The First Drop
Spinning the Cycle
By Jeffrey Klineman
Are we reaching the end of the massive food investment cycle? It depends on your lens. A recent report in the San Francisco Business Times, for example, noted that overall investment in the AgTech sector had dropped by 20 percent in the first half of the year, and was trending toward a drop of more than $1 billion, total. That same number set, however, shows that over the medium term, the amount of money pouring into the sector is way up – even with a projected drop from $4.8 billion to $3.6 billion this year, it’s more than seven times the size of investment in 2011, which was a relatively paltry $500 million. So, of course, AgTech isn’t the same as investing in, say, a coffee brand. Except that sometimes it is, and that’s where some of the confusion comes from, because the lenses get blurred. An investment in a brand like Blue Bottle isn’t necessarily AgTech – or its twin, FoodTech – but if that money put into the coffee brand came from something like Google Ventures and other tech funds (and, yes, in the case of Blue Bottle, it did), then it often gets rolled into that classification, often by less discerning observers and competitors. And there’s more blurring than that – plenty of companies like Beyond Meat, Ripple, Just Mayo, and more are as much consumer plays as they are FoodTech or AgTech. That blurring, some investors told me, tends to further the notion that entrepreneurs should expect tech-worthy valuations – and it also creates an expectation among other tech-focused investment pools that they, too, should be investing in food. They bring their own particular tech lens to the deal, potentially pushing valuations even further out of whack while they’re learning the food game. That’s not to say that I think tech investors should just stick to their e-knitting. Food and Tech platforms have been successful, say, when it comes to disrupting traditional retailing channels, and AgTech may fundamentally change the ingredients that go into our food. Both are powerful and vital and worthwhile – while sticking closer to the tech ethos that leads to the creation of new kinds of networks and distribution systems. 4 OCTOBER 2016 BEVNET MAGAZINE
But that doesn’t mean they are going to be good partners for CPG entrepreneurs. Seeing the food category in broad terms has brought energy and money into the space – but one complaint is that it isn’t always smart money. Some investors are willing to over-ante just to play in the game, one investor told me, which drives valuations even higher. Others say that underdeveloped brands get funded, at higher prices, because unsophisticated investors
sky is falling. I’m not – and I agree that the biggest overriding trend isn’t changing – sugar and calorie concerns mean that the big soft drink companies are continuing to shrink and retrench in the same way that other longstanding food categories, like pastas, soups, snacks, and frozen foods – and the ongoing declines of longstanding brands in those spaces mean that they have to make room for the growing brands of today.
Stores are big, and there’s a lot of real estate to cover and upend, and established companies are clear that they’ll rely on entrepreneurial ideas to bring their portfolios into the future. just want to get into the game. Brand owners might like the cash it brings in at the start, but there’s a long trip between being an enfant terrible of a startup and an established brand that changes the world. Right now, the object that many entrepreneurs pursue is simply selling to a strategic and getting out, a cycle that may change the lives of small businesses founders, but leaves the potential for little lasting impact on any part of the food system. Of course, the big companies painted themselves into this corner, and likely aren’t going to stop trying to buy their way out of it, but if they feel they’re getting ripped off by the transactions, then they will push back on cost (see: Dr Pepper Snapple) and private equity might not see the returns that they want, slowing investment overall. And the opportunity to fence your brand to a strategic may have slowed, as well. Since there’s been a fairly prolonged surge into the space, one investor pointed out, it means that some of the biggest have had time to make their bets, at least when it comes to grocery store stalwart categories that needed updating: certainly in the beverage space, juices, teas, dairy, alt-dairy, water, coffee, beer, even CSDs and sports drinks have received a muchneeded kick in the pants. While the categories are by no means through evolving, there has been an enormous amount of turnover in conventional grocery aisles. Another investor I interviewed wondered if I’m making an argument that the
Still, I’m not sure if the recent moves we’ve seen by some of the best-funded and most resonant brands starting to spread their wings is more due to the big companies getting better at integration, or the betting action starting to slow down a bit on individual brands. Look at Annie’s and Honest for examples of brands that are starting to move horizontally throughout the store and will likely have extended play across the next century. Stores are big, and there’s a lot of real estate to cover and upend, and established companies are clear that they’ll rely on entrepreneurial ideas to bring their portfolios into the future. And there are plenty of maturing, insurgent companies that can grow long term, as well: Vita Coco is an example of an independent powerhouse that has a lot of dry powder to acquire younger companies, and also is just beginning to explore how far it can extend as a brand. Monster, as well, remains independent, well-funded, and capable of being a brand house rather than an acquisition play. But playing in categories is different from playing in the great wide open of digital disruption – and the investors from that space have already faced a collapse of their own. They may move on as quickly as they came into the space. Meanwhile, the key is to consider how a company can grow regardless of where and when the money comes in. I’m not going to say the sky is falling. It isn’t. But atmospheres can change, and you have to know how to breathe.