VCs remain confident alternative protein has a real future

How well have alternative-protein companies done in the past year? It depends on who you ask.

The industry has had an interesting go of it between the U.S. getting comfortable with cultivated meat production, layoffs and countries banning production. Yet, startups and investors are hanging in there.

To get the pulse of what’s germinating in this fast-rising industry, TechCrunch+ surveyed five investors, all active in various areas of investment in alternative protein, and they had a lot to say on the subject.

Nate Cooper, managing partner at Barrel Ventures, bluntly pointed out the valuation mismatch that startups in the sector enjoy, saying too many “food tech” companies are today valued as if they were pure technology plays. “At the end of the day, they are selling a CPG product and should be valued as such,” he said. “Until this stops, there are unfortunately going to be a lot of investors and companies left holding the bag, and a lot of companies that, realistically, will never grow into the private valuations they were given.”

Many of the startups tackling food are doing so to help improve the Earth’s climate and change the dependency on animal-based foods. Rosie Wardle, co-founder and partner at Synthesis Capital, said it is also driven by consumer demand for the same.

4 investors discuss the next big wave for alternative seafood startups

“Shifting away from animal proteins and toward alternative proteins will be necessary for governments to address climate impacts and to reach their net-zero targets,” Wardle said. “To this end, we are already seeing alternative proteins highlighted by governments across the world as a key solution to the climate crisis, and we expect this focus to grow in the coming years.”

However, more infrastructure is needed to ensure alternative proteins can be produced at levels that will make an impact. While venture capital is helping here, companies are getting creative when it comes to additional funding sources to build manufacturing plants, said Alice Brooks, principal at Khosla Ventures.

“It’s likely that startups will need to fund their first plants largely with venture capital,” Brooks said. “However, we are seeing companies using creative ways to fund their buildouts with partnerships. We encourage startups to prove their unit economics and scalability with the minimum size plant possible so they can get out there and test with customers.”

Read on to learn how companies can get more consumers on board with eating plant-based alternatives, where the gaps are in the mainstream manufacturing of alternative proteins, and who they think are some of the “bright spots” in the industry so far.

We spoke with:

Alice Brooks, principal, Khosla Ventures
Nate Cooper, managing partner, Barrel Ventures
Peter Herz, general partner, 1cc VC
Johnny Ream, partner, Stray Dog Capital
Rosie Wardle, co-founder and partner, Synthesis Capital

(Editor’s note: The following responses have been edited for length and clarity.)

Alice Brooks, principal, Khosla Ventures

Beyond Foods and Impossible are clear incumbents, but both cited declining sales last year as the reason for their layoffs. How can alt-protein companies reach more people and earn greater customer acceptance?

The market is still early for plant proteins and we are seeing them being adopted across a range of products. Any big change, like this one, takes years for customers to adopt. For new entrants, the key to a good product is taste and cost. Can it be as tasty as the conventional option? Can it be comparable in cost?

Have valuations in the alternative-protein space compressed in line with what we’ve seen with Beyond on the public markets? How has the changed investing landscape impacted your strategy in the sector?

In the past year, given recent economic conditions, the bar is higher for fundraising. In the food tech space, we have not seen valuations soar as much as they did in other areas, but we’re still advising our companies to focus on de-risking the most critical technical and commercial milestones with each financing.

The days of growth at all costs are abating, and there is now a greater focus on demonstrating valuable commercial proof points earlier in a company’s life.

This space has seen persistent production bottlenecks, such as backlogs for factories, equipment and bioreactors. Can venture investments fund the alt-protein industry’s capital needs or will other capital sources be required?

It’s likely that startups will need to fund their first plants largely with venture capital. However, we are seeing companies using creative ways to fund their build-outs with partnerships.

We encourage startups to prove their unit economics and scalability with the minimum size plant possible so they can get out there and test with customers.

Only two companies, Upside Foods and Good Meat, have received FDA approval for their cultivated chicken products so far, which indicates that a lot of work is needed to push broader adoption. How do you advise your portfolio companies to go about working with regulators?

Talk to other startups. The most helpful guidance can come from companies who have recently gone or are currently going through the same regulatory process. We frequently bring together portfolio companies in similar sectors to share knowledge on common challenges: regulatory, production scale up and distribution. We just did one of these events earlier this year with our food companies.

Since we have been investing in food tech for over a decade, we also tap into our network to connect founders at different stages of company growth. Be realistic about timelines, build in a timing buffer just in case, and always have a plan B. This plan B could mean launching in a different geography with faster regulatory approval, testing consumer sentiment and then expanding when the company receives wider approval.

Technology continues to evolve in alternative protein. Which early-stage companies do you consider “bright spots” right now?

Two early-stage companies are going to massively impact our food systems: Leaft Foods has figured out how to harness the most abundant protein on the planet: the RuBisCo protein, which is found in all green leaves. RuBisCo is as good as any animal protein with the same digestibility, while also being allergen-free. In doing so, they are also creating a pathway for rapid decarbonization and creating a new approach to regenerative agriculture.

Equii is using fermentation to disrupt the staples category. While many startups focus on meat and dairy analogs, Equii is improving the nutrition of staple foods such as bread and pasta by fermenting grains to create high-protein grain flours. In just two slices of their bread, you get 20 grams of highly digestible protein, or 40% of the average recommended daily intake.

What impact is rising climate consciousness having on consumer demand for plant-based and other alt-protein consumption levels?

Rising climate consciousness is definitely driving more consumers to try new plant-based and alt-protein products. However, there is a higher bar to get customers to stick around and integrate these products into their everyday routine.

Climate-friendly products need to be better than the conventional incumbents: cost competitive, better tasting and more nutritious.

There is also a new generation that is more conscious about climate and how they can change their daily routines. I hope this will drive even greater change.

When will products that have found a foothold in the U.S. see similar uptake in other countries with similar cultures and spending habits?

We back companies with ambitions for global impact, not just countries similar to the U.S. International expansion happens first in markets with similar regulatory environments. Other factors to consider are price, supply chains and adapting to the local consumer tastes.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

I prefer receiving pitches over email or on LinkedIn. In our first call, I want to hear your big ambitious vision and why you are passionate about it. Don’t be shy about sharing the risks and how you plan to address them.

Higher egg prices yield demand for alternatives

Nate Cooper, managing partner, Barrel Ventures

Mostly, yes. On the contrary, many of these companies are still being held up by “tourist investors,” who don’t know a whole lot about the food industry.

There are too many “food tech” companies that are valued as pure technology plays, but at the end of the day, they are selling a CPG product and should be valued as such. Until this stops, there are unfortunately going to be a lot of investors and companies left holding the bag, and a lot of companies that, realistically, will never grow into the private valuations they were given.

I think we will continue to see innovation in this space. As an example, there is so much excess capacity in the brewing space — how do we transform that equipment into equipment that can be used for alternative use cases?

I believe this is an exciting space to watch, and if anyone is building innovation in this space, I WANT TO KNOW :).

Technology continues to evolve in alternative protein. Which early-stage companies do you consider “bright spots” right now?

I am personally more interested in the B2B space, as I admittedly have significant hesitations around the “alt-meat” plays. One company that we are invested in is Helaina. Laura [Katz, founder and CEO] and team have built a proprietary precision fermentation platform to manufacture all bioactive proteins, starting with lactoferrin.

Being liberal with the word protein to expand beyond just meat/poultry, the potential for the immune-boosting proteins that Helaina and others are creating is almost endless. Fifty years ago, whey protein was unheard of; same with probiotics and prebiotics. These are now massive industries that are just scratching the surface of the potential that this new wave of proteins can create.

Peter Herz, general partner, 1cc VC

New products are often adopted simply because consumers are excited about their “newness.” Because startups can promote all the “benefits” of their new approach without a strong voice of opposition, they will have the field to themselves for a period of time. As the negative effects of their offerings become clearer, particularly around unintended consequences, and with time passing, “newness” no longer carries the day.

Most efforts in alt-protein are produced using ultra-processed food methods. There is virtually universal agreement that ultra-processed foods are unhealthy. Therefore, these new experiments are unlikely to endure.

We see the efforts to develop alternative proteins as being grounded in legitimate concerns due to the harm that our current food system generates. Concentrated feedlot operations are harmful to both human and environmental health, and seeking alternatives makes sense.

However, we believe that the solutions need to be aligned with natural systems and grounded in old food cultures rather than trying to engineer new foods. Valuations in this space ballooned to levels that don’t make sense, and ultimately, because of the methodological flaws in the development efforts themselves, we do not believe enduring businesses of this type will emerge.

We believe that capital devoted to these efforts will be squandered, and the sooner investors understand the difference between problems that will yield to engineering are different than the problems that require different approaches, the better.

Technology continues to evolve in alternative protein. Which early-stage companies do you consider “bright spots” right now?

We believe that consumers should eat less meat and more plant-based foods. However, it’s a mistake to decide that we need to make a plant TASTE like meat. This is where many things go wrong.

We are an investor in Plant Provisions, and they are solving for sandwiches by creating plant-based deli slices. You’ll notice that the flavors offered are simply plant flavors. They are not trying to make a plant taste like meat. We are enthusiastic about eating more plant-based foods, but we are also fans of authenticity and integrity. Trying to fake meat with other things does not have integrity and lacks authenticity.

What impact is rising climate consciousness having on consumer demand for plant-based and other alt-protein consumption levels?

There are many drivers of consumer demand that include concerns over climate as well as health. However, there is a great deal of noise in the information marketplace on these topics, and it can make it very hard for consumers to understand what can work best for them and the planet.

When will products that have found a foothold in the U.S. market see similar uptake in other countries with similar cultures and spending habits?

Other countries are more circumspect around their adoption of novel foods. In part, this may be because other countries are often on the hook for the healthcare costs of their populations. This makes governments more cautious when considering novel foods.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

Entrepreneurs can reach out to us on our website.

The most important thing founders should know about 1CC is that we look for entrepreneurs building innovations that can improve the human, environmental and social health of the food system.

Cultivated beef companies tout sustainability. Will it lead to marketability?

Johnny Ream, partner, Stray Dog Capital

To reach a broader set of consumers, alt-protein companies really need to focus on bringing products to market that will resonate more widely — better products at approachable prices. This means enhancing the sensory appeal, elevating product standards in terms of quality, nutritional value and performance, and ultimately price them attractively to large consumer segments.

We’ve seen private market valuations in alt-protein experience some compression, but broadly, not to the extent seen in the public markets with companies such as Beyond Meat, which is roughly 75% down off its August 2022 highs.

We invest early at the seed and Series A stages, so significant write-downs and wind-downs are something that you’ll see in venture across all sectors. But generally speaking there has been material compression, but not to the degree we see with Beyond in the public market.

The environment really just emphasizes our core approach to alt-protein in that we have a high bar for product quality, and we focus on technologies and innovation that can unlock significant improvements that have a high potential to translate into broad customer demand.

Venture investments certainly play a key role in the early-stage environment in alt-protein to prove out early concepts of products and technologies. Growth equity is where the capital expenditure can become very significant, so in addition to venture funding at the growth stages, we believe there will be additional sources of funding, notably federal funding, that alt-protein will attract given the growing emphasis on climate impact and sustainability.

It’s questionable whether additional funding from outside private equity will be needed, but it would no doubt help accelerate widespread adoption.

We have always supported our portfolio companies engaging regulators early and being transparent with their product development processes. Having that open dialogue is critical to identify regulatory risk factors that might be present and should inform the product development strategy.

Without that engagement there will be a greater chance of significant regulatory barriers and/or regulator education as a company approaches market entry.

Technology continues to evolve in alternative protein. Which early-stage companies do you consider “bright spots” right now?

Aqua Cultured Foods is a company we recently invested in that has a very promising future. The company is focusing on alt-seafood products made from a proprietary mycoprotein. The company’s first product application, an alternative sushi product, is really phenomenal in that it is hard to distinguish from traditional sushi, has a strong nutritional profile and the ingredient label is very clean. We expect the scale-up to be relatively straightforward, and the unit economics make way for attractive pricing at fairly small levels of production. It’s an exciting investment in that it marries a fantastic product with attractive business fundamentals. We’re looking forward to seeing the company develop over the next 18 months.

What impact is rising climate consciousness having on consumer demand for plant-based and other alt-protein consumption levels?

Consumers are certainly becoming more aware of the potential impacts of their purchasing decisions, so it’s becoming more of a factor, particularly for younger generations. But product performance is still front and center; positive impact elements like sustainability are great for a brand, but without a strong product behind it, those elements won’t be core demand drivers.

When will products that have found a foothold in the U.S. market see similar uptake in other countries with similar cultures and spending habits?

I believe this will be company specific as we see a variety of go-to-market plans that range from longer penetration in domestic markets to more broad plays globally.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

The best way to get a pitch is from someone else in our network as it will simply get more attention when there’s a relationship attached to the introduction. However, we actively review each inbound submission from our website and have invested in companies that have come to us through that sourcing channel as well, but personal intros are typically the best avenue for engagement.

Investors salivate over food tech companies perfecting precision fermentation

Rosie Wardle, co-founder and partner, Synthesis Capital

We have seen huge growth in the availability of plant-based options across food service and retail settings over the last five years, resulting in a crowded space. Many plant-based companies active today have reached a ceiling in terms of the taste and texture they are able to achieve with their products. This low product quality has hindered overall adoption, as these products are not able to appeal to the mainstream consumer. This has resulted in cannibalization within the category rather than expansion.

However, we expect that to change in the short term, as we see significant opportunity for the products to improve in terms of taste, texture and nutrition through technology advancements. Improved ingredients, more advanced processing and new ingredients from technologies like cultivated meat and fermentation will help elevate the taste experience, improve nutritional profiles, and ultimately, attract more consumers.

Valuations in early-stage venture investing have certainly been impacted by current economic headwinds. We have seen the most significant valuation corrections after Series A, where round size and valuation expectations have been significantly tempered.

In addition, the most “hyped” areas of the sector have been hit the hardest, such as companies focused on consumer brands, where the reality of the lack of differentiation and innovation demonstrated by those companies has come to light.

We have been active in the alternative-protein sector for a decade, and for us, this correction was overdue. As difficult as a market downturn is in the short term, it has the benefit of helping to build a more sustainable, durable and successful ecosystem. Investors and companies are brought back to fundamentals and the challenging times create conditions where only the strongest companies survive.

Lower valuations and the renewed focus on fundamentals and milestones mean that this is a great time to be deploying capital into high-quality companies.

Venture investments have been critical in fostering the growth of the alternative protein industry to date. However, in order to scale the industry in a meaningful way, other capital sources will also be required.

As we have seen with other sectors, such as renewable energy and electric vehicles, we will see other forms of capital across private and public markets playing an important role. One example is government funding for infrastructure to scale up production capacity. The U.S.’s executive order for biomanufacturing is likely to be a key catalyst in this space, not just for food but for the wider biomanufacturing economy, with significant ripple effects for alternative proteins.

Production bottlenecks are an expected part of the growth of any sector and have been exacerbated by supply chain problems driven by the COVID pandemic and the ongoing Ukraine conflict.

The issuance of “no-questions” letters by the FDA for Upside Foods and Good Meat marks a huge moment for the sector. While we are still waiting for USDA approval before the first products can enter the U.S. market, we anticipate this should happen later this year.

This initial movement by the U.S. regulators will be key for providing a blueprint both for other companies seeking regulatory approval in the U.S. and for regulators in other jurisdictions who are considering the approval of cultivated meat or other novel food products.

We advise our portfolio companies to take a proactive approach to engagement with regulators and to cultivate open dialogue at an early stage of their development.

Technology continues to evolve in alternative protein. Which early-stage companies do you consider “bright spots” right now?

Our strategy is to focus on companies innovating upstream of the end product and developing technology platforms that will enable meaningful transformation of the food sector. We look for companies with differentiated technology approaches and defensible IP that will move the dial.

There are many early-stage companies focused on solving specific pain points of the industry through this type of innovation in the value chain. For example, in the plant-based vertical, the majority of plant-based meat companies today rely on decades-old extrusion technology to create texture, and as discussed above, these products do not appeal to the mainstream consumer.

We have invested in Redefine Meat, which is developing 3D-printing technology to create accurate biomimics of animal meat in a scalable way.

In addition, all plant-based products currently on the market rely on the existing ingredient supply chains and crops, which for the most part, have actually been optimized for other uses such as animal feed. We see an opportunity to optimize plant ingredients for alternative proteins, and this led to our investment in Equinom, which has built a non-GMO seed library of crops for alternative proteins that can build a bridge between plant genetics and food ingredient functionality.

What impact is rising climate consciousness having on consumer demand for plant-based and other alt-protein consumption levels?

Climate consciousness is an important driver of consumer demand for plant-based and alternative-protein products, alongside health and other environmental and social concerns. Looking beyond the consumer, we believe that the importance of changing food systems to tackle climate change will be a critical driver of government initiatives to support the alternative protein sector, given that animal-related food products currently make up almost 16% of global GHG emissions.

Shifting away from animal proteins and toward alternative proteins will be necessary for governments to address climate impacts and to reach their net-zero targets. To this end, we are already seeing alternative proteins highlighted by governments across the world as a key solution to the climate crisis, and we expect this focus to grow in the coming years.

When will products that have found a foothold in the U.S. market see similar uptake in other countries with similar cultures and spending habits?

Europe already has a strong plant-based industry! However, because of the regulatory environment, it is more difficult to introduce some of the more novel products containing, for example, fermentation-produced ingredients.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

We are happy to receive decks via email. The most important thing for a founder to focus on is communicating their differentiation within a crowded competitive landscape.