After seeing a ton of venture capital investment flow into independent beverage startups recently, it was time to take a step back and see if this kind of company actually made sense as a venture investment.
For one, the competition for space on grocery store shelves is fierce, eclipsed only by the fact people are finicky. The U.S. Beverage Manufacturing and Filling Locations Database contains nearly 2,500 alcoholic and nonalcoholic beverage manufacturers making everything from beer and soft drinks to coffee and 10,000 flavors of fizzy water.
Within the whole beverage sector, functional beverages grew in popularity over the past five years as consumers sought out better-for-you drinks. Most of them include add-ins like vitamins, probiotics and electrolytes and boast lower sugar content and more natural ingredients.
This market is also growing fast: Precedence Research estimated the global functional beverages market was valued at $129.3 billion in 2021 and would grow nearly 9% annually through 2030, when it’s forecast to be worth $279.4 billion.
These companies don’t usually go public, but often sell to another entity, perhaps a soda conglomerate or even an alcoholic beverage company looking to get into the nonalcoholic space.
Opening a fresh can of capital
If the amount of capital going into this area is any indication, investment into the sector makes sense. Venture capital firms pumped over $170 million into functional beverage companies in 2018, up $111 million from 2017, according to PitchBook.
Water brand Liquid Death seemed like the big winner so far this year, grabbing $70 million on a $700 million valuation earlier this month. Meanwhile, cannabis beverage startup Cann raised $27 million in February.
There were also a number of smaller rounds, including cocktail company AMASS Brands, which raised $15 million from celebrity investors like Derek Jeter and Tiësto. Sanzo, an Asian-inspired water brand, secured $10 million in February, as did Aura Bora, a maker of sparkling waters.
Over on the spirits side, Tippsy, a subscription-based kit for lovers of Japanese sake, raised $1.6 million. Tequila seltzer brand Onda secured $12.5 million in Series B funding and alcohol-free spirits startup Boisson grabbed $12 million.
In July, Deborah Benton, founder and managing partner at Willow Growth, led a $4 million round into De Soi, a nonalcoholic aperitifs startup founded by Katy Perry (yes, that one) and Morgan McLachlan.
One of Benton’s categories is health and wellness, and she told TechCrunch that beverages were an interesting secondary category for her firm. She sees nonalcoholic beverages as one of the fastest-growth segments.
“When we look at the industry, the nonalcohol movement started gaining popularity even back in the ’90s,” she said. “Actually, there are a number of countries that are probably three to five years ahead of us in this movement; for example, the U.K.”
Benton believes it became even more popular during the beginning of the pandemic when there was “a sharp increase in alcohol consumption,” but then almost immediately, consumers shifted to a greater focus on health and wellness.
Today, the younger generations are pushing this movement because they’re looking for a way to hang out with friends and hold something in their hand that wasn’t alcohol, helping them fit in with those who were drinking, she added.
In terms of venture-backed companies being able to find an exit, Benton said that was indeed something her firm looked at before underwriting its deals.
“The key to remember is this category is not just going to be for the Coca-Colas and the Pepsis, but actually for the alcohol groups,” she added. “They are alcohol alternatives and are important to keeping that consumer.”
She cited the example of alcohol brand Diageo acquiring a major stake in Seedlip, a nonalcoholic spirits brand, in 2019. She went on to say that “the group of acquires is certainly not limited to nonalcohol brands. In fact, I would argue that a stronger opportunity will actually be from the alcohol players.”
Invested, but still a little skeptical
Not every VC is on board with investment into early-stage beverage companies, though. Mark Rampolla, co-founder and managing partner of PowerPlant Partners, considers himself “one of the more skeptical people in the industry on early-stage beverage investments.”
“This was after some painful learning personally and as a fund,” Rampolla told TechCrunch.
One of the reasons venture may not work with beverages, he noted, is that with traditional technology, a 30% to 40% loss ratio could be made up with a 20x or 30x return on investment.
“That just is so extraordinarily rare in beverages,” he added. “Everyone talks about Bodyarmor or Red Bull, but the reality is, those are a statistical anomaly. About 99% of the businesses never get past $10 million in revenue, and exits are few and far between — even fewer and far, far between today.”
It’s true, like other industries, the beverage sector is not immune to failures. My colleague Natasha Mascarenhas reported that Haus, a VC-backed aperitif company, was putting itself up for sale in August following some pandemic-related challenges, including supply chain problems and a lack of word-of-mouth growth. Those all snowballed into a bigger issue when the company was unable to secure a Series A investment.
“It was difficult to build the business that I wanted to build during the pandemic considering we were building a social product,” Helena Price Hambrecht, Haus co-founder and CEO, told TechCrunch at the time. “We didn’t have people gathering, we didn’t have natural word of mouth. We were a purely digital growth brand during that time, great for acquisition but not good for monitoring long-term behavior.”
That said, Rampolla doesn’t outright dismiss beverages; PowerPlant is an investor in Liquid Death. However, he noted that when his firm invested in Liquid Death, it had $30 million in revenue, so not exactly a company still seeking space on grocery store shelves.
He expects there will be some winners, but said that it remains “a very difficult place to play in the early stages.”
Mastering distribution
As mentioned earlier, retail shelves are crowded, and people move on to the next drink. So how a brand retains a consumer’s attention could come down to how they distribute their beverages.
Benton believes the best distribution channel continues to be retail, and Scott Dicker and Dan Buckstaff, both with retailer data company SPINS, agreed.
Dicker, a senior market insights analyst for SPINS, told TechCrunch that the first purchase for most beverages is going to be made in the store because consumers want to buy a single can or bottle to try it out. Having your message in all kinds of places is important, but even if the discovery is online or on social media, where the sales will explode is in the store, he added.
Meanwhile, Buckstaff, the chief marketing officer, told TechCrunch that it is about creating a connection with consumers and making sure the product is available in places where they can find it.
“Younger generations are rejecting traditional brands, which is essentially tipping the ball and having everyone jump for it,” he said. “Shelves might look crowded, but one of the things that we work with every brand on is using data to scope out new consumer desires because there are whole categories missing in most stores.”