postmates, SpoonRocket, Sprig – it continues: “So many venture capitalists have backed so many start-ups offering such similar services – many of them expensive and unreliable – that mass failure is inevitable.
It turns out venture capitalists have had a taste for food delivery start-ups for some years now. Marking the successful first day of trading of GrubHub after it floated in April 2014 – when the current giant of US food delivery saw its share price jump 30% – this CB Insights blog notes, for example, that venture capital deals within the sector had hit a five-year high.
Since then, there has been no shortage of food delivery businesses having to scale back or close their operations – one issue being the very low ‘barriers to entry’ so that, in effect, pretty much anyone can have a go. Even for investors in GrubHub – despite that encouraging first day of trading – the ride has been anything but smooth and yet the flow of investor money into the sector shows little sign of abating.
Success is still some distance away
Nor is it as if there is the example of any runaway success that might be encouraging people to put up their cash. Even GrubHub, with its eight million-plus customers and 300,000-odd orders a day is trading at a pretty stomach-churning level – the company’s $3.5bn valuation, notes Lex, is more than five times this year’s expected sales and 19 times earnings before interest, tax, depreciation and amortisation.
In other words – and with the benefit of hindsight to boot – out of all the hundreds of food delivery start-ups people could have picked to invest, even the ‘winner’ is going to have to expand like microwaved popcorn to grow into its valuation. These businesses have provoked much excitement – overexcitement, even – and, it would appear, a significant degree of ‘herding’ among supposedly canny investors.
Mix in the high hopes and huge amounts of money sloshing around the sector and surely the key, ahem, takeaway must be that investors should, as ever, be very wary about following the crowd.