As Beyond Meat continues its reign as one of the kings of this year’s IPO mountain, and Impossible Foods serves up impossibly good numbers for Burger King, venture capitalists seem ready to feast on new food deals.
And judging by market size and the returns that some companies have already realized by targeting the dairy aisle, the next big wave in food tech might just come with a whiff of Camembert. Meat alternatives and cultured meat may be grabbing headlines, but a wave of early-stage companies are looking at the dairy business for the next big thing.
There’s nothing cheesy about the size of the check that Danone wrote for WhiteWave Foods. That over $10 billion payout for WhiteWave’s dairy alternatives was one of the single biggest acquisitions in the new food space. And consumers spent a whopping $61.9 billion on cheese in 2018 — a number that’s expected to reach $99.4 billion by 2024, according to data just published by the research group, iMarc.
But before determining which venture capitalists are going to be moving the cheese (or cutting it), it’s worth examining what’s driving the latest foodtech craze right now.
VC interest remains huge in foodtech as major IPOs outperform
Investors have long been eyeing a slice of the food business for the simple reason that it, along with healthcare, is one of the largest industries in the world. U.S. consumers, businesses and government services will shovel $1.62 trillion down the giant gaping maw of food and beverage businesses — spending more in a year on food and drink than they will on either healthcare or personal insurance, according to data from the Bureau of Labor Statistics (as CNBC noted).
Venture capitalists have already placed bets on food delivery with early wins for companies like GrubHub, and sky-high valuations for businesses like Postmates and DoorDash in the U.S. (with a combined valuation of over $8 billion) and iFood in Latin America.
Meal preparation proved less successful (Blue Apron is the most public example of a number of high-profile meal kit flameouts), but investment still persists around the fringes with companies trying to target a higher-end or more tailored diet to get the economics more aligned.
Here in Los Angeles, meal preparation and delivery companies like Territory Foods, an Upfront Ventures portfolio company, and Trifecta Nutrition, along with prepared-food companies like Daily Harvest, which raised $43 million from investors in December 2017, are hoping to beat the trends.
Investors are also looking more like restaurateurs with bets in fast-food chains like Sweetgreen. Meanwhile, Eric Schmidt’s Tomorrow Ventures is also finding itself in the food business through an investment in Lyfe Kitchen. And the automated pizza delivery service Zume raised $375 million from SoftBank’s Vision Fund for its delivery-based fast-food service.
But for the most part, these brands don’t look that much different from the retail investments that for years have been the purview of private equity firms like L Catterton Partners.
That’s why the lab-grown meat, meat alternatives and dairy substitutes may be more attractive for tech-focused venture investors. These deals, venture capitalists can argue, are more grounded in technology and can ostensibly operate at margins that look less like traditional food businesses.
“If you peel back the onion there’s a lot of innovation and technology around what they’re doing that is super disruptive to this category that hasn’t been innovated around in a while,” says Revolution Ventures principal, Kristin Gunther.
At least, that’s the idea. Beyond Meat has spent considerable time, effort and marketing dollars convincing consumers and investors that it is, in fact, a technology company rather than a food business.
The future for Beyond Meat looks much like its past, according to a recent interview with the company’s chief executive, Ethan Brown. “It’s really going to focus on doing what we’ve been doing to be successful: Beyond Meat’s rapid and relentless innovation program to make the products on the shelf obsolete. [And] we do that by a really manic focus on collapsing the gaps between our product and meat proteins,” Brown says.
Still, some investors are worried that Beyond Meat is currently caught in a hype bubble, and that better (and more logical) valuations are still to be had in the private market. “The fact that it’s sitting on a 40X multiple in sales is crazy. It’s a reflection of hype,” says one investor who heads a new $40 million food-tech investment fund.
Investors remain bullish on the market — proven by the whopper of a financing round for Impossible Foods. That $300 million financing came on the heels of an announcement from Burger King that the fast food giant would be rolling out the Impossible Whopper nationwide.
For Burger King, the decision was a no-brainer. The fast food company saw same store sales rise by 28% in the month of Burger King’s test in the St. Louis market. By contrast, McDonald’s sales were up just 2% in the market for the month of April, according to data from Technomic’s Transaction Insights.
The alternative dairy thesis
Simply put, meat alternatives can drive sales in fast food. So why move to dairy? Well, humans didn’t start out drinking milk.
Over the 300,000-odd years that some form of homo sapiens stalked the planet, people only began consuming dairy in a liquid form in the last 10,000-odd years.
At first, humans couldn’t even drink the stuff without getting at least a little nauseous. They needed to develop a genetic mutation to even process the lactose sugars properly.
“The first time that we see the lactase persistence allele in Europe arising is around 5,000 years BP [before present] in southern Europe, and then it starts to kick in in central Europe around 3,000 years ago,” assistant professor Laure Ségurel of the Museum of Humankind in Paris, told the BBC earlier this year.
If that was the rationale, it’s increasingly unnecessary for modern living, and may indeed be more of a hazard to human health.
That’s why there are at least $37.5 billion worth of reasons for investors’ interest in the milk-alternative category. It’s how much money will be spent on dairy alternatives by 2025, according to a newly released study by the market research firm Global Market Insights.
Miyoko’s Kitchen, NotCo, Ripple Foods, Kite Hill, Mooliss Vegan Cheese, New Culture and Eclipse Foods are all attempting to snag a slice of all that cheddar.
NotCo, which raised $30 million in funding led by Jeff Bezos’ investment fund, will be bringing its dairy alternative to markets in Latin America soon. The Chilean company has succeeded in billing itself as a platform company for vegetarian alternatives to dairy and egg products à la the early market mover Just (formerly known as Hampton Creek). A newer entrant, Sustainable Bioproducts, is using a novel microbe that the company discovered in the far reaches of Yellowstone National Park to develop a protein platform that can be used for both dairy, sugar and meat replacements. That company recently raised $33 million led by 1955 Capital.
Ripple Foods, which makes a dairy alternative using pea protein, is another startup that’s raised over $30 million in recent years to fund its growth.
Still, even earlier-stage businesses are waiting in the wings. These are companies like New Culture and Eclipse Foods, which have novel technologies to target dairy spreads and cheeses, specifically.
What companies like Sustainable Bioproducts, New Culture and Eclipse Foods have going for them is the deep science they’re using to create their replacement products. Rather than making alternatives that can act as acceptable substitutes, these companies are developing products that more precisely mimic the proteins they’re trying to replace. Ultimately, the goal is something even better than the real thing.