Industry Insights: How Venture Capital is fueling Innovation in Food and big Brands step up to match pace

08/21/2017
 

‘Flexitarians’ and a distrust of ‘Big Food’ are driving major changes in the food market. And venture capitalists are inserting themselves in the process. Ann Frances Kelly of Signium Germany looks at the future of food and speaks to food industry experts.



For the better half of a decade food companies have been on the radar of venture capitalists, in particular innovative start-ups with a focus on health and nutrition. The search for plant-based alternatives to animal protein continues to generate particular attention, but not just to feed the reputed 1 billion vegan-vegetarian lifestylers around the globe. The so-called flexitarians (consumers who like dairy and meat, but just want to eat less of it) are keen to explore healthy, good tasting substitutes for the produce of large-scale food manufacturers, collectively known as Big Food.

The trend is also fuelled by increasing distrust of Big Food on the part of ever more discerning and health conscious consumers. Big Food is often considered responsible for serious social and environmental problems such as the obesity epidemic prevalent in most of the developed world or the greenhouse gas impact of mass animal production.

This distrust appears to be more than just sentiment. In early 2016 Rabobank reported that the top 10 US branded food companies had lost 4% of their market share over the previous 5 years, while struggling to grow organically. Hans Taparia, Assistant Professor at the NYU Stern School of Business and Founder of an organic food company, put it more radically. In a recent Guardian article he says “What big brands should be doing is taking the long view and launching fresh food under new brand names. It would take a lot of investment and work but they have to think big, otherwise they will face annihilation in 10 years”.

 

Is Food the new Tech?

So perhaps it is no surprise that venture capital firms have tuned in to the hunger for change and the potential revenue inherent in scalable healthy ventures. Even big players such as Khosla Ventures and Kleiner Perkins Caufield + Byers, previously known more for investments in high tech, are investing more and more in new food and agriventures. Firms such as S2G Ventures and Powerplant Ventures are focusing solely on this space.

In addition to financial support, venture capital firms such as AccelFoods and Food-X are also providing other tools to “disruptive” start-ups to enhance scalability and get them market ready in the shortest possible time. Tools which have proven successful in technology such as boot camps and accelerator programmes are becoming ever more common in North America. These provide infrastructure, mentoring and business advice to fledging businesses.

Even Silicon Valley has developed a taste for food over recent years. This has seen the birth of companies such as Impossible Foods, which has engineered plant based meat products and raised $180m in funding since 2011. These companies are not just targeting the niche vegan-vegetarian public, but are thinking big, going after consumers in the broader market. Pat Brown, Founder of Impossible Foods is quoted as saying “no disrespect to vegetarians, but the only consumers we really care about are meat consumers”. Companies like themselves, or start-up competitor Beyond Meat, plan to be in the meat section in supermarkets, available to the mainstream of consumers, not hidden away in the specialty corner.

Malte Stampe, CEO of Prolupin the VC backed manufacturer of a range of branded plant-based non-dairy products is following a similar strategy. “In our non-dairy brand, MADE WITH LUVE, we replace milk protein by lupine protein isolates in a process which allows us to create tasty and usable vegan alternatives on par with conventional dairy products in every respect. And this is why we aim to have our portfolio of milk, ice-cream, yogurt, dessert, pudding products and spreads positioned on the supermarket shelf next to traditional brands - to allow consumers and shoppers to compare and contrast, to choose the healthy option, even if they don’t “have to”.                                      

 

Big Food is also ramping up investment in innovation

While venture capital funds a new generation of foodstuff, Big Food is not taking a backseat, but ramping up activities and capabilities in a range of areas.

To keep on top of innovation, Big Food manufacturers are investing. Danone has just spent €10m on organic and plant-based food and beverages manufacturer WhiteWave. Meat giant Tyson was the first to invest in a plant protein competitor, acquiring 5% of Beyond Meat this year. At the same time, Tyson Foods joins the growing number of corporates such as General Mills, Danone, Kellogg and Tate + Lyle, who have set up internal or external venture capital funds to invest in start-ups developing technologies to sustainably feed the world.

David Atkinson, Managing Partner at Tate + Lyle Ventures feels evolving innovation models are key to the future of food as we know it. “Increasingly the larger food manufacturers are re-evaluating how they innovate to meet rapidly changing consumer tastes. This requires not only reviewing internal practices but also, more pertinently, how they reach out externally to find and evaluate new opportunities. A number of forward thinking companies are developing Open Innovation teams that engage with universities and research institutes, as well as individual entrepreneurs. Some are also complementing this with investment in their own or specialist external venture funds that can invest in early-stage businesses in the Food-Tech space and help them develop with funding, advice and expertise. We find that Open Innovation and VC funding are highly complementary for the corporate. Open Innovation can take a 1-2 year commercialization approach, whereas the VC takes a longer-term, 3-5 years view. Both provide the corporate an excellent window on innovation and fresh thinking in the food space.”

 

The move to cleaner portfolios

Companies such as Mars, Nestlé and General Mills have committed to phase out the use of animal flavors and colourings in many of their products, challenging their science and technology teams to replicate the taste and texture of many of their bestsellers and come up with clean alternatives. But even smaller companies like privately owned German branded meat and sausage company Rügenwalder Mühle are seeing the need to enhance their portfolios with sustainable products, launching a meat free range back in 2014. In a recent interview Godo Röben, General Manager, revealed “By 2020 we plan to be doing 40% of our business with vegetarian products”.

So, it looks very much like a make and buy innovation strategy will drive the market, creating demand and challenges for next generation food scientists, who will be used as internal and external resources.

How this impacts on Executive Search

We at Signium are seeing genuine appetite for alternative food businesses in the recruiting market. Top Managers in big food companies are looking for sustainability as well as the challenges of building new categories. These changes are drawing top talent, wary of start-ups since the 90s dot com crash, back into the start-up arena.

“Myself and the key people in my management team have been senior players in companies like Kraft, Mars and Unilever, but have been drawn to the opportunities and challenges of doing something genuinely new, good and different. By nature, we are all ambitious doers and entrepreneurs and in this new generation environment we can draw on our significant experience, but act without the constraints of a massive organization” agrees Malte Stampe, CEO Prolupin.

Global Regulation and Glass Walls

Well engineered, tasty, sustainable and affordable foods won’t, however, just walk onto our supermarket shelves.

Conrad von Kameke (who looks back on a 20 year career in policy, regulation and government / industry affairs in leading edge biotech companies Novozymes and Monsanto, as well as consulting boutique BioInnovators Europe) believes “as companies with innovative food technologies strive to expand into the major consumer markets, they will be faced with two intertwined challenges.

The first is meeting regulatory requirements. While this is table stakes, nevertheless it can be challenging - especially in biotech innovation, known for never-ending legislative cycles which keep raising the (regulatory) bar. Technology sceptics as well as policymakers, weary of hostile public opinion, are important drivers behind this seemingly perpetual trend.

The second, and more important, is building consumer trust. Companies tend to think that people will love their products as long as they are safe and have rationally compelling attributes. However, earning and building trust in an area that combines food and biotech is not a given. On top of a science-based approach to ensuring safety for human health and the environment, companies should equally consider a science-based approach to understanding consumer (and policymaker) reactions, and helping consumers (and policymakers) understand.

In light of the ominous GMO debates around the world – be it in Europe or in the US, be it in China or in India – this seems kind of obvious. But it is hard work. To date, no major company has made an obvious decision to actually also take a truly science-based approach to earning trustworthiness and political and consumer acceptance. I believe that even companies with great products will need to work much harder on these issues or fail to reap the rewards they probably deserve”.
 

Will these food start-ups really threaten Big Food?

It would seem that the food revolution is well and truly under way and that disruption in food is set to continue. But will a growing barrage of food start-ups really threaten the existence of established food companies?

Malte Stampe, CEO Prolupin thinks so: “Consumer behavior is dramatically changing to more healthy and plant-based alternatives, which should also be GMO-free and produced sustainably. This global mega trend cannot be stopped. We represent the antithesis of big food – addressing tomorrow’s consumer trends by providing healthy and sustainable eating and drinking options”.                                  

Whether these changing consumer attitudes remain fringe or grow to become mainstream as Stampe expects, changes in climate and population growth point to established cultivation and consumption patterns coming under real pressure. This opens the path for “new food” to find its way onto the supermarket shelf. Demands will continue to be made of big brands to rethink their obligations to their consumers and innovation will be key to success. Food is about to be disrupted and the need for strong talent pipelines in food innovation, science , regulatory and policy is set to reach new heights.  

 Contact Details: 

Ann Frances Kelly is a Partner in Signium Germany and Global Head of Signium’s Consumer Practice Group. If you would like to discuss this article or any of your Executive Search needs, you can contact her at frances.kelly@signium.de