Venture capital inflow shows food sector promise
Dec. 13, 2016
It is difficult to imagine a more powerful indicator of the dynamism and promise of the food and beverage industry than the emergence of venture capital funds targeted specifically at the sector. Recognition of this potential extends beyond the investment community.
With the industry’s largest and more mature companies seeking new avenues for growth, many have established such venture funds in pursuit of innovation and to avoid the high multiples involved in acquiring such businesses as Annie’s and Applegate Farm later in their development.
Beyond the high cost of acquisitions, there are other reasons why venture capital investing has become a preferred avenue toward innovation in food and beverage. Most notably, the process allows manufacturers to test new product concepts outside of their higher-equity stables of brands, brings less risk to the innovation process and may ultimately lead to less expensive acquisitions.
Food and beverage companies active in the venture capital market include Nestle S.A.; The Coca-Cola Co.; General Mills, Inc.; Kellogg Co. and others. In some cases, the creation of a fund may reveal the pursuit of strategic shifts. For example, Tyson Foods, Inc., one of the world’s largest meat protein providers, recently created Tyson Ventures L.L.C., a $150 million fund that will focus on opportunities in alternative proteins, food waste and food insecurity and improving the supply chain through technology.
The fund’s first investment was a 5% stake in Beyond Meat, a California manufacturer of meat-free burgers and single-serve meals. The move may be viewed as recognition by Tyson Foods that the greatest future growth in protein lies beyond its core markets for chicken, beef, pork and prepared meals.
The Campbell Soup Co. entered into a partnership with Acre Venture Partners earlier this year to create a $125 million fund. Denise Morrison, president and chief executive officer of Campbell Soup, said about the company’s participation in the fund that defining the future of food requires new approaches and new business models.
The fund reinforced Ms. Morrison’s statements when Campbell Soup invested in a personalized nutrition meal delivery service called Habit (see related story on Page 36). What stands out about the investment is how it differs so widely from Campbell Soup’s current business mix. Habit uses personalized data generated from a number of indicators, including DNA testing, to create customized meal plans. As part of the program, Habit will prepare the customized meals and deliver them as well.
The venture fund approach also suggests a belief that new brands may incubate more effectively in small, nimble businesses versus under the stewardship of the largest consumer packaged goods companies. A study published earlier this year by the consultancy A.T. Kearney highlighted how small- and mid-size food and beverage companies have seen sales increase at the expense of the industry’s 25 largest companies. The top 25 food manufacturers in the United States, which include companies with annual revenues of more than $4 billion each, have ceded 300 basis points to small- and medium-size competitors since 2012 and have grown revenue at 1.8% compared with 11% to 15% for smaller companies, according to the report.
A similar study published by the market research firm I.R.I. in partnership with the Boston Consulting Group shows small companies, those with less than $1 billion in sales, and mid-size companies, those with sales between $1 billion to $5 billion, accounted for 46.4% of total C.P.G. sales in 2015, a 2.7% gain since 2011. The gain translates into an $18 billion shift in the $670 billion C.P.G. market during the past four years, according to the study. The shift has taken place as more niche companies are establishing themselves in specific categories as viable competitors to some of the largest C.P.G. companies.
Whether any of the early-stage investments prove scalable and brings the growth companies are seeking remains to be seen. A great positive is that so many companies are willing to embrace ideas and approaches outside of their traditional business models. It shows an openness that is required to identify ideas that may be considered truly innovative.