Opinion: Darwin, mega trends and tech drive food and beverage venture investing – FoodBev.com

Mark Lynch, Oghma Partners

Mark Lynch, partner at Oghma Partners, discusses the food and beverage investment landscape and the subsegments garnering healthy interest from crowdfunding sites, angel investor networks and early-stage venture capital firms.

A review of early-stage investing in the food and beverage industry over the period 2012-2022 shows a step change in activity from 2015 onwards as more companies came forward for investment. From 2018 onwards, there was a step up in the size of investment as, in part, businesses matured and the need for capital expanded along with this growth.

The overall period reflects a healthy start-up culture in the UK food and beverage industry, as well as a keen appetite from investors to back businesses and brands in the sector. Some of the most notable investments, by size, have been a function of mega trend and tech businesses tapping investors for growth capital.

Looking forward, we see some of these trends continuing to drive funding, albeit a decline in the overall outlook for the economic environment is likely to reduce levels of activity and fundraising, as we move into 2023.

2012-2014 saw an average annual total of 60 food and beverage companies receive early-stage funding from a variety of sources, including crowdfunding sites, angel investor networks and early-stage venture capital firms.

From 2015 onwards this activity stepped up to 150 p.a. and has remained at this level, or higher, until now. It is difficult to pinpoint the exact reasons for this change; however, we believe that it is linked to an increased appetite for risk on the part of investors, assisted by low returns elsewhere (ie. bank interest rates) and importantly the higher degree of accessibility of interesting investments.

Investing in innovation

While a notable beneficiary of investor interest has been Brewdog, in some senses, it is an outlier amongst the larger (50m+) fundraisers over the last ten years in the regard that it has a traditional business model.

The other notable fundraisers of scale (which in total made up over 25% of all funds raised over 2012-22), were, in our view, leveraging new business models.

Thus, for example, Gousto (meal kits) and Butternut Box (pet food), which together raised over 360m are direct-to-consumer delivery businesses. Along with companies like Simply Cook, Mindful Chef and Tails they are offering internet-ordered, bespoke, products delivered direct to the door of the consumer.

They broke from the traditional consumer model of shopping at the supermarket. They have leveraged the internet and using a tech stack, are able to present product variants to consumers based on historic choices and desires surmised by the algorithms embedded in the ordering software. These businesses were born from the internet and software changes of the last 20 years and wouldnt have existed in their current form without these developments.

A new wave of investment opportunities

While direct-to-consumer businesses have been prevalent in terms of volume of fundraisers, being the second most popular by volume of deals in the period 2018-22, there has been a very strong bias of investment for one particular business. Gousto has been the whale of the sector, scooping up a total above 300m, over 70% of funds raised; it is also probably the only unicorn in this group with an estimated valuation in excess of 1bn.

Technological developments have assisteddirect-to-consumer businesses and likewise have helped the agribusiness area, which was the fifth most active sector for fundraising (by volume of deals) in the second half of the period under review.

The notable company in this area, again taking up circa 90% of funds raised, is GrowUp a vertical farming business that has raised over 100m from two funding rounds. GrowUp appeals to investors through its use of renewable technology, developments in vertical farming and the desire to produce food more efficiently and closer to market.

The final business to mention demonstrates the leveraging of the meat-free trend. Our analysis shows that this segment of the food and beverage space was the third most active by volume and value of deals in the second half of the decade. Consumer concerns around healthy eating and animal welfare have driven consumer interest in this area. In the UK, Meatless Farm has raised almost 100m from investors as it has taken part in the meat-free land grab that we have witnessed in recent times. We estimate that this sum represents almost one-third of all funds raised in this segment.

An eye toward the future

We can conclude that while a favourable investor environment has helped to raise funds in the industry for early investment, equally important has been the emergence of a handful of leaders in the direct-to-consumer, agribusiness and meat-free subsegments, which have leveraged technology and consumer mega-trends.

The above theme continues with the latest iteration of this trend being Ivy Farm, a cultivated meat business that raised 36m earlier this year. These businesses have grabbed a large slice of the equity on offer and therefore probably have given themselves the best chance for success.

Darwinism, it would seem, holds true in the early-stage food and beverage investment space as it does elsewhere in life.

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Opinion: Darwin, mega trends and tech drive food and beverage venture investing - FoodBev.com