Investors crave food startups, but will they overindulge?
- Venture capital is pouring into the food and beverage category, according to Tech Crunch. Its analysis of venture funding shows startups in this space received more than $3 billion in venture capital investments during the past year. This includes a mix of huge deals, smaller seed rounds and everything in between.
- Alternative meat products are a growing trend — and investors are taking notice. More than $600 million in known funding has gone into the sector, Tech Crunch said. The report noted makers of plant-based versions of popular meat dishes also are attracting investors. Its research found two top funding recipients are Seattle Food Tech, which is working to mass-produce meatless chicken nuggets at a reasonable cost, and Good Catch, which focuses on fishless seafoods.
- Venture capitalists also are interested in robot chefs, especially in the areas of pizza and salad creation. Tech Crunch cited Chowbotics, a developer of robots for food service whose lineup includes Sally the salad robot, and its announcement of an $11 million Series A round, as an example of a growing trend. In addition, investors remain interested in companies looking to create treats with less sugar or healthful sugar substitutes. The report said no one knows which early-stage food startups will take off, but based on its findings, the meal of the future will be high in protein, low in sugar and prepared by a robot.
Today’s consumers no longer feel brand loyalty and often shun established products in favor of smaller food companies that offer new flavors and exciting concepts. As grocery buyers turn to smaller, newer brands, startups are seeing interest both from outside investors and the venture capital arms of major food companies looking to get in on the action.
One reason investors might be turning to food could be the large sums — and likely significant returns — acquisitions have brought in in recent years. Dr Pepper Snapple paid $1.7 billion to acquire Bai Brands in late 2016, seven years after it was founded. PepsiCo acquired startup KeVita for $200 million in late 2016, while Nestle took a majority stake in Blue Bottle for a healthy $500 million last year.
Even early-stage startups are seeing interest from food companies and investors looking to build connections without shouldering higher acquisition costs. A string of major manufacturers — including Chobani, General Mills, Nestle and PepsiCo — are making VC investments or launching their own startup accelerators to help small companies scale up. Eventually, these startups could make good acquisition targets as well. Dr Pepper Snapple, which has small investments in a number of fast-growing companies such as AriZona, Fiji Water, BodyArmor and Vita Coco, had a similar stake in Bai before purchasing it.
“Those guys are all fast-growing companies and when it’s the right thing to do, as in the case of Bai, we’ll certainly evaluate [whether to buy them]," James Trebilcock, executive vice president and chief commercial officer for Dr Pepper Snapple, told Food Dive last year. For now, “we’re letting these entrepreneurs and all the capital behind them develop and build those brands, and we’re leveraging the strength of our distribution network to get them available.”
The risk, of course, is that as the most attractive companies are gobbled up, smaller, less important players remain. The challenge for investors and Big Food is that because they are desperate for growth and want to gravitate to the hot trends, they don't overpay for an asset.
Still, industry leaders and investors should pay close attention to which trends take off. Funding companies looking to create meat alternatives, as well as “lab grown” meat, seems like a smart bet. While Tyson Foods is best known for its beef, pork and chicken, it has minority positions in plant-based foods maker Beyond Meat and Memphis Meats, a cell-cultured meat startup.
Some 60% of consumers say they’re cutting back on meat-based products, substituting beef burgers in favor of plant-based alternatives. And a third of 1,000 U.S. and United Kingdom consumers who participated in an online survey said they’d be willing to buy lab-grown meat if it was available in restaurants or grocery stores. Consumers love meat and protein, but still have concerns about health, the environment and animal welfare, making this sector ripe for investment.
Investing cautiously in companies with new ideas for lower or no-sugar dessert options also seems smart. Surveys show today’s consumers want to indulge in sweet treats, but are on the lookout for healthful options. This is why Halo Top — the ice cream that seemingly came out of nowhere to dominate the industry through its promise of fewer calories, less sugar and higher protein — is among the young upstarts forcing its big-name, deep-pocket competitors to take notice.
Aside from the novelty factor, shopper desire for menu items prepared by robots seems less certain. Millennials are looking for a personal experience, which would seem to be the opposite of what a robot provides. But this idea might make sense if automation can trim significant labor costs, something onlookers likely will accept if it can result in a lower price.
Food startups are definitely having their moment, but as in the dot.com bust of 20 years ago, not all of them will find long-term success.