A Balancing Act: Leveraging startup investments by looking at the end game
Editor's note: This "A Balancing Act" story is the eighth in a series for Food Dive, where experts examine trends uncovered in earnings reports and discuss strategies that impact the balance sheet. You can read the first piece here, the second here, the third here, the fourth here, the fifth here, the sixth here and the seventh here.
General Mills enjoyed a heavy helping of natural and organic products when it acquired Annie's in 2014, but that deal came with a hefty price tag: $820 million.
Many could say the investment was worth it. General Mills has helped foster significant growth for Annie's in the two years since announcing the acquisition, and Annie's has strengthened and diversified General Mills' overall portfolio.
But imagine if General Mills had instead been an early investor, owning a minority stake in the company and beginning a relationship with its end goal — acquisition — in mind from the get-go. Having already owned a portion of the company in its earlier stages, General Mills may have been able to save itself a sizable chunk of change when it ultimately came time to acquire Annie's outright.
This dilemma continues to confound manufacturers and venture capital investors in the food and beverage industry today. Understanding exit strategies in the big picture of a startup investment — and how their timelines fall — could help manufacturers become more competitive as they face increased pressure from other investors.
How do manufacturers’ venture arms stand versus other investors?
Several major manufacturers have committed to making VC investments by launching their own internal groups or startup accelerators. These include:
- General Mills’ 301 Inc.
- Coca-Cola’s Venturing and Emerging Brands (VEB)
- Campbell Soup’s Acre Venture Partners
- Anheuser-Busch InBev’s Techstars Connection (partnership with Techstars)
- Kellogg’s eighteen94 capital (1894)
- Hain Celestial’s Cultivate Ventures
- Danone’s Danone Manifesto Ventures
- Diageo’s Distill Ventures
- Chobani’s Chobani Food Incubator
Often the strategy for manufacturers who get involved with venture capital — also known as strategic investors — is to put the startup through a test run. This involves supporting it in an incubator to determine whether to acquire the entire startup later down the line, Anthony Valentino, deputy editor at Mergermarket, told Food Dive.
Food-centric VC firms and startup accelerators and incubators also run the gamut. They include:
Ultimately, each manufacturer, VC investment firm or accelerator will have different philosophies that determine what they’re looking for in an investment target and potential future acquisition.
“Some (manufacturers) really feel that their venture arms should be catered toward identifying products that are within categories that they're already in, or in close adjacency,” Lauren Jupiter, co-founder and managing partner at AccelFoods, told Food Dive. “It's more natural or almost obvious investments for them, given where they stand today.”
“Then, there are other strategics out there who view the venture arm as ways to get into categories that their business would have never naturally had that flow into,” Jupiter continued. “They're not such natural adjacencies. Their own business isn't going to be innovating in those spaces, and so it's a way for them to do something that's completely outside of their typical scope.”
It’s all about the exit strategy
When it comes to investments, the exit strategy — and whether acquisition or sale options are on the table — will often guide the selection process. It will also figure into an investor’s plan for promoting growth through capital infusion and the relationships the investor can offer. Here, manufacturers vying for a hot startup may have an advantage over VC firms in terms of introducing them to ingredient suppliers and retailers that can help them grow their business.
“A branded asset is quite a bit more valuable long term, potentially, to the venture arm of a strategic," Valentino said. "Especially if they think they can grow it and assimilate it into their own portfolio before fully acquiring the rest of the business.”
“That’s compared to a VC firm who's going to pump a lot of money into it and then try to sell it to a CPG firm in five years,” said Valentino. “It could lead to some pretty fierce competition with some of these brands.”
One difference between manufacturers and investment firms’ exit strategies is that manufacturers tend to want to acquire the startup in the end, while firms lean toward selling the startup — often to another manufacturer.
By that time, the startup will usually earn a higher price tag than if the manufacturer had invested in or acquired it earlier. That could intensify competition between manufacturers and investment firms all hoping to purchase the same promising startups.
“Any VC investor putting capital into a business, either they're really looking at who is the ultimate buyer of that business or of their position,” said Jupiter. “Because obviously they have to understand what the end game is for that investment and the return on their capital.”
“Clearly they're looking at market size, market growth, competitive dynamics within those markets, but they're also looking at where they see consumers looking to increase their share of wallet,” Jupiter continued. “They are also looking at where the strategics are looking to make acquisitions and ultimately what the exit game is for them.”
Valentino suggests that because of differing exit strategies, manufacturers may have more on the line with startup investments — but also more to gain long term.
“At worst, they invest in a smaller company, and they end up not wanting it in their own portfolio,” said Valentino. “Then they just get rid of it at some point. The gain there is so much more because if you have your foot in the door, and you can grow it and just acquire the rest of it. The potential gain is a much bigger win than potential loss.”
“The gain there is much bigger, potentially (for manufacturers), than what a VC get out of it, who's really just going to try to invest, invest, invest and then flip — and most likely flip to a strategic,” Valentino continued.
How strategy impacts investment and acquisition timelines
Different investors are likely going to have their own timelines in terms of investment and exit strategies, Valentino said.
“We think about exits, obviously the size of the exit, but we also think about the time horizon,” said Jupiter. “Not just the corporate-owned VCs are getting involved, but theoretically some of those buyouts by the big corporates may be happening sooner. There's the ability potentially to think more about earlier exits for VCs, so I think there will potentially be a focus on that as investors think about categories.”
As startups become hotter commodities, both VC and strategic investors will compete to bankroll them, as well as accelerate the startups’ ability to reach the next level of scale and success. The time between initial investment and acquisition or sale could become increasingly short, especially as investors of all types gain more experience and are better able to identify the next hot food and beverage trends.
The "A Balancing Act" series is brought to you by BMO Harris Bank, a leader in commercial banking. To learn more about their Food & Beverage expertise, visit their website here. BMO Harris Bank has no influence over Food Dive's coverage.