Investors Dish On Food-tech Startups That Tantalize

The rate of investment in food-tech startups has slowed a bit over the last year, but a new generation of health-conscious, choosier consumers and a more polished batch of entrepreneurs are keeping the venture capital spigot open, according to investors at an industry conference Wednesday.

“Our general thesis is that the consumer has fundamentally changed, and that’s creating ripple effects across the food system,” said Victor Friedberg, cofounder and managing director of Chicago-based S2G Ventures, who spoke at Rethink’s Future Food-Tech conference in Manhattan on Wednesday. Consumers want the affordability, abundance and access of existing system but they also want authenticity, food that has been the fruit of labor, and that ties into the culinary traditions of the past as well as offering new ideas.

S2G, which debuted its first $125 million fund last October, is a multi-stage investment firm that Friedberg cofounded with Open Table founder Chuck Templeton and investor Sanjeev Krishnan. They consider investing in startups that range from “soil to shelf” along the food pipeline, he said.

Their investments include the salad chain L.A.-based Sweetgreen, and also Harrisonburg,Virginia-based Shenandoah Growers, which is aiming to solve the fresh food distribution issue with a hub-spoke model that will have food grown initially in one central greenhouse and then disburse it to urban vertical farms that will complete the process, and ultimately harvest fresh produce closer to population-dense cities.

Others in the investment space, be they relatively new or around for some time, say the industry has been shaking off dust in recent years.

“The last 50 years, industrialized food systems focused on producing at lowest cost, and that’s been accomplished,” Vishal Vasishth, cofounder of Obvious Ventures said. “The next 50 will be focused on producing the best food.”

He sees opportunity for companies working in bio-based innovations, plant-based proteins and food safety, and an opening for consumer-facing companies to deliver fresh food directly to homes.

While food investment isn’t new, Nick Rosa, managing director of Cultivian Sandbox Ventures in Chicago, said the consumer has brought changes to the industry.

“Millennials are different — the way they shop and care about the planet is very different from the older guys,” said Rosa, whose firm specializes in agricultural technology and food companies, and has several corporate investors behind it, including Dupont and Florida Crystals. Rosa says the quality of startup presentations and the number of “hopeful solutions to the world’s problems,” is on the rise, and funding interest remains strong.

“We get calls from people not in the ag[riculture] business wanting to invest in the ag business,” he said.

The food tech space exploded last year, with a record $5.7 billion raised globally across 275 deals, with much of growth happening in Asia, CB Insights reported in January. In North America, funding for food tech startups spiked by more than five-times between 2013 and 2014. But 2015 saw fairly minimal funding growth year-over-year, with funding increasing from $936 million in 2014 to $949M in 2015, led by two $100 million-plus bets placed on meal-kit company Blue Apron and Impossible Foods, which is creating plant-based foods.

A key challenge for startups going against legacy players in the industry is getting to scale. Friedberg says part of the equation is going to require startups to invest in parts of the food system that “are not very sexy, everything from soil health and storage to logistics and ingredient development,” he said.

When talking to startups, he looks for founders who have a reasonable set of assumptions on how to scale and for those with perseverance.

“The big thing is the tailwinds. With healthy, sustainable, safer food, the tailwinds are with you,” he said.

One area of interest to Rosa’s firm is providing data to farmers, which is why they invested in Descartes Labs, a Los Alamos, New Mexico startup that was spun out of the Los Alamos National Laboratory.

“By and large, farmers are overwhelmed, “ Rosa said. “We have to make the data useful for them.”

Rosa’s advice for startups looking to scale is to look for larger food companies as partners.

“The earlier you can get out and talk to them about your nascent idea the better,” he said. “If you can ally with those companies, what they are really good at is distribution systems.”

Source: New York Business Journal, Teresa Novellino
Photo: Investors in the food tech space are looking at companies such as Sweetgreen to tackle a new kind of consumer. (Courtesy of Sweetgreen)