Indian Economy News

F&B sector attracts a slew of investment deals

Bengaluru:  Nitin Saluja, founder and CEO of tea chain Chaayos, was in the market to raise capital for just three weeks before the firm got their first term sheet.

"We engaged with only three tier one marquee venture capital funds who connected with us through common acquaintances before we closed the deal with Tiger Global," said Saluja who raised $5 million, or about Rs 32 crore, from the fund last month.

This investment — also Tiger's first in food and beverage (F&B) sector after five years of a pure technology focus — is reflective of growing confidence of investors in the space covering varied segments including pie-fresh food brands, packaged food companies, food-tech, B2B firms supplying end companies, and cold chain/logistics firms.

A large market that's getting organised and moving towards higher value-added products has sparked investor interest in the F&B space where there's rising demand for better, healthier, affordable and easy to access products, paving the way for entrepreneurs to jump in and build next generation brands.

"These are good signs for investors to participate in the market opportunity," said G V Ravishankar, managing director at Sequoia Capital, which has made multiple F&B investments across sub-categories including food technology company Faaso's, FMCG players Hector Beverages and Prataap Snacks, and coffee retailing chain Cafe Coffee Day.

According to startup analytics firm Tracxn!, from 2014 to date, there have been 23 investments totalling $167 million, or about Rs 1,060 crore, in offline F&B space. Food tech companies attracted investments of $92 million, or about Rs 585 crore, across 26 deals during the same period.

Apart from big ticket funds such as Tiger and Sequoia Capital, the sector has also attracted a slew of angel investors who are backing ventures with the promise of scale.

Chaayos, for one, is also backed by angel investor Zishaan Hayath (cofounder of Toppr) and cab aggregator Ola's founders Bhavish Aggarwal and Ankit Bhati.

In April, Bengaluru-based food delivery service provider Dazo (formerly Tapcibo) attracted big wigs such as Amazon's Amit Agarwal, Google's Rajan Anandan, TaxiForSure's founder Aprameya Radhakrishna, Commonfloor cofounder Sumit Jain and former CEO of FreeCharge Alok Goel, into its funding kitty.

"Apart from the traditional VCs who are looking at more tech-enabled plays, there is a lot of interest from family offices in India who understand the consumer space well," said Kanwal Singh, founder of Fireside Ventures, a family office that has invested in ice cream chain Hokey Pokey.

Typically funds stay invested for 5-7 years on an average, which may extend to 10 years in some cases.

"F&B is different from traditional B2C or technology companies. Here you can build good solid businesses that you can grow organically and deliver 5-7x in returns," said Ash Lilani, managing partner at Saama Capital.

Last month Saama invested $6 million in Veeba Food Services, a manufacturer of specialty food ingredients. Its other investments include Bengaluru-based tea chain Chai Point, seasonings and flavourings company Vallabhdas Kanji and Sula Vineyards, which it exited by way of sale to Visvires and Reliance.

"It may not be as high returns as pure tech companies, but there is more stability in return as these companies can be cash flow soon. Unlike pure delivery models, these are more capital efficient businesses and so returns over time neutralise," Lilani said.

Food tech in particular is getting attention as entrepreneurs try to replicate models of global comparisons like Munchery and Doordash, and are thus commanding generous valuations as people try to build business that can dominate in the long-run. "These companies need to build logistics and back-end infrastructure deeper along with branding and marketing activities and, therefore, there's a lot of money going in," Lilani said.

Vishal Sood of SAIF Partners said that for operationally intensive restaurant businesses, keeping up product and service levels day in and out year after year is tough. "If a management team can deliver this, then the returns are as good as or better than investments in any other sector," he said.

SAIF — the first investors in specialty restaurants in 2007 with Mainland China—made its maiden investment in a food tech company this year when it picked up a stake in SpoonJoy. 

Singh of Fireside Ventures said F&B brands attract valuations from 3/5X to 10X of revenue, while Sequoia's Ravishankar said that in general FMCG-driven brands command a premium to store-driven F&B businesses due to better scalability. 

The next 12-18 months, say experts, will see survival of the best teams and models which can scale as far as online businesses go and that's where monies will flow. 

"We will see more angel and late stage investment in FMCG brands while food tech will get more venture capital," said Rahul Chowdhri of Helion Venture Partners that's invested in FMCG company ID Fresh and north Indian QSR chain Mast Kalandar.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.