Venture capiral
Two venture capital executives outline what they look for in new investments.

ANAHEIM, CALIF. — Emerging brands in the natural and organic marketplace have captured the attention of institutional investors in the past few years, a trend that was apparent at this year’s Natural Products Expo West trade show, held in Anaheim, Calif., in early March.

“The show was a good place to see firsthand how many of these larger companies with V.C. arms are looking for investments and trying to figure out how to play in this early-stage space,” said Ross Davisson, vice-president of operations for CircleUp.

CircleUp is an investment platform that connects food start-ups with venture capital firms. The company has partnered with Campbell Soup Co.’s Acre Venture Partners and General Mills’ 301 INC to facilitate investments in such brands as Back to the Roots and Rhythm Superfoods.

“When you think about the size of Expo West and how big it has gotten, so much innovation in food and beverage is happening in the natural food space,” Mr. Davisson said. “It’s interesting how the line has blurred between the natural food industry and the general food industry and how much of the growth and innovation is coming from that space.”

Bone broth, bean-based snacks and kombucha were among some of the leading trends Mr. Davisson identified at Expo West.

Kombucha is seen as an emerging trend in the North American beverage space.

“Kombucha is a space we’ve been watching for a while,” he said. “There have certainly been some breakout successes there… We think it’s not just a passing fad. We’re seeing a blossoming of that market and a second wave of companies coming out.”

PepsiCo, Inc., Purchase, N.Y., is one such company investing in the category. This past November the company acquired KeVita, a manufacturer of fermented probiotic and kombucha beverages.

Other beverage trends Mr. Davisson identified include drinking vinegars, cold-brew coffee, matcha tea and enhanced waters.

“We saw a lot of different takes on waters,” he said. “Maple water is one … but there’s also cactus water, honey water and other things like that.”

Additionally, a number of brands at the show featured snacks or pastas made from chickpeas, beans or lentils.

“There is definitely an interest in alternatives, instead of starch having a bean- or legume-based food,” Mr. Davisson said.

What makes a business attractive to investors? It’s a combination of brands, teams and distribution, Mr. Davisson said.

“We think about those three dimensions when we’re evaluating investments, and we think investors think about those three dimensions,” he said. “It can seem like on paper two companies are very similar if they both have chickpea snacks, but we’re looking at how does the brand position itself, and what is the social engagement with that brand?

“Does the team understand the space very well and (have) a demonstrated track record? Hypothetically, looking at two different companies, if one has a founder that has done this before, who started another healthy snack company, he or she is going to know lots of different distributors. He or she is going to know about co-packing and will know the challenges that come with early stage brands.”

CircleUp typically works with businesses that have up to $10 million in revenues.

“There’s a lot more you can sink your teeth into when you’re investing in a company that has $10 million in sales,” Mr. Davisson said. “Even at that stage, you can start to tell that this company, which grew 100% last year and has $2 million, is doing a lot better than this one that has $2 million that only grew 10% last year.”

General Mills gets aggressive

For 301 INC, the new business development and venturing unit of General Mills, Inc., the formula is relatively straightforward.

“Remarkable products with brands we think can stand for something and become growth platforms,” said John Haugen, vice-president and general manager of 301 INC, during an interview at Expo West. “Not necessarily defined by category but defined by consumer experience. And really talented management teams.”

The latest investments by 301 INC have included Farmhouse Culture, a maker of sauerkraut and fermented foods, and D’s Naturals, which offers plant-based protein bars and nut butters. The company also recently increased its investment in Rhythm Superfoods, a producer of kale chips and beet chips.

Farmhouse Culture Kraut Krisps
Farmhouse Culture is one early-stage investment made by 301 INC.

“If you put a filter on everything we’ve done, it’s a lot of plant-based,” Mr. Haugen said. “In terms of spaces, we’re continuing to look at high nutrient density, closer to real food, closer to source, really thinking about proactive nutrition in a differential way…

“I think we’ll continue to look at things that are more on the omni-channel side or across a number of different formats in retail, e-commerce — those are significant and interesting to us as well since we’re seeing such a migration in channels and how people are discovering and finding and buying.”

He added, “We haven’t invested in any unabashed indulgence brands. They have always been better-for-you brands. I suppose there’s nothing that says we couldn’t. Globally, we have a business called Häagen-Dazs. It ain’t a health brand.”

Rather, businesses that are attractive to investors offer products featuring some kind of functional benefit, Mr. Davisson said.

“I think that there’s this overarching trend of functionality,” he said. “It might be a cleaner label, still indulgent but playing loose with the term functional.

“The sense I get is there’s absolutely room for that indulgent stuff, but people like a different twist on it. It’s still fat and sugar, but maybe it’s a healthier version of fat and sugar, like a coconut milk ice cream.”