Editor’s note: This story is the second installment in a monthly series looking at individuals and organizations that invest in food and beverages. Previous articles sponsored by BMO Harris Bank can be found here.
When Laura D'Asaro started Chirps Chips — a gluten-free snack made from high-protein cricket flour — fresh out of college in 2013, she had trouble convincing investors to get on board.
"We were putting something out there that people considered disgusting. We were suggesting people eat bugs," she told Food Dive. "So you can imagine early on, we had a really hard time getting funding."
In the first two years, she and her co-founders turned to non-traditional funding routes, including pitch competitions and a Kickstarter campaign. But then Chirps secured a spot on "Shark Tank," the entrepreneurial reality show where big name investors listen to startups pitch their companies and hope for funds. Dressed in a green cricket costume, D'Asaro and her co-founder caught their attention. They left with a $100,000 investment from billionaire Mark Cuban for 15% equity in the company.
"There is this magical glow around celebrities or investors that are better known that people are just a little bit more willing, they are a trendsetter. It's like the cool kid in class. If the popular kids do it, then other people are more willing to try."
CEO and co-founder, Chirps
That funding changed the trajectory for the company. After Cuban's investment, more people were willing to invest. Chirps has continued to grow since, expanding from a couple hundred stores with the product to more than 1,500.
"I think sustainable protein will be an important product in the future," Cuban told Food Dive in an email.
Big name investors can raise the profile of companies, getting other investors to jump in and bringing nationwide attention with them. More brands are reaping those benefits as investors increasingly turn to food and beverage companies to boost profits and invest in products they believe in.
"There is this magical glow around celebrities or investors that are better known, that people are just a little bit more willing. They are a trendsetter," D'Asaro said. "It's like the cool kid in class. If the popular kids do it, then other people are more willing to try. That always matters, but it matters especially when you're talking about new ideas that maybe otherwise people are a little hesitant to try."
According to CB Insights data sent to Food Dive, equity funding activity for the food and beverage space has increased in recent years. In 2016, the space saw $1.2 billion. Then $1.9 billion the next year, and $2 billion in 2018. As of September, the category has seen $1.2 billion this year, according to the analytics firm.
Cuban has invested in various food companies through the years, from Chirps Chips to Alyssa’s Cookies — which features his testimonial on its website. He said his approach has evolved, but "for the most part I want products that I like and would use." Alyssa's and Nuts N' More, a protein-packed nut butter company that has excelled since his investment, fit that model.
"The others are just business investments because I think the companies will do well or want to support the entrepreneurs," he said. " 'Shark Tank' is a different animal. There are times where I invest because it's the right thing to do, the entrepreneur deserved a chance or I think it can excel in some manner."
Unique offerings attract investors
Companies who scored funds on "Shark Tank" through the years said having a unique product that investors enjoyed eating was key to securing an offer.
Elyse Oleksak, co-founder of Bantam Bagels, told Food Dive that having a brand that is different with out-of-the-box products draws attention from investors and consumers. The New York City-based company, which makes frozen mini stuffed bagels, pancakes and Egg Bites, was founded in 2013 by Elyse and her husband Nick Oleksak.
After starting the business with funding from family and friends, the couple appeared on "Shark Tank" in 2015. When the "Shark Tank" investors bit into the bagel bites, reactions of "love it" and "oh wow" could be heard as they chewed. They attracted a $275,000 investment from Lori Greiner in return for a quarter of the business.
The investment and subsequent attention helped business. Last year, Bantam Bagels was acquired by T. Marzetti Co., a wholly owned subsidiary of Lancaster Colony Corp., for $34 million. Oleksak said the acquisition allowed them to continue running the brand, while having a parent company to help them scale production.
That acquisition was in part made possible because of Grenier's help, which Oleksak called "instrumental" in the company's growth. She said "Shark Tank" gave the brand a national audience, and Grenier provided it "street cred."
Junea Rocha, co-founder and CMO of Brazi Bites, told Food Dive that she started her company to bring frozen, gluten-free cheese bread snacks — a staple in Brazil — to the United States.
"I grew up eating this product," she said. "I realized there was a huge opportunity in the U.S., that this product was not distributed to Americans in the way that it deserved."
When Rocha went on "Shark Tank," the company had already built some brand recognition with its products in 1,000 stores nationwide. But it was still a young company growing organically. Having the investors on "Shark Tank" interested in the product and talking about how they could not believe it was gluten-free really helped with exposure, she said.
After the show, the product sold out nationwide, and Greiner offered Brazi Bites $200,000 in exchange for 16.5% equity.
Although the company accepted the deal on air, Rocha said the deal fell through, which is not unusual. However, Rocha said more consumers were interested in the product because big-time investors enjoyed it on TV.
"Over time, we've seen that companies that get offers on this show, whether that deal closes or not, have a larger success rate and a larger impact coming from this show," she said. "That gives you more appeal, the consumers looking at that in the audience and they're like this must be amazing."
The company has continued to grow since its TV appearance. Last year, Brazi Bites sold a majority stake in the company to a private equity firm, and this year the company expanded its offerings with a line of empanadas.
"There are times where I invest because it's the right thing to do, the entrepreneur deserved a chance or I think it can excel in some manner."
"Shark Tank" investor and businessman
Daniel Lubetzky, founder of Kind and now executive chairman of the company, will appear as a guest investor on Season 11 of "Shark Tank," which starts airing at the end of the month. Lubetzky told Food Dive in an email that when investing, he looks for entrepreneurs who are strategic and resourceful with an "innovation that solves an actual problem, as opposed to just copying an existing solution, or solving a problem that doesn’t really need to be solved."
Lubetzky said he also recognizes his limitations and makes sure he is investing in companies where he can add value based on his own experience and skill set.
"When it comes to food companies, first and foremost the product has to be superior to what is out there — it has to taste great and provide a unique selling proposition that meets a real need and is not just trying to mimic existing products," he said. "Authenticity is very important to me. I avoid fads in favor of endurable solutions."
How investors decide where to put money
But it's not just "Shark Tank" investors putting money into the food and beverage business. From Bill Gates and Jeff Bezos to Warren Buffett and Richard Branson, more big name investors have been pouring money into the food and drink space.
Last year, food technology ingredients company Motif raised $90 million in funding round led by Breakthrough Energy Ventures — a fund that includes billionaires such as Amazon founder Jeff Bezos, Microsoft founder Bill Gates and Virgin founder Richard Branson. Warren Buffet's Berkshire Hathaway has a stake in Kraft Heinz. He also bought old time candy maker See's Candies in 1972 for about $25 million, and considers that one of his favorite acquisitions since the company has made more than 8,000% in returns and he loves the candy.
Analysts and investors told Food Dive there are different reasons why the food space is attractive. Some have moved their money from technology to food because of recent innovation in areas like plant-based and cell-based foods, meal kits, artificial intelligence and food delivery technology.
As companies look to more plant-based and eco-friendly options, investors like Bill Gates have said they want to put funds into companies that are making a difference. Beyond Meat has secured investments from big names like Gates, Leonardo DiCaprio and former McDonald's CEO Don Thompson.
"Raising meat takes a great deal of land and water and has a substantial environmental impact," Gates wrote on his personal blog in 2013. "Put simply, there’s no way to produce enough meat for 9 billion people. Yet we can't ask everyone to become vegetarians. That's why we need more options for producing meat without depleting our resources.”
Other rich investors have expressed a similar mindset to Gates. Besides his investment in Motif, Richard Branson has also invested in Memphis Meats, a cultured meat startup based in San Francisco.
"In 30 years or so, I believe we will look back and be shocked at what was the accepted way we killed animals en masse for food. I think that in the future clean and plant-based meat will become the norm, and in 30 years it is unlikely animals will need to be killed for food anymore," Branson wrote in a blog post last year.
These types of investments come with financial opportunities as well. Analysts from Barclays wrote in a recent report the alternative meat market could hit $140 billion during the next 10 years, meaning it could capture about 10% of the total $1.4 trillion global meat industry.
Will Hayllar, a partner in the consumer goods practice at OC&C Strategy Consultants, told Food Dive there are a number of sectors through which investors are looking at long-term views of how they expect societies and economies to evolve. As they look to the future, Hayllar said it makes sense some investors are putting money in those sectors, like food technology and protein alternatives.
"There clearly is a kind of dietary shift going on over health and environmental drivers that sort of underpin that. You can build quite a degree of confidence in totality that sector will become more important, and that growth will last for a few decades, and therefore, if you're looking to place money in things where you think there is going to be structural growth, that is a sensible place to make some investments," he said.
However, he said, there are uncertainties to investing in the disruptive new technology space because it is hard to predict whether it will be successful and what kind of return on investment the company can provide.
"There's always more of a risk profile around some of those early stage things: which one is really going to take off, which one will actually taste great, and deliver against that consumer expectation and not just be sort of interesting on paper. But I think that's why money is going into those sort of spaces," Hayllar said.
Why invest in food and beverage now?
From celebrities and athletes to venture capitalists and firms, more people have turned to the food and beverage space to make investments in recent years as consumer spending on the industry continues to increase.
U.S. consumers, government entities and businesses spent about $1.71 trillion on food and beverages in 2018, according to data from the Department of Agriculture. Additionally, the average American's annual spending on food increased last year at a higher rate more than most other essentials, according to the Bureau of Labor Statistics.
"One truth of food and drink is people will always need need to eat and drink. So if you have a long-term perspective, and you think you can keep adapting your proposition, then it is a place that you can see as a long-term investment," Hayllar said.
He said a really simple element behind food investments, and the single biggest reason any type of food is successful, is because it tastes good. He said taste and texture is critical because that will determine whether people keep coming back to a product — and whether it makes a lucrative investment.
The world population is expected to increase by 1 billion in a 15-year period, leading to a 35% increase in food consumption, according to reports published by PwC and cited by Forbes.
"One truth of food and drink is people will always need need to eat and drink. So if you have a long term perspective, and you think you can keep adapting your proposition, then it is a place that you can see as a long term investment."
Partner, OC&C Strategy Consultants
Richard Colloca, partner at EisnerAmper, said the food and beverage space can make for smart investments. It is a relatively easy market to promote products with strong distribution channels domestically and internationally. Especially with the growth of social media, he said, it has become easier to market new products in the industry.
"The food industry is a very competitive industry, and it's also a very innovative industry," he told Food Dive. "Nearly 25% of every dollar spent in retail is attributable to the food and beverage industry, which is significant."
Gautam Gupta, a partner at venture capital platform M13 and co-founder and former CEO of direct-to-consumer food company NatureBox, told Food Dive that more startups are growing quickly and becoming increasingly attractive to investors.
"You're definitely seeing more investors come into the food and beverage space, and I do think that it's a bit of a flywheel effect, where investors are seeing a lot of these brands growing very quickly. ...Some of them are having very successful exits. And I think that flywheel is creating more interest for investors to get into this space and participate in early-stage investing in food and beverage brands," Gupta said.
This 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.