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Protecting investors in food delivery start-ups

By Ose Binitie
21 November 2022   |   2:47 am
According to Mckinsey, the food delivery industry was worth more than $150 million as at 2021. Food delivery companies are however cost intensive with a low margin of profitability, requiring a multiplier effect.

Food delivery

According to Mckinsey, the food delivery industry was worth more than $150 million as at 2021. Food delivery companies are however cost intensive with a low margin of profitability, requiring a multiplier effect. Scaling is therefore a factor necessary for consistent profitability.

The advantage of technology and tech enabled startups can also not be over emphasised. This tech heavy element can be optimised for ordering already prepared meals, as well as ordering large quantities of raw food crops.  One therefore finds a level of versatility and innovation in the specie of start-ups emerging in the food delivery industry.

Other investment considerations in this industry may also include the niche of the food delivery start up, the calibre of partnerships the start up optimises to provide extra layers of service, real estate assets, operating efficiency and breadth of service offerings of the start up, changing consumer habits and so forth.

Investors need to be aware of the nitty gritty elements that guarantee profitability in food delivery start-ups in order to make informed decisions in investing. This article seeks to guide prospective investors in food delivery start-ups on the
clauses to consider in their investment agreements to protect their investment interests

1. The food delivery service is a specie of logistics, focusing on quick commerce logistics. Such deliveries are time based, usually less than one hour, depending on the specie of food delivery the start up is designed to address. This sort of business proposition requires high calibre partnerships. It is important that such partnerships and collaborations the start up claims to possess are not theoretical but are actual, and that the founders have secured these partnerships with favourable commissions due to the start up.

Where the start up is expanding to a new country, it is important that the start-up founders/workers have already secured or are able to secure the partnerships and connections for seamless expansion into that new location. Thus, it is important that investors analyse each location proposed for expansion and ensure that those locations are profitable.

The investor must therefore ensure that clauses to ensure that the representations made by the founders as regards partnerships are true, and remain true.

Recently Dominos pizza had to close shop in Italy, after it failed in its attempt to sell fast pizza in the country where pizza was invented, and thus could not secure the partnerships pertinent to its success in Italy.

2. Extra layers of protection could come in the form of ensuring the proper auditing of the assets and their operations. Some of the problems that developing countries face include the side tracking of funds with regard to ecommerce and logistics companies. The bigger the start up, the easier it may be to lose track of the management of funds. It is therefore important for the investment agreement to include the proper auditing of funds and assets as a warranty.

This is to ensure the trail is never lost.  Also, a proper audit report could also be made a condition precedent to getting extra injections of funding from the same investor. Jumia, an ecommerce company listed on the New York Stock Exchange is 70% below its IPO price, and one of its challenges it has had is the disparities in its orders and payments, some which may have come from untraceable customers due to Africa’s less than efficient postal systems, the cash payments on delivery unremitted and a host of others. These issues are rampant in food delivery as well as e-commerce companies in developing countries, and they must be checked with efficient systems that guarantee accountability and clauses that ensure same.

3.  A third way is for a clause allowing the investor to take part in the mentorship of the founders or a clause ensuring that an advisory board is set up to constantly check in on the progress of the start up, in addition to frequent reports. Every company, not being small, shall have at least 2 directors. A board of tried and tested directors, mentors or advisors has been found to be essential for successful companies. However, many start-ups leave this aspect till they are forced by a crisis to set up a proper board of directors.

This clause could work when the start up is in the seed phase of fund raising and not many investors or lenders have provided funds for it. This would be especially so as the start up would have to do all it takes to secure funding from the few investors it has.

4. With regard to food delivery start ups, turn around time is supremely important to ensure increased profitability. This is also important with the sub category of fast food delivery, since the person ordering is hungry and expects super fast, as well as affordable delivery. It is important that there are not too many middlemen that would cut out the profit. Thus, it is important that the start up owns assets such as bikes and POS machines to ensure seamless service. Therefore, ownership of these owned assets must be put into consideration and clearly stated in the investment agreements to be signed. In the alternative, a percentage of the funding obtained by the investor should be deployed to acquiring such assets.

A clause ensuring that a percentage of funding should go toward obtaining such assets will be apposite. This is one way to put a check on deploying investors’ funds to endless marketing and not much else. In 2021, Kuda declared that it suffered losses of  ₦6,092,554,866 ($14,214,681), which was as a result of the high default rate of its overdrafts and other loans. Despite that, a proportion of its budget was toward marketing, with regard to obtaining more overdraft customers. Though not a food delivery start-up, the same principle applies: Kuda may need to create other income generating (hard) assets to compensate for the losses sustained by its defaulters.

This is butressed by the fact that it allows for 25 free transfers a month to each customer, coupled with its non-pos styled business model.

5. Given currency devaluation issues in Nigeria, inflation and looming recession challenges experienced globally, investors need to hedge against currency losses. They must ensure that there is a clause pegging the agreed amount to be paid back to them over the term of the agreement, in order to correct for changes in the value of the exchange rate of the foreign currency to which a particular currency clause is pegged against the domestic currency. Though this is not highly practised in a lot of venture capital funds, as such risks are a bit difficult to measure, it should be increasingly considered, using factors such as exit date visibility, nature of exit, likelihood of investment success and materiality of the potential currency losses.
Binitie is a Lagos based lawyer, who can be reached at osebinitie@gmail.com

 
 
 

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