The OECD defines 'food systems' as a complex network involving all the elements, activities, and stakeholders associated with food production and consumption. These systems have a profound impact on our society, influencing our economy, politics, environment, and health. However, our current food systems face significant challenges. Inefficiencies and negative impacts are leading to a global call for change.
With world population projected to hit 9.1B by 2050, a staggering 70% increase in global food production will be required. This implies that we need to generate more food in the next three decades than we have throughout human history.
A term coined by Bain & Company, which defines the phenomenon of when global income rises, so does the demand for protein. But if the rate of protein production remains constant amidst population growth, a protein crisis awaits us by 2028, with protein demand surpassing available supply.
More than 345M people suffer from food insecurity today, a number that's doubled since 2020. The issue isn't just about increasing food production but ensuring its equitable distribution and access too.
Food systems contribute up to a third of global human-induced GHG emissions, and 80% of global water consumption and almost 90% of global deforestation. On top of that, over a third of all food produced globally goes to waste each year. These are alarming facts and paired with the sustainability goals of 2030, we often question how can this be solved?
The informed consumer today prioritizes more than just food quality. Factors like health, environmental impact, and animal cruelty are now integral to food choices, and many are willing to pay a premium for healthier, sustainable products.
Now, more than ever, it is obvious how technology and innovation have a crucial role to play in transforming our food supply chains. Foodtech, as outlined by Forward Fooding, leverages technology and innovation to enhance efficiency and sustainability across the food supply chain.
From IoT, AI, satellite imagery, drones, 3D printing, these innovations offer potential for transforming food systems by increasing production, improving distribution, reducing waste, enhancing food security, as a way to scale the growing demand for food in the most sustainable way possible.
Iberia, renowned for its rich gastronomic heritage and quality food products, plays a critical role in feeding Europe due to its strategic location and well-established trade networks. Providing context, the European market size for food consumption is projected to reach nearly $2 trillion by the end of 2023. Iberia's contribution to this market is estimated to be 7.8%, equivalent to $156 billion.
Interestingly, if we further analyze Iberia's contribution to European food production, both in agriculture and food processing & manufacturing, it is estimated to be around 7.4% for both sectors. In other words, out of the $636 billion agriculture output in Europe in 2023, Iberia contributes $47 billion. Similarly, for food processing and manufacturing, Iberia's contribution is $22.4 billion out of Europe's total of $304 billion (excluding drinks). To close the loop, Spain (along with the Netherlands) accounted for the largest intra-EU trade surpluses in 2021 by €16.5 billion from agricultural, fisheries, and F&B products.
Spain has the second-largest utilized agricultural area in the EU, spanning 23.9 million hectares. This accounts for approximately 15.2% of the total agricultural land in the EU. Portugal on the other hand has an extensive coastline with 1,793 kilometers and its privileged location encompassing mainland Portugal and the archipelagos of Madeira and the Azores, possesses one of the largest Exclusive Economic Zones (EEZ) in the world. Despite ranking as the 16th largest country in Europe by land area, its maritime size sets it apart as the 5th largest in Europe and the 20th largest globally. As a result Portugal and Spain have a robust fishing culture, on top of a large aquaculture industry (Spain accounted for 25.4% of the EU's aquaculture output).
In essence, Iberia's geographic advantages and robust agricultural and aquaculture sectors, reinforces the importance this region has to contributing to European food production. Yet, it has yet to see a large-scale adoption of technological and innovation and play its role in transitioning to a more sustainable food system.
Lastly, while we have reservations about considering Iberia as a favorable market for the sale of these opportunities. However, our curiosity lies in exploring Iberia as a platform wherein technology companies can leverage its rich legacy of food production, coupled with a slower pace of technological adoption, to strategically capitalize on opportunities that cater to a significantly broader market. For instance, companies in areas such as BioTech foods and potentially an Agritech company could find an ideal environment in Iberia to thrive and flourish.
Thanks to Dealroom´s and Five Seasons Ventures 2022 Foodtech report, we are able to withdraw the following takeaways for VC funding in Europe 2021 to 2022:
In 2022, European foodtech startups in total raised €5.9B in 2022. While this figure is impressive on its own, it actually represents a 36% negative growth since 2021. This decline is mainly attributed to a decrease in appetite to invest in the food delivery companies due to the rise in competition, difficulty in sustaining growth, and long-time horizons to reach profitability. As a result, investments in food delivery fell by 64%, but it still remains the most funded category in foodtech in 2022 with a total of $3B.
However, when investments in food delivery are set aside, the foodtech sector actually stands out as one of the few sectors that experienced funding growth between 2021 and 2022, with only real estate outpacing it.
One of the winning categories is alternative proteins, which saw a remarkable spike in funding by 75% reaching $950M in 2022. This comes to no surprise considering the protein paradox we've previously mentioned and the recent swell of new funds popping up to invest in climate change solutions. However, we also believe there is an additional contributing factor to the surge in investments in alternative proteins, which is the absence of a clear market leader. Until regulation opens, the sector is essentially a waiting game taking place backstage. This dynamic contributes to FOMO build up among investors who are eager to back the potential market leaders of tomorrow.
Despite challenges related to product quality, consumer adoption, scalability, and achieving price parity, the possibility of investing in a technology that could fundamentally change how we consume food in the future is too enticing to ignore. So, while everyone waits for the regulatory landscape to become clearer, production costs to reduce, infrastructure to scale, and large-scale market validation, investments continue to flow into this promising sector despite unclear outcomes scenarios.
Agritech is another interesting observation, despite slower funding comparatively to other categories (37% YoY), it attracted $1.3B, making it the 3rd most funded foodtech category in 2022. This is particularly intriguing considering the exit multiples for this category have not been great so far, but we will delve more into that below. Meanwhile, investors have become more bullish in B2B Marketplaces with an increase of 63% in funding, although the total amount was merely $290M. (Seeing this datapoint reminded me of two Point9 investments: Rooser and Wikifarmer, both B2B marketplaces in food).
2022 saw a significant shift in investment distribution along the supply chain, with more funds moving upstream to the primary and secondary stages of production and processing. These two stages combined, attracted $3.6B in funding, and have been demonstrating a very stable YoY growth pattern. Conversely, the distribution and consumption stages suffered substantial fluctuations over the years. These stages saw spikes in investment during 2017, 2019, and 2021, contrasted by dips in 2018, 2020, and most recently in 2022, where funding went from $7.2B in 2021 to $3.2B in 2022 (-58%)!
Our assumption is that the historical underfunding in the primary and secondary stages could be attributed to several intertwined factors such as the inherent resistance for tech adoption in the agricultural industry. Additionally, innovation in food production and processing has been constrained by heavy regulation, particularly so in Europe.
Industry-wide inertia also plays a significant role here. As transactions in the primary and secondary stages are typically B2B, there is less inherent pressure to innovate or disrupt in order to enhance aspects such as speed, convenience and productivity, as often seen in businesses that transact directly with consumers. In fact, many established players within these stages have made significant investments in their current operations, leading to high switching costs that ultimately slow the pace of technology adoption. Additionally, we also believe the lack of funding targeting upstream solutions was significantly overshadowed by the hype of investing in downstream solutions, which was heavily fueled by the opportunities covid brought to the market.
Another shift in the funding landscape has been the decline in B2C investments by 56%, while investments in B2B increased (although only modestly) by 9%. This shift is also seen in the uplift of combined enterprise value in B2B companies by 97% in one year, while B2C decreased by 22%. As funding, and consequently technology, shifts upstream and gravitates toward B2B models, we hope this creates more meaningful incentives and the right foundations to genuinely address issues of scalability and sustainability, at the very start of food production.
Corporates are already capitalizing on the Foodtech revolution and more and more we are seeing strong, big and well-established players in the food industry become interested in European Foodtech startups is not only a symptom of the pressure on food systems to innovate, guided by the main industry stakeholders, but also of momentum. Foodtech is no longer a trend, but an opportunity, since we are already seeing all industry agents (i.e. corporates, venture capitals, startups…) aligning their interests. For instance, we saw two agri and food giants, Cargrill and ADM, participating in Innovafeed´s $250M Series D round, hoping to not only reduce their dependence on traditional protein sources for their products, but also making real commitments to deliver them sustainability as demand increases. Another curious move is JBS positioning itself as an “protein company” (versus the largest beef distributor in the world) through its investment in a Spanish lab grown meat company (BioTech) and building what it hopes to be the world’s largest cultivated meat facility in Spain. JBS has long come under scrutiny for its ties to deforestation. Brazil is now the leading exporter of beef, much of which comes at the cost of large swaths of the Amazon rainforest
Other leaders from various sectors are actively participating in the foodtech revolution. Telco Swisscom joined forces with xFarm, a farm management app offering integrated connectivity and precision farming solutions. Kitchen appliance Vorwerk invested in Better Dairy (UK plant-based dairy products) and Fresco Cooks (Irish connected cooking platform). Branding and packaging company Avery Dennison, participated in Modern Milkman (UK return-and-reuse grocery delivery service) Series C.
We have to admit that assessing foodtech exits hasn’t been easy, however the general consensus is that most exits by count have been acquisitions, while the few IPOs that occurred, have dramatically outsized in value (Deloitte). The US for example saw 4 IPOs and their median size was $3.1 billion. Most of these IPOs have been attributed to food brands, while the agritech space seems to be lagging behind. An interesting example that caught our attention was the acquisition of Danish BioPhero by FMC in 2022. BioPhero specializes in pheromone-based biocontrols for the crop-growing industry. After raising $17 million in a series A funding round the previous year, the company was acquired by FMC for $200 million in 2022.
What stroke us about this exit, is that BioPhero, unlike many other agritech companies, was able to build a product that seemed to quickly gain market demand, as FMC stated it expected $1 billion in revenues generated from pheromones and pheromone-based insect control products as early as 2030. However, the acquisition by FMC cut short the potential for further growth and success for both the company and its founders, leaving us curious about the underlying reasons. This example underscores the complexities and considerations involved in funding scientific-based companies, where strategic acquisitions can sometimes limit the long-term growth potential that investors hope to achieve in VC.
An interesting piece of research from Finerva, looking at 25 companies in the Global X AgTech & Food Innovation ETF (KROP) - managed by Mirae Asset Financial Group - sheds some light on this. You can read their report here, but long story short, the median EV/Revenue multiples have been decreasing as low as 1.4x in Q4 2022 largely due to supply chain disruptions and high inflations naturally impacting margins.
Putting our thoughts into order regarding exit outcomes for VCs:
One of the critical challenges is the inherently low-profit margins in the industry. The capital and labor-intensive nature of agriculture and food production contribute to thinner margins, affecting revenue multiples and, by extension, exit multiples.
These sectors are particularly susceptible to supply chain disruptions and operational risks. For example, as mentioned before, Covid was the perfect example that shows how quickly disruptions can affect productivity, profitability, and by consequence, valuations.
Market trends and prevailing investment flows also significantly influence the exit landscape. Increased investments in downstream solutions can lead to inflated valuations, raising concerns about a potential market correction that could affect exit multiples negatively.
Lastly, the timeline for potential exits is naturally longer due to the slow pace of technology adoption in agriculture and the lengthy process of regulatory approval in food engineering. This prolongs holding periods for VCs, which can impact returns and exit strategies.
Nonetheless, we are still deeply passionate and extremely bullish about the space :)
Our food supply chain has recently been subjected to some of the most extreme and polarizing stress tests imaginable - from covid lockdowns leading to a demand surge and subsequent supply chain shortages and disruptions, to geopolitical upheavals that forced a global realignment. Coupled with rising interest rates and unprecedented inflation levels, returning to previous norms is simply not feasible. The industry is on the cusp of transformative change, a change that will happen whether we're prepared or not. As VCs, we should strategically position ourselves to navigate and capitalize on this seismic shift.
As investment trends shift from B2C to B2B, we believe this will be key in providing the right incentives for a restructured B2B landscape that addresses scalability and sustainability in the very early stages of the supply chain in order to stay competitive.
Despite the sluggish pace of agtech adoption, farmers demonstrate a willingness to embrace innovative solutions, as found out in this McKinsey Report. After their global survey to row and speciality crop farmers, they found out that 39% of these are currently using or planning to use agtech products in the next two years, as 43% seek new products to boost yields and 22% plan to modify their purchasing and vendor strategies to improve profitability and manage financial risks. In addition, variations exist across farms with different sizes and regions. Indeed, large-farms and European farms are the most willing (81% and 62% respectively) to adopt agtech solutions.
Regulation changes can create significant opportunities for FoodTech due to their potential to shape the operating environment and market dynamics. Indeed, it can create a favorable environment for FoodTech by addressing safety concerns, stimulating innovation, unlocking new market segments, and shaping consumer demand. By understanding and adapting to evolving regulations, food technology companies can leverage these opportunities to drive growth and make a significant impact on the future of the food industry.
Our planet demands it, and if we as VCs are not the ones taking the risk so that we can capture some of that value creation, and be part of the shift, who will?
Since last year we have been debating what are the opportunities that excite us, what are the fundamental problems that we would like to see addressed to scale food production in the future in a sustainable way, but also what are the opportunities that can give us a meaningful return, and how do we align our fund’s lifecycle with the market dynamics of this industry. The truth is, we still don’t know.
What we do know is that we will most likely refocus our priority beyond that distribution and consumption as we have been exposed to them through our investments in Keatz, Katoo, LGFM and Rice. Indeed, we are excited at Kfund to see a change in investment flow towards upstream B2B models, since these better allow for i) larger ACVs paired with long or multi-year contracts to counter the slower pace seen in this industry ii) higher switching costs indirectly causing the company to stick longer to the solution, and so give it enough time to see ROI and ingrain these solutions that contribute to more sustainable practices and iii) cross-selling possibilities that might provide the right incentives for the entire industry and supply chain to adopt these innovations.
As we reflect on the complexities and dynamics within the FoodTech space, it's undeniable that we stand at the threshold of a new era. The challenges facing us are multi-faceted, involving population growth, food insecurity, environmental pressures, and evolving consumer preferences. While our food supply chains have been tested by unprecedented stresses recently, these pressures have only amplified the urgent need for transformation. Navigating this landscape requires a strategic, forward-thinking approach, an ability to redirect incentives, and a recognition that technology adoption in agriculture is not just a passing trend, but a vital component of our future food systems.
Although the VC landscape in food has its unique intricacies, the promise of making a lasting impact on the sustainability and scalability of our food supply chains is compelling. Shifting funding trends from B2C to B2B models, favorable regulation changes, recent willingness for tech adoption in agriculture, all suggest that the time for meaningful investments in this sector is now. We continue to grapple with the alignment of market dynamics with our fund's lifecycle, exploring opportunities that not only excite us but also promise meaningful returns.
In conclusion, revolution in food production is not a matter of if, but how, and we, as VCs, are uniquely positioned to fuel this transformative shift. Investing in this space is not just about realizing returns but also about contributing to a more sustainable and equitable future.
*This report has been built after our conversations over these past months with many Foodtech and Agritech startups (NAX Solutions, Klim, Source.ag, Esencia Foods, Soplaya, Multus, Carbon Maps, Heura Foods, Nova Meat, Cubiq Foods, Väcka, Uncommon Bio (former Higher Steaks)… among others), Food Industry Players (such as Makro), and other relevant funds and organizations (Eatable Adventures, EIT Food, NX FOOD, Zintinus, KM Zero…). A special thank you to all of you who helped us build this piece.
The OECD defines 'food systems' as a complex network involving all the elements, activities, and stakeholders associated with food production and consumption. These systems have a profound impact on our society, influencing our economy, politics, environment, and health. However, our current food systems face significant challenges. Inefficiencies and negative impacts are leading to a global call for change.
With world population projected to hit 9.1B by 2050, a staggering 70% increase in global food production will be required. This implies that we need to generate more food in the next three decades than we have throughout human history.
A term coined by Bain & Company, which defines the phenomenon of when global income rises, so does the demand for protein. But if the rate of protein production remains constant amidst population growth, a protein crisis awaits us by 2028, with protein demand surpassing available supply.
More than 345M people suffer from food insecurity today, a number that's doubled since 2020. The issue isn't just about increasing food production but ensuring its equitable distribution and access too.
Food systems contribute up to a third of global human-induced GHG emissions, and 80% of global water consumption and almost 90% of global deforestation. On top of that, over a third of all food produced globally goes to waste each year. These are alarming facts and paired with the sustainability goals of 2030, we often question how can this be solved?
The informed consumer today prioritizes more than just food quality. Factors like health, environmental impact, and animal cruelty are now integral to food choices, and many are willing to pay a premium for healthier, sustainable products.
Now, more than ever, it is obvious how technology and innovation have a crucial role to play in transforming our food supply chains. Foodtech, as outlined by Forward Fooding, leverages technology and innovation to enhance efficiency and sustainability across the food supply chain.
From IoT, AI, satellite imagery, drones, 3D printing, these innovations offer potential for transforming food systems by increasing production, improving distribution, reducing waste, enhancing food security, as a way to scale the growing demand for food in the most sustainable way possible.
Iberia, renowned for its rich gastronomic heritage and quality food products, plays a critical role in feeding Europe due to its strategic location and well-established trade networks. Providing context, the European market size for food consumption is projected to reach nearly $2 trillion by the end of 2023. Iberia's contribution to this market is estimated to be 7.8%, equivalent to $156 billion.
Interestingly, if we further analyze Iberia's contribution to European food production, both in agriculture and food processing & manufacturing, it is estimated to be around 7.4% for both sectors. In other words, out of the $636 billion agriculture output in Europe in 2023, Iberia contributes $47 billion. Similarly, for food processing and manufacturing, Iberia's contribution is $22.4 billion out of Europe's total of $304 billion (excluding drinks). To close the loop, Spain (along with the Netherlands) accounted for the largest intra-EU trade surpluses in 2021 by €16.5 billion from agricultural, fisheries, and F&B products.
Spain has the second-largest utilized agricultural area in the EU, spanning 23.9 million hectares. This accounts for approximately 15.2% of the total agricultural land in the EU. Portugal on the other hand has an extensive coastline with 1,793 kilometers and its privileged location encompassing mainland Portugal and the archipelagos of Madeira and the Azores, possesses one of the largest Exclusive Economic Zones (EEZ) in the world. Despite ranking as the 16th largest country in Europe by land area, its maritime size sets it apart as the 5th largest in Europe and the 20th largest globally. As a result Portugal and Spain have a robust fishing culture, on top of a large aquaculture industry (Spain accounted for 25.4% of the EU's aquaculture output).
In essence, Iberia's geographic advantages and robust agricultural and aquaculture sectors, reinforces the importance this region has to contributing to European food production. Yet, it has yet to see a large-scale adoption of technological and innovation and play its role in transitioning to a more sustainable food system.
Lastly, while we have reservations about considering Iberia as a favorable market for the sale of these opportunities. However, our curiosity lies in exploring Iberia as a platform wherein technology companies can leverage its rich legacy of food production, coupled with a slower pace of technological adoption, to strategically capitalize on opportunities that cater to a significantly broader market. For instance, companies in areas such as BioTech foods and potentially an Agritech company could find an ideal environment in Iberia to thrive and flourish.
Thanks to Dealroom´s and Five Seasons Ventures 2022 Foodtech report, we are able to withdraw the following takeaways for VC funding in Europe 2021 to 2022:
In 2022, European foodtech startups in total raised €5.9B in 2022. While this figure is impressive on its own, it actually represents a 36% negative growth since 2021. This decline is mainly attributed to a decrease in appetite to invest in the food delivery companies due to the rise in competition, difficulty in sustaining growth, and long-time horizons to reach profitability. As a result, investments in food delivery fell by 64%, but it still remains the most funded category in foodtech in 2022 with a total of $3B.
However, when investments in food delivery are set aside, the foodtech sector actually stands out as one of the few sectors that experienced funding growth between 2021 and 2022, with only real estate outpacing it.
One of the winning categories is alternative proteins, which saw a remarkable spike in funding by 75% reaching $950M in 2022. This comes to no surprise considering the protein paradox we've previously mentioned and the recent swell of new funds popping up to invest in climate change solutions. However, we also believe there is an additional contributing factor to the surge in investments in alternative proteins, which is the absence of a clear market leader. Until regulation opens, the sector is essentially a waiting game taking place backstage. This dynamic contributes to FOMO build up among investors who are eager to back the potential market leaders of tomorrow.
Despite challenges related to product quality, consumer adoption, scalability, and achieving price parity, the possibility of investing in a technology that could fundamentally change how we consume food in the future is too enticing to ignore. So, while everyone waits for the regulatory landscape to become clearer, production costs to reduce, infrastructure to scale, and large-scale market validation, investments continue to flow into this promising sector despite unclear outcomes scenarios.
Agritech is another interesting observation, despite slower funding comparatively to other categories (37% YoY), it attracted $1.3B, making it the 3rd most funded foodtech category in 2022. This is particularly intriguing considering the exit multiples for this category have not been great so far, but we will delve more into that below. Meanwhile, investors have become more bullish in B2B Marketplaces with an increase of 63% in funding, although the total amount was merely $290M. (Seeing this datapoint reminded me of two Point9 investments: Rooser and Wikifarmer, both B2B marketplaces in food).
2022 saw a significant shift in investment distribution along the supply chain, with more funds moving upstream to the primary and secondary stages of production and processing. These two stages combined, attracted $3.6B in funding, and have been demonstrating a very stable YoY growth pattern. Conversely, the distribution and consumption stages suffered substantial fluctuations over the years. These stages saw spikes in investment during 2017, 2019, and 2021, contrasted by dips in 2018, 2020, and most recently in 2022, where funding went from $7.2B in 2021 to $3.2B in 2022 (-58%)!
Our assumption is that the historical underfunding in the primary and secondary stages could be attributed to several intertwined factors such as the inherent resistance for tech adoption in the agricultural industry. Additionally, innovation in food production and processing has been constrained by heavy regulation, particularly so in Europe.
Industry-wide inertia also plays a significant role here. As transactions in the primary and secondary stages are typically B2B, there is less inherent pressure to innovate or disrupt in order to enhance aspects such as speed, convenience and productivity, as often seen in businesses that transact directly with consumers. In fact, many established players within these stages have made significant investments in their current operations, leading to high switching costs that ultimately slow the pace of technology adoption. Additionally, we also believe the lack of funding targeting upstream solutions was significantly overshadowed by the hype of investing in downstream solutions, which was heavily fueled by the opportunities covid brought to the market.
Another shift in the funding landscape has been the decline in B2C investments by 56%, while investments in B2B increased (although only modestly) by 9%. This shift is also seen in the uplift of combined enterprise value in B2B companies by 97% in one year, while B2C decreased by 22%. As funding, and consequently technology, shifts upstream and gravitates toward B2B models, we hope this creates more meaningful incentives and the right foundations to genuinely address issues of scalability and sustainability, at the very start of food production.
Corporates are already capitalizing on the Foodtech revolution and more and more we are seeing strong, big and well-established players in the food industry become interested in European Foodtech startups is not only a symptom of the pressure on food systems to innovate, guided by the main industry stakeholders, but also of momentum. Foodtech is no longer a trend, but an opportunity, since we are already seeing all industry agents (i.e. corporates, venture capitals, startups…) aligning their interests. For instance, we saw two agri and food giants, Cargrill and ADM, participating in Innovafeed´s $250M Series D round, hoping to not only reduce their dependence on traditional protein sources for their products, but also making real commitments to deliver them sustainability as demand increases. Another curious move is JBS positioning itself as an “protein company” (versus the largest beef distributor in the world) through its investment in a Spanish lab grown meat company (BioTech) and building what it hopes to be the world’s largest cultivated meat facility in Spain. JBS has long come under scrutiny for its ties to deforestation. Brazil is now the leading exporter of beef, much of which comes at the cost of large swaths of the Amazon rainforest
Other leaders from various sectors are actively participating in the foodtech revolution. Telco Swisscom joined forces with xFarm, a farm management app offering integrated connectivity and precision farming solutions. Kitchen appliance Vorwerk invested in Better Dairy (UK plant-based dairy products) and Fresco Cooks (Irish connected cooking platform). Branding and packaging company Avery Dennison, participated in Modern Milkman (UK return-and-reuse grocery delivery service) Series C.
We have to admit that assessing foodtech exits hasn’t been easy, however the general consensus is that most exits by count have been acquisitions, while the few IPOs that occurred, have dramatically outsized in value (Deloitte). The US for example saw 4 IPOs and their median size was $3.1 billion. Most of these IPOs have been attributed to food brands, while the agritech space seems to be lagging behind. An interesting example that caught our attention was the acquisition of Danish BioPhero by FMC in 2022. BioPhero specializes in pheromone-based biocontrols for the crop-growing industry. After raising $17 million in a series A funding round the previous year, the company was acquired by FMC for $200 million in 2022.
What stroke us about this exit, is that BioPhero, unlike many other agritech companies, was able to build a product that seemed to quickly gain market demand, as FMC stated it expected $1 billion in revenues generated from pheromones and pheromone-based insect control products as early as 2030. However, the acquisition by FMC cut short the potential for further growth and success for both the company and its founders, leaving us curious about the underlying reasons. This example underscores the complexities and considerations involved in funding scientific-based companies, where strategic acquisitions can sometimes limit the long-term growth potential that investors hope to achieve in VC.
An interesting piece of research from Finerva, looking at 25 companies in the Global X AgTech & Food Innovation ETF (KROP) - managed by Mirae Asset Financial Group - sheds some light on this. You can read their report here, but long story short, the median EV/Revenue multiples have been decreasing as low as 1.4x in Q4 2022 largely due to supply chain disruptions and high inflations naturally impacting margins.
Putting our thoughts into order regarding exit outcomes for VCs:
One of the critical challenges is the inherently low-profit margins in the industry. The capital and labor-intensive nature of agriculture and food production contribute to thinner margins, affecting revenue multiples and, by extension, exit multiples.
These sectors are particularly susceptible to supply chain disruptions and operational risks. For example, as mentioned before, Covid was the perfect example that shows how quickly disruptions can affect productivity, profitability, and by consequence, valuations.
Market trends and prevailing investment flows also significantly influence the exit landscape. Increased investments in downstream solutions can lead to inflated valuations, raising concerns about a potential market correction that could affect exit multiples negatively.
Lastly, the timeline for potential exits is naturally longer due to the slow pace of technology adoption in agriculture and the lengthy process of regulatory approval in food engineering. This prolongs holding periods for VCs, which can impact returns and exit strategies.
Nonetheless, we are still deeply passionate and extremely bullish about the space :)
Our food supply chain has recently been subjected to some of the most extreme and polarizing stress tests imaginable - from covid lockdowns leading to a demand surge and subsequent supply chain shortages and disruptions, to geopolitical upheavals that forced a global realignment. Coupled with rising interest rates and unprecedented inflation levels, returning to previous norms is simply not feasible. The industry is on the cusp of transformative change, a change that will happen whether we're prepared or not. As VCs, we should strategically position ourselves to navigate and capitalize on this seismic shift.
As investment trends shift from B2C to B2B, we believe this will be key in providing the right incentives for a restructured B2B landscape that addresses scalability and sustainability in the very early stages of the supply chain in order to stay competitive.
Despite the sluggish pace of agtech adoption, farmers demonstrate a willingness to embrace innovative solutions, as found out in this McKinsey Report. After their global survey to row and speciality crop farmers, they found out that 39% of these are currently using or planning to use agtech products in the next two years, as 43% seek new products to boost yields and 22% plan to modify their purchasing and vendor strategies to improve profitability and manage financial risks. In addition, variations exist across farms with different sizes and regions. Indeed, large-farms and European farms are the most willing (81% and 62% respectively) to adopt agtech solutions.
Regulation changes can create significant opportunities for FoodTech due to their potential to shape the operating environment and market dynamics. Indeed, it can create a favorable environment for FoodTech by addressing safety concerns, stimulating innovation, unlocking new market segments, and shaping consumer demand. By understanding and adapting to evolving regulations, food technology companies can leverage these opportunities to drive growth and make a significant impact on the future of the food industry.
Our planet demands it, and if we as VCs are not the ones taking the risk so that we can capture some of that value creation, and be part of the shift, who will?
Since last year we have been debating what are the opportunities that excite us, what are the fundamental problems that we would like to see addressed to scale food production in the future in a sustainable way, but also what are the opportunities that can give us a meaningful return, and how do we align our fund’s lifecycle with the market dynamics of this industry. The truth is, we still don’t know.
What we do know is that we will most likely refocus our priority beyond that distribution and consumption as we have been exposed to them through our investments in Keatz, Katoo, LGFM and Rice. Indeed, we are excited at Kfund to see a change in investment flow towards upstream B2B models, since these better allow for i) larger ACVs paired with long or multi-year contracts to counter the slower pace seen in this industry ii) higher switching costs indirectly causing the company to stick longer to the solution, and so give it enough time to see ROI and ingrain these solutions that contribute to more sustainable practices and iii) cross-selling possibilities that might provide the right incentives for the entire industry and supply chain to adopt these innovations.
As we reflect on the complexities and dynamics within the FoodTech space, it's undeniable that we stand at the threshold of a new era. The challenges facing us are multi-faceted, involving population growth, food insecurity, environmental pressures, and evolving consumer preferences. While our food supply chains have been tested by unprecedented stresses recently, these pressures have only amplified the urgent need for transformation. Navigating this landscape requires a strategic, forward-thinking approach, an ability to redirect incentives, and a recognition that technology adoption in agriculture is not just a passing trend, but a vital component of our future food systems.
Although the VC landscape in food has its unique intricacies, the promise of making a lasting impact on the sustainability and scalability of our food supply chains is compelling. Shifting funding trends from B2C to B2B models, favorable regulation changes, recent willingness for tech adoption in agriculture, all suggest that the time for meaningful investments in this sector is now. We continue to grapple with the alignment of market dynamics with our fund's lifecycle, exploring opportunities that not only excite us but also promise meaningful returns.
In conclusion, revolution in food production is not a matter of if, but how, and we, as VCs, are uniquely positioned to fuel this transformative shift. Investing in this space is not just about realizing returns but also about contributing to a more sustainable and equitable future.
*This report has been built after our conversations over these past months with many Foodtech and Agritech startups (NAX Solutions, Klim, Source.ag, Esencia Foods, Soplaya, Multus, Carbon Maps, Heura Foods, Nova Meat, Cubiq Foods, Väcka, Uncommon Bio (former Higher Steaks)… among others), Food Industry Players (such as Makro), and other relevant funds and organizations (Eatable Adventures, EIT Food, NX FOOD, Zintinus, KM Zero…). A special thank you to all of you who helped us build this piece.
