Funding is one of the biggest obstacles in starting any company. Venture capital investors (VC’s) are the traditional funding resource and it helps to understand what attracts them in new companies. Traditionally, VCs loved “pure tech” companies, which were not complex enterprises — think three guys in a garage developing an extensible software product — where not much could go wrong.
With the growth of consumer internet, VCs warmed up to investments outside of pure tech like in food delivery operation, which introduced them to the potential and mammoth size of the food market. Soon followed investments in food delivery service companies such as Seamless and the recent wave of Uber for X… . Next VCs turned their investing focus towards food planning and preparation startups (e.g. BlueApron).
Mainstream VCs have began to invest further beyond pure tech, in food science companies that are solving problems in well defined large markets. Here, I will focus on these type of companies, and explain what makes them attractive. My goal is to give an overview of the “food tech” landscape and help our team understand the lens through which most professional venture investors look through so we best position a venture in this burgeoning space. I end this doc with some questions that could help us define what we want to achieve and an appendix about the caffeinated beverage market. Please let me know if you would like me to add more color about anything.
Part A: Context. Current Landscape of Food Market Space
New Era in the Food Industry
“The food industry is ripe for disruption. For too long the industry and research surrounding nutrition have been dominated by self-interested traditional food companies that have left consumers confused, sick, and unhappy.” Chris Dixon, Partner, Andreessen Horowitz
The successful public offerings and continual positive performance of companies such as Seamless, Chipotle, Shake Shack, WholeFoods and the growth of private companies like Blue Bottle indicate that innovative companies in this space can achieve high growth in revenue that is akin to software companies and so they could command similar valuations and be funded in similar investment rounds.
The First Wave of recent food industry disruptors were mostly retail start ups such as: WholeFood Market brought the niche “Health Food” experience to the masses Chipotle and fast casual chains that brought healthy, high quality, low cost food They went after the mass market in a very deliberate and contrarian way. Tech VCs were not investors in these companies.
The Second Wave, in which we are in, includes many companies that take advantage of shift to Mobile. These startups solve operational inefficiencies and use expertise in logistics to provide consumers with higher quality, lower cost, convenient access to food/service/products.
Food Tech trends Food and beverage related companies attracted $1.1 billion in venture capital worldwide in the first half of 2014. In 2013, the sector gobbled up $1.59 billion in venture funding, a 39% increase from the $1.14 billion in 2012.
The “meal-kit” companies and Investors less afraid to “touch” food “Meal-kit” or food planning businesses comprise almost 15% of the overall food-related funding. They operate like subscription services, deliver to customers homes, send kits of pre-measured ingredients for a recipe to be cooked at home. These companies are “tech” companies and are built on logistics but they also source ingredients, package And deliver it. Since emerging in 2014 this sector is saturated with investors who are attracted to these companies growth and the total gains available to the winning companies are so large. In the US, the total spending on home-delivery and mail-order food alone has steadily increased since 2000 and now exceeds $25 billion annually.
Company Valuations – In general, price/sales (or price/revenue ratio) is the multiple most commonly used in young high-growth companies. It only requires knowing one financial statistic, revenue, that is normally pretty accessible – even for small private companies. If you know the price/sales ratio for comparable private companies, getting the valuation is multiplying the company in question’s revenue by the comparables’ valuation multiple. According to “All Revenues Are Not Equal” by Bill Gurley, General Partner at Benchmark Capital, companies are very different, and therefore necessarily have different values, even if they have the same revenue. There are variables such as market growth, market demand, market competitiveness, profit margins and marketing prowess that differ from company to company. Companies in the food space tend to be be valued at much lower multiples than software startups. Investors assume that companies in software space can grow exponentially since they need very little output to grow, compared to the relative high cost outputs of food companies (raw material, space, fulfilment production, advertising, shelf space, etc’).
Tech Valuations vs. Food Tech Valuations There is widespread discussion that valuation multiples that are appropriate for a tech company financing shouldn’t be applied to food businesses, especially “pure food” companies that make fresh or packaged foods and beverages. Too-high valuations and expectations could have a negative effect on future deals. But for now, the involvement and nascent interest by tech investors in food startups means “more good concepts are getting funded.
The difference between Food tech and “Pure Tech” Traditional investors argue that entrepreneurs and investors make a mistake not realizing the profound differences between building a pure tech company and a food-related one. Namely, it is very hard to win and very easy to lose a “high-frequency” customer if you make, deliver or produce food.
The most sought after companies in the food space currently don’t make food but rather facilitate its preparation or delivery. However, it looks like investors have warmed up to companies that count food as at least one component of their product
On Demand Delivery: Prepared Food: Seamless/GrubHub – Seamless received $51 Million in 3 Rounds from 5 Investors. Grubhub received $84.1M in 6 funding Rounds. It went public in April 2014 and traded on the first day at a valuation of about $2.67 billion, or about 19 times last year’s revenue
EatStreet – Raised $12.1 Million in 3 Rounds from 8 Investors. Saw 300% average annual sales growth with 15,000 restaurant partners in 150 cities Postmates: Delivery. Raised $80 million in the last round of funding led by Tiger Global Management on June 25th. $400 million valuation Caviar – Raised $15 million in 2 rounds from Tiger Global and Andereseen Horwitz. Acquired by Square 8/2014 Uber Eats – internally investing in a 10 minutes delivery service Munchery – Raised $124.9 Million in 7 Rounds from 23 Investors Food Hospitality:
KitchenSurfing – $19.5 Million in 3 Rounds from 15 Investors On Demand Delivery: Groceries: Instacart – $274.8 Million in 5 Rounds from 13 Investors (20% growth monthly) AmazonFresh and eBay – are also investing internally and developing products in this category
Companies that “touch” food in their product creation cycle (listed below) don’t seem to be treated differently from the more “pure tech” companies listed above. Investors seem to see the major upside potential:
BlueBottle Coffee -$115.7 Million in 3 Rounds from 16 Investors. In 2012 the founder disclosed that revenue has jumped an average of about 50% from 2011 to between $15 million and $20 million Sprig – Delivers locally-sourced, sustainable lunches for $10 in 20 minutes. $56.7 Million in 4 Rounds from 22 Investors. Early investors include Greylock Partners Maple – $26 Million in 2 Rounds from 9 Investors
LiveBlends- Y Combinator; $745 Thousand in 3 Rounds from 25 Investors Juicero – Raised $89.9 (some say $120) Million in 3 Rounds from 7 Investors Planned/prepare meals (Subscription): PlateJoy – $1.7 Million in 2 Rounds from 10 Investors Blue Apron – $193 Million in 4 Rounds from 15 Investors. $2 billion valuation (June 2015). Delivers c. 3 million meals a month, up from 1 million in November. At $10 a meal, that translates to a monthly revenue of about $30 million HelloFresh Raised $193.5 Million in 4 Rounds from 6 Investors Plated – Raised $21.4 Million in 4 Rounds from 14 Investors
Part B: The Next Frontier of Food Tech – Food Science companies that go “Beyond X”
“We must invest in humane foods . . . that avoid the industrial food chain. [Humane foods] can achieve 5X improvement in efficiency through innovation without compromising taste” Vinod Khosla
In thenext wave of companies the “tech” element is the combination of science with the Silicon Valley ambition that aims to bring massive improvements in human health, wellness, and performance across nutrition, fitness, and medicine.These “#worldpositive”start-ups are seen as having a competitive edge over traditional food companies.
Some common characteristics of the leading companies in the space: Their ideas LOOK IMPOSSIBLE/BAD early on. The premise is non-consensus or goes against convention. founders have courage (not give up at adversity) and genius
They are contrarian, but they have MEANINGFUL INSIGHT on the market (founders are “secret holders”)+ they know how to deploy a successful strategy Solve problems no one thought was a problem or people think are unsolvable Chose products in markets with large potential upside – these companies aspire to be the next Kraft, Uniliver, Oscar Meyer, Yum Brands Use science to revolutionize an entrenched product or its supply chains. They make them more efficient or re create them entirely in a lab Can quantify their efficiency or set quantifiable goals
Ready to educate consumers: get them comfortable with the idea of harmlessly engineered food. The public will understand that the food industry is changing and old technologies are not necessarily the best to achieve the same results Grand Mission: These companies’ mission statements are grander than the previous waves and see their potential as far reaching for humanity Fixing a massive inefficiency creates massive goodwill, “cult” following, affinity group that evangelizes (think early Uber, Tesla, OneSolar) The product they launch needs to be obscenely [in fact or perception? — obscene is quite a qualifier!] better than what they are trying to substitute
Investments Specialty food “Beyond” companies have driven the growth of investment in food startups. Investors poured $83.4 million into the sector during the third quarter of 2014, the most in any quarter since 1992. This space has continued to attract more money in 2015.
Some overview on the best examples from this space:
Soylent Soylent seems to have the right product/market fit. They focus on being a food replacement rather than a meal replacement. A food replacement needs to have all your nutrition in one product. They don’t care about taste. Product: a convenient, affordable, and nutritious replacement for unhealthy meals. It is still a nutritional experiment and hasn’t been declared medically safe yet Target market: techi. particularly popular with people without detailed backgrounds of personal fitness and dieting. Marketing: Inverts the Big Food business model, spending nothing on advertising. The ‘marketing plan’ is to invest in its online community and in peer-reviewed scientific studies.” Distribution: solely through e-commerce
Valuation: the company is profitable. Raised two rounds: $1.5 million seed funding round with return investor Lerer Ventures. Long term plan:Improve current product. Explore algae as a cheaper/sustainable protein source. Dramatically reduce the price of Soylent from the current $3 per meal. Possible new products: Soylent bars, baked goods Fundraising/Valuation: $20m in 4 rounds. Latest valuation is $100 ymillion Investors: Andreessen Horowitz, Lerer Ventures, and Index Ventures Some success factors: Soylent identified an underserved market and is catering to them. Like Underarmor which started selling what previously amounted to women’s underwear, to men and GoPro.
Hampton Creek Mission: Reach a broad consumer base with access to substitution products that move away from current food-production methods, which are often inhumane, inefficient and damaging to large areas of land. Create healthier and better-tasting than egg-based and other products Products: Cookies, cookie dough, a mayonnaise-like spread and other products. Launching biscuits, crackers and pasta that feature a plant-based protein. Notes: Mayonnaise market totals $2 billion annually Distribution: Retail; It sells its food in 15,000 locations, including in Walmart, Costco, Kroger and Safeway Raise/Valuation: Total $120 Million in 5 Rounds from 25 Investors; $90 million raise in the Series C round at a valuation of $190 million pre-money. While the deal makes Hampton Creek one of the most valuable in the startup food sector, it is a step down from earlier discussions. Total venture backing is $120 million Investors: Khosla Ventures, Horizon Ventures. Marc Benioff, who founded Salesforce.com; Eduardo Saverin, who co-founded Facebook Inc.; and return investors Mustafa Suleyman and Demis Hassabis, who co-founded artificial-intelligence company DeepMind Technologies Inc Barrier to entry: science, distribution, propriety, be first and own it, Brand recognition Strategy: Mass market, get into food services, commoditized white label. be the first. own it.
Beyond Meat Mission: create mass-market solutions that perfectly replace animal protein with plant protein. Products: Developed products that provide the same texture and taste as beef and chicken that are made entirely from plants Distribution: retail
Valuation: Undisclosed. 4 rounds Investors: Kleiner Perkins Caufield & Byers joined the Series D, along with DNS Capital, WTT Team: a team comparable to one at a biotech or pharma company. It is largely made up of molecular biologists and biochemists, as well as some physicists; only a few members of his staff have a background in food science or have culinary training. Investments, S2G Ventures, The Obvious Corp., Bill Gates and Morgan Creek Capital Strength: Producing protein that is ten to twenty times more “calorically efficient” than how animal protein is produced. The US beef industry alone is worth $88 billion. Barrier to entry: Science, distribution, proprietary. Be the first, own it. Brand recognition Strategy: Mass market, get into food services, commoditized white label. be the first. own it.
Another reason Beyond X firms are a compelling investment topic Introducing a new food category is risky as it takes a lot of time and money. Big food firms prefer to acquire innovative products rather than develop them internally.
The Hybrid Logistics + Science companies: These companies are building vertically Integrated logistic companies that rely on science as much as on logistics:
LiveBlends – (Y Combinator), raw smoothie delivery service creating a Keurig-like smoothie maker without the messy cleanup. Designed by a team of MIT engineers. The machine is a self-cleaning blender that can process fruits, seeds, veggies and nuts within 30 seconds.
Juicero- (stealth) Founded by former Organic Ave. CEO. The big idea that investors are buying into is that Juicero will change the way fruits and vegetables are delivered Mission: creating the freshest juice in the world with a contraption that’s sort of like a coffee Keurig. The fruit, hand-picked before you drink it, is shipped in a pouch. Juicero could own its own farms, and pick the fruit fresh before delivering it They would like to create a whole agricultural arm to the business, which hints that the company plans to grow and supply the fresh produce around the world Raised/Valuation: $90 (or $120 million) since 2014 in 3 or 4 rounds. Valuation? Investors: Kleiner Perkins, which housed the early-stage, Campbell’s Soup. Google Ventures
An example of a marketing company going after a big market (supplements)
ALOHA Founded by former nutritionists, health coaches and members of Google and Gilt, They bring expertise in marketing, advertising, fundraising, deep relations within the investment community Mission: disrupt supplement industry. Develop a “wellness platform” with many products and redefine the way consumers purchase nutritional supplements by bringing a higher level of transparency to the health and wellness industry Strategy: Create products to complement real food (and an actual diet). Combine “scientific research with ancient traditional wisdom” to develop products together with doctors, scientists, trainers, yogis, nutritionists, and holistic health practitioners. Marketing: Content strategy with an online magazine and lots of online ads and having the products available in retail Distribution: subscription and retail business model
Raise/Valuation: $4.5 Million in 2 Rounds from 17 Investors Investors: Khosla Ventures, Sherpa ventures
Example of a marketing product that relies on pseudo science to sell a “lite” version of “Beyond Coffee”
BulletProof Executive Background: Began as a blog that focuses on “bio hacking” Fitness, Nutrition, Active Lifestyle. Focuses on “scientific” “biohacking” formulas individuals could apply to boost their health, athletic performance. The BulletProof Coffee product promises a superior experience with better sourced ingredients and scientifically proven health benefits. The science hasn’t been proven.
Distribution: started online and expanded to select coffee shops Revenue: has grown 700% since last year, opening a standalone Bulletproof coffee shop in Los Angeles, the city with the most website visitors Products: the first product in 2011 was the coffee beans. It now offers a variety of products in its “Upgraded Self” online shop, including low-toxin coffee (Asprey claims mycotoxins, or mold toxins, play a role in obesity), MCT oil (Asprey calls his “Brain Octane Oil”), sleep induction mats, heart-rate variability sensors, and an $895 “Focus Brain Trainer” sensor headband. 20 employees.
BulletProof Coffee claims: Better for you: Delicious; Improve the effectiveness of coffee, making it jitter-free and eliminate spikes and crashes Science: Starting your day off like this turns your body into a fat-burning machine promotes healthy weight loss Eliminates hunger pangs Improved mental focus and brain power Asprey claims that his Upgraded beans undergo a secret, proprietary process that all but eliminates mycotoxins. He also claims that mycotoxins are the reason coffee is typically bitter.
PART C: PROJECT CHACO What is the product?
An effective, balanced, natural ‘pick me up’, appetite suppressant, non addictive, antioxidant. scientifically proven, long release, good taste, high quality, healthier and more effective consumable than available stimulants. It must have strong community element, a core constituent group, clear message, well defined large market, fast growth. Questions:
What does Beyond Supplements mean? Why is it ‘beyond stimulants’? Since it’s a blend of reishi mushroom, cacao and l theanine WHY is it not another matcha, or matè, or coffee? What is it? A refrigerated beverage? Powder? Soylent doesn’t make any claims right… It’s just beyond food. This is saying it’s good for concentration. Then you want to see some research? For investors: How large is the potential upside? Efficacy. What are the effects of the formula? Can we measure it? Who do we want to resemble: more a Soylent than a BulletProof/Hampton Creek? Production costs – what are the ingredients, who makes them? Is it a Supplement, Stand alone, Substitute?
What’s the target Market, it’s size and potential? Side effects? Ideal dosage? Ideal use case?
Like a natural adderall that gives an 8 hour balanced focus enhancing buzz A significant and impactful impact on mood and performance Focus attention on the positives (compared to the negatives on Adderall, caffeine):
Appendix
The Coffee Market
After crude oil, coffee is the most sought commodity worth over $20 billion in the US. and is the largest food import Americans consume 400 million cups of coffee per day, equivalent to 146 billion cups of coffee per year, making the United States the leading consumer of coffee in the world More than 3/4 of Americans drink Coffee
59% of Americans say they drink coffee each day, while 71% reported partaking at least once per week Coffee Consumption Coffee represents 75% of all the caffeine consumed in the United States American consumers spent on average $21.32 on coffee per week When deciding where to purchase their favorite coffee, consumers rated the taste of the coffee as a key buying factor 72% of coffee drinkers take their coffee with dairy or non-dairy creamer, which means 28% drink their coffee black 30% of coffee drinkers sweeten their coffee with sugar or some other form of sweetener 55% of coffee drinkers would rather gain 10 pounds than give up coffee for life 52% of coffee drinkers would rather go without a shower in the morning than give up coffee 49% of coffee drinkers would rather give up their cell phone for a month than go without coffee Coffee Trends
27% of consumers own single Cup “Kuering” like machines Consumer awareness to Kuering is 75%, and “definite” or “probable” intent to buy within the next six months is up to 12% Age profiles for coffee consumers is shifting: overall consumption skews older – espresso-based beverages are significantly more popular among those 18-39 An overall decline in non-gourmet consumption among those 18-24 The growing “out-of-home” retail market dominated by Starbucks and Dunkin with a combined market share of $50 billion in 2011
General Coffee Facts Coffee farms are the economic livelihood of over 25 million people Primary ground coffee brands for the at-home coffee segment include Folgers and Maxwell, based on sales. Folgers is owned by J.M. Schmucker and accounted for $852.4 million in 2012 The retail value of the U.S coffee market is c. $46 billion, with specialty comprising c. 51% volume share but nearly 55% value share On the retail level, roast and ground coffee still took the largest sales share with 36% of retail sales in 2013 Tea
People under 30 are increasingly drinking more tea than older generations. The most likely explanation for rising tea consumption is the drink’s perceived health benefits Green tea is proving especially popular across the nation among health-conscious consumers Coffee’s dominance may gradually erode over the next few years
Energy boosting product –General Global sales of non-coffee energy boosting products – foods and beverages positioned primarily around energy boosting claims – grew by 12% to $29 billion in 2012 Energy drinks account for $25.5 billion in retail sales
The vast majority of products sold utilize caffeine as their main energy source Caffeine’s ubiquity and the increasingly publicized negative side effects has led to growing unease among both consumers and regulators There has been a growing push by legislators from the federal all the way down to the municipal level, to institute sales and formulation restrictions on high-caffeine products, such as energy drinks and energy shots Simultaneously, consumer interest in caffeine substitutes is growing daily, especially in products positioned as natural or herbal/traditional there is a growing view that added caffeine is unnatural and potentially dangerous. As such, consumer interest in whole-food stimulants is increasing [according to?]
Caffeine Alternatives Popular caffeine substitutes such as green tea extract, green coffee bean extract, guarana, and yerba mate actually rely on natural caffeine content to provide energy. This reality seems lost on many consumers. The resulting, very commonplace misperception that the energy these ingredients provide is inherently different from that of coffee or caffeinated energy drinks and shots B vitamin products and ayurvedic ingredients like ashwagandha are viewed as potential standalone energy supplements