‘There’s going to be a lot of burnt capital…’ Navigating the ‘hand-wringing phase’ of alt meat investment
So what is the mood in the market amid weakening US retail sales of meat alternatives, grim P&L figures from a couple of high-profile publicly listed brands, and mixed messages from big CPG players (Kellogg says it remains bullish about the long-term prospects of its soon-to-be spun out $350m plant-based business despite some recent issues, while Maple Leaf Foods plans to re-allocate some resources away from plant-based back to conventional meat)?
‘We are talking about a monumental shift in how people think about food’
At Unovis Asset Management, which has invested in several early-stage players in the broader alt protein space spanning dairy, egg, and meat & seafood alternatives from MyForest Foods (mycelium-based whole cuts) to The Protein Brewery (biomass fermentation) to cell-cultured meat (Mosa Meats), the message is keep calm, and carry on, says managing partner Dan Altschuler Malek.
“Everybody expects results today, and if that doesn’t happen, people become very binary and talk about success or failure, but we are talking about a monumental shift in how people think about food.”
"I think valuations got to a point where they did not make sense, given the margins and the capital requirements of a food company.' Dan Altschuler Malek, Unovis Asset Management
‘Some people are looking at this whole movement based on the stock tickers of a handful of companies’
Stepping back and looking at the global picture (both Unovis and Big Idea Ventures invest in firms in this space around the world), the trajectory is clear, he argued.
“I'm looking at Brazil, Mexico, Thailand, Israel, Australia, New Zealand, Europe, and there are more products on shelves every year and a huge shift has begun… but some people are looking at this whole movement based on the stock tickers of a handful of companies.”
That said, he added, “I think valuations got to a point where they did not make sense, given the margins and the capital requirements of a food company.
“I think now that some of the market craziness is going away and it’s allowing for more sound, financially responsible investments to happen, while at the same time, there is a stronger understanding by a broader set of investors that margins and operational efficiencies in food companies matter.”
‘It feels a bit like the more established brands are putting their hands up and saying this is the best we can do’
At Big Idea Ventures, which has also invested in a series of players in plant-based, fermentation-based and cell-cultured products around the globe, Mastrobuoni is also convinced that we “have to change the way people eat,” but says the limitations of current offerings in some markets, such as meat alternatives, have become more apparent at a time when budgets are tightening and shoppers are focused on value.
“From a product innovation perspective, from a taste perspective, things have not really improved over the past two years.
“It feels a bit like the more established brands are putting their hands up and saying this is the best we can do, which doesn’t work when you’re trying to prove a segment and grow penetration rates. And if your hero SKUs don’t taste good enough, people are not going to move to other categories.”
And while many large CPG and protein companies, meanwhile, have placed big bets on plant-based categories, they always have the option to pull back and retrench at times such as this when some less engaged consumers that dipped into the category in the early months of the pandemic have pulled out again, he pointed out.
“The legacy food companies are already making enough money from the old stuff so they're saying we'll have a plant-based brand because we need to have one, but we can pull back anytime we want."
‘When you get to the core of it, you're making food out of a list of publicly available ingredients, so what you're really building is a connection with the consumer’
So what distinguishes winners from losers in the alt meat space? And are there really meaningful differences in technology between players that have raised modest amounts and those that have attracted the megabucks?
“As you move from novel technologies to commoditized food, which is where plant-based meat is right now, brand is all you have,” claimed Mastrobuoni. “There's no IP, there really isn't. When you get to the core of it, you're making food out of a list of publicly available ingredients, so what you're really building is a connection with the consumer.
“The price gap [between animal and plant-based meat] is actually closing, yet you didn't see people really move to plant-based, so there has to be an issue with taste.
“So now I'm sitting here as an investor saying, what can I invest in that will really help these companies make better products? Should we be looking at electro-spinning technology, different texturizers, what can we do?
“So we invested in a company called Cocuus out of Spain because they are doing manufacturing technologies that work with plant based and cell-based that mimic more closely the mouthfeel and the stryation that you get with meat.”
The smart money is in ‘enabling technologies, systems, inputs’
The smart money, he said, is on “enabling technologies, systems, inputs. The brands have become very crowded, so people that come to us and say I have a new plant-based burger, I say OK good luck with that.
“You have to move more upstream, look at the inputs, the picks and shovels, the technologies that will solve the challenges that the branded companies are facing.
“So we’re looking for the IBMs [of meat alternatives], companies that have the basic skeleton of a solution that they can go sell to everybody in the market, but where they really make their money is customizing it to each customer… the scaffolding companies, the companies that are perfecting texturization, ingredients solutions, reducing the reliance on single plant based proteins, seed genetics, crop enhancers, the non-sexy stuff.
“We have to think even to the farm gate, how do I incentivize growers? And a lot of VCs just aren't thinking that far up. We are.”
[The smart money is on] “enabling technologies, systems, inputs. The brands have become very crowded, so people that come to us and say I have a new plant-based burger, I say OK good luck with that.' Tom Mastrobuoni, Big Idea Ventures
The global picture: Food is a national security issue
It’s also important to think with a global perspective, he added.
“You’re seeing places in Asia do well because they need it; then GCC countries [Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates] are dealing with an explosion of diabetes and food is also a national security matter, as we’ve seen with the pandemic and Ukraine. You talk to security analysts and they'll tell you we’re nine missed meals away from rioting in the streets.”
He added: “I remain confident there's a place for alternative proteins, especially when you look at developing and resource-constrained nations vs the US, which right now has a bountiful protein supply. I think Africa has a tremendous opportunity around alternative proteins, for example.
“Germany has seen probably the best growth in plant-based year over year. European consumers make purchasing decisions for different reasons than US consumers do, so they are more sustainability focused, much more focused on animal welfare. There's also legislation in the UK and other places around packaging, and a different cultural mindset.”
'My concern is people who aren't as well educated in the spaces that we and some of our brother and sister firms are, they are writing very large checks because they feel ‘We missed plant-based, we missed cell-based, so precision fermentation is the next thing, let’s go write a $100m check to someone,’ so there’s going to be a lot of burnt capital.' Tom Mastrobuoni, Big Idea Ventures
‘Companies that rely on consumers to make purchasing decisions to help them achieve their sustainability goals, it’s not going to happen’
And with that in mind, consumer survey data should be viewed with some caution, he observed. “My favorite is when people say, ‘We asked consumers if they would be willing to pay more for sustainably-sourced products and 40 or 50% say yes.’ No one wants to be the jerk who says no, but when you pull their loyalty card data, look at what people actually buy.
“Companies that rely on consumers to make purchasing decisions to help them achieve their sustainability goals, it’s not going to happen. We have to make better tasting products with fewer ingredients that are more affordable.”
‘You have food companies acting like tech companies, and public investors treating them like food companies’
Looking at the investment climate, he said, while there has been an issue with food companies being treated like tech companies, with unrealistic expectations of rapid and exponential growth, now we’re in a situation where “You have food companies acting like tech companies, and public investors treating them like food companies, which make money, have free cash flow, positive gross margins, and EBITDA.
“And when you're asking traditional retail investors to invest in a new food company, it makes it really difficult when quarter after quarter, you see evaporating gross margins, continued losses and flat revenue.
“So the question then becomes, is it an investor education problem, that they don't really know what they're investing in, or is it that these ‘new food companies’ need to be food companies and sacrifice a bit of rapid innovation for supply chain optimization, gross margin expansion, all the things that investors used to see from food companies?”
‘We're starting to see companies with more experienced food industry people on the team’
That said, he observed: “We're starting to see companies with more experienced food industry people on the team… and they may not attract huge technology valuations, which to be transparent, is a problem if you’re an investor as you’re looking at writing checks to companies earlier and earlier, taking on more execution risk in order to get valuations that provide more potential upside.
“It’s really hard to make an investment and say I'm going to make a venture-like return on this, investing into a nine-figure valuation for a company that has seven figures of revenue. That's really hard to do.”
'My favorite is when people say, we asked consumers, 'Would you be willing to pay more for sustainably-sourced products?' and 40 or 50% said 'Yes.’ No one wants to be the jerk who says 'No," but when you pull their loyalty card data, look at what people actually buy.' Tom Mastrobuoni, Big Idea Ventures
‘You have companies raising hundreds of millions of dollars to build pilot facilities’
He added: “And then you have companies raising money to fund capex projects for which venture capital… even private equity money, is not the right capital to use for that, but they cannot access [other forms of capital] because there's nothing to underwrite against.
“So you have companies raising hundreds of millions of dollars to build pilot facilities. And I worry that investors are investing other people's capital to fund research in areas that may not prove vital.
“My concern is people who aren't as well educated in the spaces that we and some of our brother and sister firms are, they are writing very large checks because they feel ‘We missed plant-based, we missed cell-based, so precision fermentation is the next thing, let’s go write a $100m check to someone,’ so there’s going to be a lot of burnt capital,” predicted Mastrobuoni.
Cell cultured meat: ‘We have to make sure the infrastructure is there’
As for the next wave of alt meat, he said, products combining textured vegetable protein and cell cultured fat could go some way to addressing some of the flavor and textural challenges in meat alternatives if you are going after a meat-eating audience (such products will likely not resonate with hardcore vegans or vegetarians even though no animals were harmed in the production process).
“Fat is the part that provides so much of the flavor of meat and is much easier to make than [cell-cultured muscle tissue].”
As for cell-cultured meat in general, he added: “When you look at resource-constrained places such as Israel, Singapore, GCC, developing parts of Africa, cell-based meat is really interesting, because if you have distributed bioreactor farms that have a small footprint, they can create local, fresh protein that can address those small community needs.
“But we have to make sure the infrastructure is there to support the bioreactors. You need a reliable electrical grid, you need reliable cold storage, strong safety regulations, all of those things.”
‘There’s a huge manufacturing challenge around plant-based protein’
But whether it’s cell-cultured, fermentation-based or plant-based meat, he said, “We have to solve the supply chain challenges. There’s a huge manufacturing challenge around plant-based protein. There's just not enough manufacturing capacity.
“There's a 12 to 18 month wait time to get newly manufactured equipment and it's not only because of its unique equipment. All this equipment is stainless steel because it's food production and there's a steel shortage.
“We’ve talked to co-manufacturers and for the life of me I can't understand why someone hasn't just spun up a plant-based division, because the demand is there.”
Ultimately, he said, “there's a huge opportunity to make a positive impact on the environment, on health, on food availability, on food deserts, on nutrition. We just have to keep trying and keep pushing forward, and that's why we keep investing, because we have to change the way people eat.”