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Private Investors Are Helping Up-and-Coming Food Brands Grow

June 7, 2020
Once viewed as a steady but unspectacular investment, food is attracting interest from a variety of private investors.

As food nourishes people, money nourishes food. And the source of that nourishment is undergoing a fundamental change.

As an investment, food has long been seen as staid and steady but unspectacular. The two major funding structures were private ownership, often by the company founders, or public status. The latter generated stock usually considered safe but unlikely to grow much, often valued more for dividends than for any growth potential. The thinking was that people have to eat, but they’re unlikely to eat much more, or differently.

But recent history has upended that notion. Food is seen in some quarters as having the same, or greater, investment potential as durable goods, or even tech – and it’s attracting private investment as a result. According to one estimate, venture capital alone – a form of private investment that’s mostly limited to startup companies – has invested nearly $10 billion in food companies since 2013.

Private investment has touched all points on the food chain, from the bottom to the top. 3G Capital, a Brazilian private equity firm, took over two of the most iconic names in food processing when it bought H.J. Heinz in 2013 and merged it with Kraft Foods in 2015.

Other notable private investment acquisitions include Hearthside Food Solutions, whose startup in 2009 was funded by one private equity firm, and was sold to another in 2014 and to still another in 2018; and Keurig Green Mountain, which was acquired by JAB Holding Co. in 2016, which engineered its merger with Dr Pepper Snapple Group in 2018.

Heather Gates, national emerging growth company practice leader for Deloitte, says investing in food is part of a trend of venture capital and other private investors broadening their horizons.

“Venture investing has gone from a technology vertical to across almost every single industry you can think of,” Gates says.

Going back to the 1990s, private investors tended to concentrate on technology companies, especially internet-based ones, says Hank Cardello, a food industry consultant and commentator.

“Back then, a lot of the investment was going into the tech industry,” Cardello says. “It was perceived as higher growth versus the food industry, which historically has been more staid, more steady growth, but slow compared to what you can gain out of getting into IT, etc.”

But that view of food is changing, Cardello says: “Now, all of a sudden, even compared to some of their other options to invest in, [food] is looking quite attractive.”

Keeping up with expectations

A big part of that changing dynamic stems from consumers’ changing expectations for food – and the industry’s success, or lack of it, in meeting those expectations. To put it simply, consumers are much more focused on healthy, “natural” eating than they used to be. That broad imperative has branched out into an array of fast-changing manifestations: low fat, low salt, unprocessed foods, plant-based meat substitutes, and on and on. 

Keeping up with them has proven to be quite difficult for many of America’s biggest, oldest food companies. This has created an opening for smaller, nimbler companies, which in turn has created a demand for private funding.

TeaSquares and Coco Five are two of the companies in the portfolio of Spiral Sun Ventures.

Numerous private investor companies have emerged as specialists in the better-for-you space. One of these is Spiral Sun Ventures, whose motto is “Investing in Healthy.” Spiral Sun’s investment portfolio includes Coco Five, a line of coconut water created by a head trainer for the Chicago Blackhawks; TeaSquares, “energy snacks” infused with small-batch organic tea; and Skinny Souping, a line of “all-natural, healthful soups.”

“Spiral Sun Ventures was our first investor and is an incredible partner as TeaSquares continues to grow,” says Jordan Buckner, TeaSquares’ CEO and co-founder. “They invested at a very early stage a few years ago, and their funding was instrumental in allowing us to build out our manufacturing facility.”

Michael Kaplan, founder and managing partner of Spiral Sun Ventures, says he is helping fill an opening in the market left by the inability of large food companies to develop healthy products quickly.
“If you look at the research, they’re losing billions of dollars a year in revenues and large pieces of their market share to these smaller, innovative companies making healthier products, because that’s what consumers want,” Kaplan says.

“The large companies can’t innovate very well themselves, because they have quarterly earnings. Innovation takes a long time, and they don’t really have time and energy to devote to innovation teams to incubate these healthier products over five or seven years.”

Kaplan sees it as a chance to do well by doing good. “It happens to be a really good space to be in economically as well as an important thing to do for society, to help promote better health and wellness.”

Cali’flour, one of the first products to use cauliflower for pizza crusts, received funding from CircleUp Growth Partners.

Trevor Rechnitz, partner with CircleUp Growth Partners, agrees. CircleUp is a venture capital fund that, like Spiral Sun, specializes in small companies that produce better-for-you foods (as well as personal care and other products). Its investments include Cali’flour Foods, a pioneer in pizza crusts made with cauliflower; Koia, a line of plant-based protein shakes; and Nut Pods, which makes coffee creamers based on nut milks and other plant-based ingredients.

Like Kaplan, Rechnitz sees a niche left by big-company inertia. “You have stale incumbents, like Kraft Heinz and General Mills, that are not investing in R&D, do not have structures set up to innovate, and basically are set up to cede shares to these smaller, emerging players that are able to move quickly.”

Rechnitz says food and other CPGs are naturally attractive as investments simply because the sector as a whole is so big. Trends disrupting the sector include convenience, personalization and health and wellness. In addition, food companies share synergy that is not available in sectors like technology or consumer electronics.

“The environment is very, very, very data-rich because a lot of these channels are similar and scalable,” he says. “The supply chain and overall value chain is much more similar for food companies than it is for technology companies.”

When CircleUp considers investing in a company, it looks at the category for its particular product line: whether it is dominated by a few incumbents, what the company’s category share looks like, how that is trending and where the category as a whole is going.

“The key question that we’re trying to answer whenever we look at a consumer company is, what problem does this solve for the consumer?” Rechnitz says. “How is this product different in a way that matters to people, and in a way that matters to enough people to make a business really, really large?”

Uniqueness wanted

Venture capital firms like Spiral Sun and CircleUp usually invest in startups or in companies that are not long past the startup stage. Most of these are high-risk/high-reward investments; they’ll endure eight or nine failures to hit one home run. Basically, they’re looking for people with unique ideas.

“Their belief is that they’ve found an entrepreneur, a gem, somebody who’s got an amazing idea,” Gates says. “They’re there to provide financial capital, provide guidance, provide help through a network of portfolio companies or other VCs that have networks and relationships that they bring to the table to enable them to be successful. But they are highly reliant on great entrepreneurs, great leadership and great teams.”

In Pursuit of Funding

The list below is a good place to start if you're looking to grow your product. 

Food Processing Top 100 Companies with their Venture Capital programs

Non-Category Specific Venture Capital

Female-focused funding

If you'd like to be added to this list, please contact us

Another source of investment in new companies is “angels,” or individual investors. These are simply rich individuals who put up their own cash to help fund a new food company. Some of them just see this as a way to make money, some are relatives or friends of the entrepreneurs, and some are motivated by belief in the product’s mission.

For instance, Beyond Meat, the pioneering plant-based analogue meat company, had a slew of angel investors that included Bill Gates and Leonardo DiCaprio, simply out of conviction that the world would be better off with alternatives to meat.

Cardello sees angels as taking more of a role in startup financing. “Angel investors have taken over the original space that venture capitalists were in,” he says. “VCs were almost purely startup, and now they’re shifting a little further downstream.” There are still some venture capital firms that will jump in early on something they like, he says, but for most part the angels are providing the early seed money, with venture capitalists coming in afterwards, after they’ve seen some proof that the company’s concept is viable.

Established values

Private equity firms have an entirely different focus. They tend to invest in established companies, sometimes long-established ones. Often these companies, for whatever reason, are experiencing difficulties, but that isn’t always the case, Gates says.

“There are many instances where the entities are not in trouble, and they just provide expansion capital or other portfolio companies that they can work with,” she says. Sometimes cross-portfolio synergy is possible.

“A lot of times, the private equity guys will have a portfolio of companies that may be complementary to the entity they’re investing in. So bring them into the fold, and all of a sudden you’ve got an entity that’s much broader in scale,” Gates continues. “Maybe there’s a concept where you can add the companies together but the back-office synergies can create operational benefits.”

However, especially when an acquired company is doing badly, a private equity firm often will try to turn it around by cutting unnecessary businesses, units, divisions and/or personnel. Sometimes this works, sometimes it doesn’t. Perhaps the most spectacular example of the latter was Kraft Heinz.

3G Capital, a private equity firm based in Brazil, bought H.J. Heinz Co., in conjunction with Warren Buffet’s Berkshire Hathaway, in 2013. Two years later, they bought Kraft Foods and merged it with Heinz, promptly taking the new company public.

Once that happened, 3G Capital closed factories, cut thousands of jobs, and instituted “zero-based budgeting,” which basically makes managers justify every purchase anew every year. All this cutting worked at first, driving the stock price up 32%.

But Kraft Heinz ran into the same problem as many companies owned by private equity firms: Among the departments cut was research and development. Few new products were hitting the pipeline, and consumers were starting to turn against the highly processed center-store staples that had sustained Kraft and Heinz for decades.

Kraft Heinz suffered a spectacular implosion in early 2019, when its stock suddenly plunged 62% from its high since the merger, dropping below $35 a share (it was about $31 at press time.)

“We bought brands and we thought they would last forever,” 3G co-founder Jorge Paulo Lemann was quoted as saying in the Wall Street Journal. “Now, we have to totally adjust to new demands from clients.”

Buying control

The Kraft Heinz experience is an example of how private investors often change the companies they invest in – for good or ill.

Investors will usually seek a degree of control, ranging from a seat on the board of directors to outright ownership. This degree varies, but in general, angel investors don’t seek much control, if only because they usually put up only a fraction of the seed money a new company needs. Venture capitalists are more likely to seek significant degrees of control, especially for companies in their early stages.

Rechnitz says that CircleUp will typically ask for a seat on the board of a company it invests in.

“We’re looking to be a resource in whatever way is most effective and most helpful for the company,” he says. But “at the end of the day, we are fiduciaries for our limited partners, and so we do need an element of control that comes along with the check size that we write.”

If the company has issued stock (even though probably isn’t yet publicly traded), CircleUp will invest in enough shares to establish voting rights that will give it veto power over moves like acquisitions, allow it to make sure there isn’t too much debt on the books or excessive salaries for the founders or other officers, and take other precautions.

As companies mature, the degree of control that investors expect goes down. Private investment often goes in rounds to match the stages of a company’s growth, with less control available at each round.

“The further on you go, you care less about control and you care more about the viability of the business and its prospects for seeing daylight, either through a strategic buyer or through an IPO,” Cardello says.

End games

A strategic buyer or a public offering of stock are the two basic goals of almost all forms of private investment. There are exceptions, with some investors staying in for the long term, but most of them want to have an end game in sight where they cash out, either through an acquisition by a larger company – a “strategic buyer” – or by taking the company public with an initial public offering.

The former is far more common, especially with small food companies. Gates estimates that 80% to 90% of venture-backed companies end up exiting through an acquisition by a larger company. An IPO will probably yield more money, but IPOs require financial reporting and the ability to cope with stricter regulations, which will add to the cost of operations.

Strategic buyers can work in stages, buying a minority stake in a promising company with the option to buy it entirely later. “So they can give you training wheels,” Cardello says. “Maybe access to their distribution system or marketing or something like that.”

Some major food companies are systematizing that process. They’re establishing their own venture capital funds, providing seed or early-stage money to promising new food and beverage companies, and acquiring the ones that fulfill that promise. See the sidebar above for a list of Top 100™ companies who fund or help fund venture capital programs. 

Probably the first to take that approach was Coca-Cola, which started a venture-capital unit in 2007. It ended up acquiring several of the companies it funded this way, including Honest Tea and Fairlife milk. General Mills has funded more than half a dozen companies through its 301 Inc. unit. Other big food companies that have established venture funds include Kraft Heinz, Tyson Foods and Kellogg Co.

“From a small business owner’s standpoint, that’s a nice way to go, because at least you have an exit strategy with somebody who has some interest in building it along the lines of your mission,” Cardello says.

Private investment is increasing in importance as a funding vehicle for the food industry, for both new and established companies. Done judiciously, it has the potential to give food companies both the money and the flexibility they need to succeed.

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