Srirama Chaitanya Manyam, Senior Manager- Food Processing and Retail, Sathguru Management Consultants
Businesses have played an essential role in addressing challenges that helped shape the evolution of the food processing ecosystem in India. Processing and consumption have evolved from simple primary processed cereals, pulses, and oilseeds to highly processed food products today. In parallel, the Liberalisation, Privatisation, and Globalisation (LPG) policy in the 1990s had paved the way for new businesses and can be considered as the embryonic step for the Indian startup ecosystem. Most companies were conceived in this timeframe, started by boomers who returned from abroad, in the IT and services sector. Supported by an economical and well-qualified workforce in Science, Technology, Engineering, and Mathematics (STEM) streams, these companies have recorded steady growth and laid a strong foundation for the startup ecosystem we witness in India today. With the access of the internet to the public in 1995 and introduction of broadband to the masses in 2003, internet-led businesses were conceived. Unlike in the IT and services industry, there is no clear indicator to pinpoint the rise of small businesses in the food sector in India.
In the developed western countries, food processing has been at an advanced stage with mega factories in the 1980s itself, compared to India. Agriculture in India has a deep-rooted traditional and cultural connection, which defined the slow path of industrialisation in food processing. With the growth in the economy, purchasing power, and nuclear families, the demand for processed food and eating out has increased. Coupling this with rapid urbanisation, the rising participation of women in the workforce, the steady increase in demand for processed food has led to the sector’s growth, though still dominated by traditional businesses, whether on a large scale or an artisanal scale.
In the later part of the 2000 decade, especially after the 2008 economic crisis, the interest in setting up small-scale food businesses has increased. Low entry barriers, relatively low capital requirements, and the ability to pilot at a small scale have become attractive factors for starting small-scale food processing businesses. After witnessing processed products in the western world, many people who have returned from abroad have realised the lack of options in the domestic market and started food businesses with surplus funds at a time when venture capitalist (VC) and Private Equity (PE) fundings are not a known thing. Very few businesses have succeeded in this approach. Those with partial success have re-oriented themselves to suit Indian consumer needs for long-term sustainability.
In the last decade, in line with the growth of the startup ecosystem in India, the number of food startups has also increased. The growth of the internet, mobile usage, and e-commerce have contributed to the growth of food startups in India as well. However, the internet and e-commerce dominated startup ecosystem has skewed the focus of both entrepreneurs and investors dominantly on addressing demand-side challenges like consumer reach and retail solutions.
In fact, the definition of “food technology” is now misconstrued to the application of IT technology in the food sector as against the traditional definition of using science and engineering solutions to solve food value chain problems. Few companies, which started based on conventional food processing in this timeframe to address core consumer problems, successfully scaled up and became full-fledged businesses.
Though many companies register as food companies across the country, there is no standard metric to measure them as per the startup definition. As per the Start-up India Initiative by the Government of India, there are 8000 startups involved in the food processing and food technology sectors. Of these, 31 per cent are in ideation stage, 28 per cent are in validation stage, 27 per cent are in early traction stage and 11 per cent are in scale-up stage. There is a high possibility that the number of startups can be more, as many companies might be operating at an Individual scale. In the last five years, with more participation and active lookout by VC and PE funds for startups addressing core challenges, an encouraging funding scenario was witnessed in the food sector.
In the last five years, the trend of PE investments has been cyclical, and on a growth path if adjusted for COVID dip in 2020. $415 million has been invested in the food startups by PE and VC funds between 2017 and 2022 (Q1). The median investment range is about $1.84 million, and the highest investment recorded is approximately $40 million. Majority of startups secured investment in the range of $0.45 to 6.5 million.
Figure 1: Distribution of PE investments in Indian Food Start-Ups from 2017 to 2022 (Source: Sathguru Analysis)
Figure 2: Category wise investments in food start-ups in last five years in USD million (Sathguru analysis)
Among the categories of food products, significant investments were made in startups like Wing Green and Veeba Foods in the Dip, Sauces, and Dressings Category in the last five years. Milk products, inclusive of ice creams, are the second-largest category to gain investments into startups like Country Delight, Milk Mantra, Native milk, Milk Lane, Osam Dairy and VilFresh. Companies operating in novel categories like plant proteins like Proeon and other companies operating in plant-based foods have seen investors’ participation, signifying investors’ growing interest in the emerging sectors. Startups that secured a higher range of investments in the recent past are depicted in the below table. Categories like Coffee, Tea, Beverages, and Healthy snacks have seen active participation of startups in recent years.
| 2021 | $ M | 2022 (Q1) | $ M | |
| Wingreens Farms | 17.0 | Eekifoods | 8.5 | |
| Lahori | 15.0 | Slurrp Farm | 7.0 | |
| Happilo | 13.7 | Dogseechew | 6.7 | |
| Troo Good | 7.4 | Blue Tokai Coffee | 2.8 | |
| Sleepy Owl Coffee | 7.0 | Jimmys Cocktails | 1.8 | |
| Dogseechew | 7.0 | WickedGud | 1.0 | |
| Storia Foods | 6.0 | |||
| The Whole Truth | 5.8 | |||
| Walko Food Company | 4.8 | |||
| Eggoz | 3.5 |
Table 1: Start-ups secured highest investments (USD m) in the Food sector in 2021 and 2022 (Q1)
Opportunities and Outlook
Startups should find opportunities to solve consumer issues in terms of food availability, quality, food safety, convenience, pricing, and nutrition, while novelty can be another minor driving force. Novelty on its own is not a sustainable driver unless backed by any of the primary needs addressed above. Until now, food startups are mainly focusing on product formats or marketing-driven trends, with only very few players trying to address the core issues. While low entry barriers create opportunities for many new players, most entrepreneurs don’t strive to understand the core value chain challenges that originate at the grass-root level, and most solutions/ offerings are only topical.
The application of fundamental science and innovation quotient in the field of food processing is unfortunately very limited, especially with small and medium companies. Unlike startups in other sectors like Biotechnology, Healthcare, and Information Technology, the emphasis on creating new technologies, IP generation, and technology transfer in food processing startups is minimal. It can also be attributed to the possibility of difficulty in justifying the premium in food processing compared to low volume high-value sectors like Biotechnology or Healthcare.
Unlike these sectors supported with well-developed ecosystems like Biotechnology Industry Research Assistance Council (BIRAC) and Department of Biotechnology (DBT), there is no holistic ecosystem to guide and drive the food startups to solve the value chain problems in food processing. Though there are sizable incubators specific to food, most facilities are limited to standard unit operations and focused on creating only product formats. The complex nature of problems, the underlying science, and market dynamics in food processing calls for a broader approach to building long-lasting and scalable food startups.
With looming threats of decreasing agricultural land, growing population, climate change, and complex world dynamics, the food value chain’s challenges will only become complex while also presenting new opportunities. The areas that hold potential for food startups in the future are-
Food Valorisation: While India is a leading producer of many commodities, we also face significant losses along the supply chain. Valorisation of food wastes and by-product utilisation will become a focal element while being threatened with resource crunch and population growth. Many commodities like fruits and vegetables, cereal, oilseed by-products, etc., hold untapped value-add potential.
Alternate food production methods: Lean processes and mass-scale production of nutrient sources will become mainstream, with food-biotechnological processes gaining perfection. Production of protein sources, other food and specialty ingredients will occur through fermentation, culturing, or other closed-loop systems.
Sustainable packaging solutions: Packaging is an undeniable part of the processed food industry. Owing to growing concerns about the usage of plastics and the seepage of micro-plastics into the food chain, opportunities exist for creating safer and sustainable packaging solutions that can be scaled up and adopted for a wider range of food products.
Supply chain challenges: The food production in India, unlike in western countries, is not centralised. The food production systems and supply chains are highly fragmented. One needs to press ears to the ground to understand the grass-root level challenges. India needs the adoption of localised solutions, and mimicking western trends will not yield any lasting results. Supply chain solutions to connect the actors and material hold a lot of hidden opportunities, with traditional trading systems ready to be disrupted with modern localised solutions for procurement, warehousing, and logistics.
The funding and investor ecosystem in the food sector should also realise that while market trend driven ideas/ products gain traction in the short-term, most will fizzle out for not solving any underlying real-world problem. The ecosystem should open up and listen to deglamorised ideas as well. The startups in food should focus on deploying technology, innovation-backed solutions, and novel business models in solving supply-side challenges also, as that’s where the worthy opportunities exist in the Indian food sector.
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