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The Coming Food Bubble

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Editor’s note: Robyn Metcalfe is a food historian at the University of Texas at Austin and the Director of The Food Lab at UT, a catalyst for scientific and cultural exploration, experimentation and innovation in the food system.

In 1851, Charles Mackay wrote his 600-page tome, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. In it, he describes 86 economic bubbles, like the tulip and the South Sea bubbles during the 17th and 18th centuries, both which burst and caused thousands to lose their fortunes through speculation. Mackay believed this economic phenomenon was evidence of a reckless obsession.

We’re seeing some of that same recklessness creeping into the food industry, as we rush to embrace a new surge of food-related startups. A bubble is coming. Unfortunately, venture capitalists may not be subjecting food startups to the same due diligence that they do for non-food-related startups.

Michael Lippold, CEO of FreshRealm, a startup that offers a cloud-based system for distributing food, shares a growing concern. He notes that in December 2013, Instacart, a San Francisco-based grocery delivery service, raised $220 million with a $2 billion valuation. In 2014, Instacart’s revenue was about $100 million.

Investors should be cautious about technology as the inflator of a food business.

At least it had revenue. An increasing number of food startups aren’t yet generating significant revenue. Deliveroo, a food delivery startup based in the U.K., received $25 million on a previous valuation of $100 million, though its annual revenue was only about $1 million. The list goes on.

Money is flowing into the food sector; VCs raised $48 billion for food startups in 2014, the highest amount since 2000. We’re facing an oversupply of capital even as water and arable land are in short supply.

We should celebrate this new enthusiasm for food-related innovation. Everyone from food activists to entrepreneurs, investors and technology providers are disrupting and (hopefully) improving how we eat. McDonald’s is working hard to stay relevant. Fast food is no longer content to be fast; it now wants to be casual, local and green, tapping into an alert and voracious market. Entrepreneurs are the foundation of a growing economy and goodness knows, we need growth.

However, the coming food bubble may be more difficult to anticipate than others due to several obfuscating details.

The food bubble is nested and expanding within a general tech startup bubble. Delusions tend to be infectious, infusing the over-valuations of general tech startups into the food community, making it difficult to discern whether a food-delivery service has a solid value proposition or if the technology itself is overhyped.

And since most food startups today are brought on by the convergence of technology and food, investors should be cautious about technology as the inflator of a food business. The coming bubble is also complicated by its occurrence during an ongoing weak economic recovery when the fundamentals are changing and the future is unknown.

The overvaluations that we see in the tech sector are infecting food startups. Overvalued food startups aren’t so different from overvalued tech startups. They have all of the necessary ingredients: a team of young rock stars; a segment that is rapidly evolving that no one understands; and a well-designed pitch deck.

But a food startup is different from a tech startup because of the complicated emotional relationship between humans and their food. Make the product ugly, cause it to look like it might be unsafe, neglect the relationship between food and identity: Any one of these oversights will result in certain deflation, even if the market is ready and the product technology is stunning.

And then there is the fact that many who start a food business lack experience in the food industry. Pitifully few have been farmers, almost none distributors, and only a few know how to make food that tastes good. The only shared quality seems to be that everyone eats, which somehow qualifies us all as food entrepreneurs.

Is it okay if startups or their advisory boards fail to recruit members with experience in the food system? Maybe. It might be that our new food system will be so different from the old that we need ideas from outside the traditional agricultural, food and beverage sectors. But how do we weigh a lack of experience against a fresh start?

The more ideas the better as we prepare for the unexpected innovations, the unimagined connections and disconnections that will eventually put healthy food on more tables around the globe.

Many food startups avoid scale and see profitability as an anathema to their business model. Ask entrepreneurs how they will scale their businesses and half will say that they have no intention of scaling. For some food entrepreneurs, being big means being bad, unethical or – horror! − industrial. Some just want the pleasure of being a small business, being self-employed and in a business where low-volume/high prices make sense.

The pleasures of handling raw ingredients, making things with your hands, and building relationships is hard to resist. And while there is nothing wrong with artisans, we should be careful not to assume this is a sign of “the next big thing.” It’s simply small business in action around food. Laudable, yes. Revolutionary, probably not.

Let’s get ready for the food bubble. We can and should heed Mackay’s warning about delusional behavior, but we should welcome the bounty of startups, all seeding their place in the new, disruptive food system.

The more ideas the better as we prepare for the unexpected innovations, the unimagined connections and disconnections that will eventually put healthy food on more tables around the globe. Even if the bubble of food startups “have their little day” as Mackay said of those early bubbles, each entrepreneur will contribute to a new collaborative business culture that we hope will deliver healthy, affordable food to everyone.

Featured Image: Aleksandar Mijatovic/Shutterstock