Your choices are:
1. Don't invest, and lose your investors to a competing VC firm.
2. Invest, even if you think it's a bad idea. Worst case if it blows up you blew up in a popular way, "I didn't do any worse than our competitors, what do you want?"
Thus once something is hot, it gets lots of investments even if the people doing the investing think it's a bad investment.
This is the same reason most mutual funds and hedge funds invest in similar ways to index funds: incentives for the fund managers are to lose in a popular way.
(This is a variant on the "principal-agent problem".)
As to why somebody is funding them, there are probably lots of reasons. Investors may believe that they are backing the best team, or that the market is large enough, or that they need a player in the market, or such a service would compliment other investments (such as a grocery store chain investing in a "we shop for you" startup).
They are propped up by VC dollars and not yet profitable. See Blue Apron's struggle post-IPO.
https://en.wikipedia.org/wiki/Blue_Apron#History
Perhaps the biggest issues are high customer acquisition cost, cost of shipping, and customer retention.
I wouldn't consider meal kits itself a niche market — it's a huge market with many niches inside it for so many specific diets and dietary preferences served by different kits.
I think the future of meal kits is partnerships with grocery stores where consumers can pick up there, like Kroger's acquisition of Home Chef.