By Ingrid Fung and Jennifer Place, Finistere Ventures
Over the summer, we launched a new series of shorter, in-depth digital posts to examine key trends and topics across several agtech niches and turned our attention first to the next wave of evolution in crop protection & input management. We followed that work up with an examination of the role that agtech investment can play in feeding 10 billion people without increasing greenhouse gas emissions. In the pursuit of more thoughtful discussion and discourse around the most exciting segments of our sector, we've turned to the timely topic of foodtech (a sector into which Finistere will be investing in the near future) for the latest post in hopes of sparking further conversation and reflection upon the future of investment into food and agriculture.
The trends shaping the food & beverage space over the past decade have largely represented the industry’s response to growing consumer scrutiny and demands on the provenance and quality of their food. Driven by the overall consumer trend of aligning purchasing decisions with personal values, consumers are increasingly selective about what they add to their carts in response to mounting social, environmental and health concerns around certain commoditized categories, particularly targeting animal-based products. This has paved the way for products that boast claims regarding lowered environmental impact, improved health or ethically/socially responsible production rising in popularity, despite often representing more expensive options.
This increased consumer interest not only in flavor and quality, but also in production-related aspects of food, has already spurred the growing adoption and development of emerging tech such as traceability solutions, functional ingredients for health, and plant-based replacements for animal products in food production. Concurrently, consumers are embracing digitization of food procurement and distribution thanks to increasing convenience. This has resulted in a number of innovations in e-commerce and meal kit delivery platforms that bring the convenience of online shopping to grocery, all while reducing waste.
As mounting pressure from changing consumer preferences continues to squeeze industry incumbents, the accelerating need for innovation across the food & beverage supply chain helped the foodtech space to capture nearly $9 billion in total invested capital during 2018. Foodtech has outstripped agtech in terms of both total investments as well as exit activity in recent years. In contrast to foodtech, the agtech sector garnered some $2.3 billion in aggregate during 2018 and kept pace this year, with $2.0 billion invested year to date.
Conversely, deal activity in the foodtech space was significantly lower than that in agtech. Last year 390 foodtech companies completed funding rounds globally, compared to 522 financings closed by agtech startups. The five foodtech companies that raised the most capital in 2018 (Instacart, Swiggy, Meicai, DoorDash and Miss Fresh) made up around half the capital invested in the sector that year. As the foodtech sector matures, we expect investors to continue to make selective and outsized bets into startups that have managed to scale in capital-intensive segments like e-commerce and meal kit delivery or R&D-heavy companies in the novel ingredients and alternative proteins space. However, this should not obscure other emerging areas of opportunity. With this in mind, the team at Finistere has undertaken a more granular approach when evaluating trends across foodtech.
As Finistere begins to refine our investment focus for Finistere Ventures Fund III, it has become clear that foodtech is a sector that we cannot ignore. As we did with agtech, our team has worked to clearly define and refine our thinking around the sector before sharing our views with the broader ecosystem in the hopes of enriching the discussion and collaboration around the foodtech segment as well. Backing out foodtech from food + tech Despite all the excitement and investment into the food sector, the space is crowded with companies that possess relatively similar business-models and are differentiated by branding and with relative success underpinned by scale and execution through quality of service or product. Truly unique technological developments have been rarer in this segment thus far. At some $6.4 billion across 185 rounds last year, roughly two-thirds of invested capital this past year was deployed across food delivery or e-commerce platforms in a race to win over the consumer in their search for more convenient, higher quality and local food options.
Within Finistere we define foodtech as a broader category, which encompasses disruptive technologies that seek to improve the nutritional value, freshness and experience of food. As such, one of Finistere’s first investments in the space was in Plenty Ag, supporting the thesis that consumer desire for fresh, high-quality produce in urban environments would disrupt the supply chain and be a driver for innovative indoor farming systems. Another investment we have made in this segment is Farmer’s Fridge, a company retooling the vending food chain by direct sourcing from farmers and using AI to plan inventory to reduce food waste and increase profit.
Looking ahead, we expect that health, environmental and animal welfare concerns will continue to disrupt the supply chain, creating new farming and food paradigms. Furthermore, global growth in openness toward plant-based diets is driving consumers to seek dairy and protein alternatives, requiring innovation across new plant-based formulations and associated ingredients or entirely new production processes, such as lab-cultured protein. As consumer demands continue to drive the need for innovation in food, we anticipate that the foodtech sector will continue to grow and mature at a rapid rate.
Foodtech, as we have defined it at Finistere Ventures, is loosely comprised of three major subsegments:
1. Consumer foodtech
2. Industrial foodtech
3. Supply chain & procurement technologies
It is important to note that as a technology-focused fund, our taxonomy focuses on technology-differentiated food companies (as opposed to CPG or branded food). Share of global VC deal count (%) in foodtech by subsector for 2018 Share of global VC deal value (%) in foodtech by subsector for 2018
Industrial foodtech: companies that are mainly focused on improving the efficiency, quality or sustainability of food production processes, with a B2B lens. This category encompasses the discovery or commercialization of novel processing & packaging solutions, targeted last year for 18 funding rounds and $129 million in aggregate value. It also importantly includes technologies around food safety, as well as novel ingredients, whether functional or industrial, targeting improvements in taste, texture, freshness or appearance of food or providing alternatives to traditional ingredients like flour or sugar. In 2018, this was still a fairly nascent space overall, capturing only $194 million of VC capital on 45 funding rounds across a number of early stage companies trying to crack complex issues like food safety, cost effective production of fermented ingredients or proteins and shelf life extension. Examples include:
Consumer foodtech: companies that focus on the commercialization of new products marketed directly to the consumer yet rooted in data or technology. This includes innovations across alternative proteins, including plant-based and lab-grown sources like cultured meats or alternative dairy products as well as, more broadly, novel consumer health products associated with gut health or nutraceutical benefits. Together, these subsegments commanded $714 million in VC investment on 52 rounds. Finally, we cannot forget the massive role that delivery & e-commerce plays in responding to consumers looking for convenience, i.e., meal and grocery ordering, as evidenced by the fact that almost 90% of consumer foodtech capital has poured into this last bucket at more than $7 billion in combined value across nearly 250 VC financings. Setting this aside though, it is also worth highlighting that 2018 saw a peak in activity for alt. protein and dairy with Impossible, Ripple and Beyond Meat, Kite Hill and Perfect Day raising meaningful rounds. Examples include:
Supply Chain & Procurement: companies developing technologies aimed at transforming, automating or improving the food supply chain. Supply chain technology includes business models improving transparency through food traceability, along with those companies specializing in the reduction of food waste or the development of procurement software such as B2B marketplaces. In certain instances, companies seek to leverage or upend the use or hardware throughout the supply chain, with hardware-enabled offerings for food monitoring and distribution like next-gen vending machines, smart ovens or automation of food prep, storage and processing. Taken together, activity across this category followed consumer food with $1.7 billion across 100 financings for companies operating in this subsector last year. Examples include:
Although consumer foodtech companies have received much of the media attention along with an outsized share of venture funding, supply chain & procurement companies have commanded a sizable share of investment as well. In 2018, funding rounds for companies operating within the supply chain & procurement segment of the foodtech sector represented almost one of every five deals closed. It’s pretty apparent that while meal delivery and e-commerce solutions have been more rapidly adopted by the broader consumer market, investors are also interested in the longer-term opportunity to disrupt the food supply chain itself.
It is fair to say that foodtech is no longer an emerging category, with over a dozen “unicorns” including names such as DoorDash, Instacart, Rappi, BigBasket, Impossible, Beyond Meat and JUST, which are closely followed by many other rapidly growing companies transforming their respective categories, like Plenty, Apeel, Ripple and Soylent. Foodtech startups have also piqued the interest of a broad universe of corporate acquirers who are turning to external innovation to keep pace with changing consumer demands and have also captured the attention of public markets, demonstrated by the Beyond Meat IPO earlier this year. At Finistere, we are excited to explore the other side of the “farm to plate” journey, as it continues to be reshaped by disruptive business models and technology capturing new value throughout the supply chain.
Catch up with Finistere Ventures for additional industry insights.