“He will win who knows when to fight and when not to fight.” Sun Tzu
What can “The Art of War” teach us about investing? According to Sun Tzu, an investment should be made when there is a clear benefit, after deeply analysing the pros and cons, not just for the sake of doing something, and without getting dragged into the hype.
What follows is a simple list of deals in global agrifood-tech. No attempt to judge or evaluate them: just the facts, to understand whether global foodtech might have reached a turning point.
A lot of interesting deals
1st May 2019: Beyond Meat prices its IPO at $25, with an initial market cap of $1.46bn. Three years later, Beyond Meat reported another slow quarter, with net revenue of $109.5m (+1.2% YoY), an EBITDA of -$78.9m and some big investors starting to rumble, with the plant-based pioneer facing hurdles.
17th January 2021: Deliveroo closes a Series H round of $180m, bringing the total raised to $1.7bn and reaching a valuation of $7bn. Two months later, Deliveroo gave the London Stock Exchange what has been defined as “the worst IPO in history”, losing $2.8bn in valuation from its initial market cap.
19th October 2021: Gorillas closes a Series C round of $1bn, reaching a valuation of $2.1bn. On 23rd May 2022, Gorillas announced 300 layoffs due to internal reorganisation.
17th March 2021: Getir closes a Series E round of $768m, skyrocketing its valuation to $12bn. On 25th May 2022, Getir announced it would reduce its global workforce by 14%, cutting 4,480 employees.
Two years ago, one of the global foodtech rising stars, Zume Pizza, after $423m raised ($325m of it from SoftBank) and a $4bn valuation, shifted its business from robotic pizza delivery to food packaging. The reasons? We will probably never know them, but it’s hard not to see a connection with profitability.
Impossible Foods has raised $2.1bn to date, reaching an undisclosed valuation of $7bn, with a burn rate of $500m per year. Profits? Zero. Elementary, Watson.
Time for a change?
Let’s stay with British literature. According to Agatha Christie, one coincidence is just a coincidence, two coincidences are a clue, three coincidences are a proof. So what about four coincidences or more?
Does foodtech have a serious problem with hyper valuation and profitability? There are probably not enough elements to support this suggestion, and we have to consider that the quick commerce space took advantage of the hype created by the pandemic, which undoubtedly “doped” the numbers. We shouldn’t forget that an innovation environment must be, by definition, quick and agile, where startups always keep one eye wide open on revenue and the other closed on profit. But can we say it’s definitely time for a change in the strategy of foodtech startups?
According to the latest report by Dealroom and Five Seasons Ventures, funding in the foodtech industry in Q1 2022 dropped 41% from Q4 2021 levels. Are these the first signs of change?
To answer these questions and outline the near future of global foodtech, I reached out to some reliable international foodtech venture capitalists and experts, with three simple questions, the same for everybody:
- Do you think it’s time for a less aggressive strategy by foodtech startups or it would alter their innovative spirit, making the rounds less attractive?
- Consequently, do you think there should be more attention to profit and less to revenues?
- Do you think the time of hyper valuation is over, so we will see “smoother” rounds?
The experts
Severine Balick
Do you think it’s time for a less aggressive strategy by foodtech startups or it would alter their innovative spirit, making the rounds less attractive?
I think the current downturn and reset in valuations is a healthy reality check and readjustment for many foodtech founders and investors, bringing a good dose of reality and significant repricing.
Having been in the foodtech space for over a decade, we felt that some sub-segments in foodtech like alternative proteins, plant-based and online delivery were too hyped, and many valuations were unrealistic when not insane, driven partly by FOMO: we saw many pre-revenue start-ups looking for a $100 million pre-money valuation, with some of them raising tons of cash and spending it quickly in order to raise more money, instead of focusing on building a sustainable business model.
So for some entrepreneurs the reality check is brutal, as they get deal offers this year that are not even half of what they expected last year, or see valuations marked down by a third or even more in some cases.
But we welcome this correction and readjustment to more realistic and healthy economic fundamentals. I don’t think this will affect the creativity, entrepreneurship or drive of foodtech founders, who will remain resilient in this new context. This will also bring great opportunities for new founders to enter the space.
On another note, I personally agree with Jessica Pothering’s view expressed on AgFunder, questioning current investments in foodtech, and in particular the huge proportion of money allocated in Europe to online e-grocery and super-fast delivery start-ups like Gorillas, Flink or Picnic, which attracted almost 50% of VC money in Europe, while other companies or sub-segments upstream that were doing a better job at really solving global issues like climate change, food waste, or removing chemicals and fertilizers from our soils were not getting as much attention and money.
This is also a question of our collective responsibility as agrifood-tech investors, citizens and parents: deciding today where we want to allocate our money across the food value chain, where we want to have the most impact, and then deciding whether to invest in Gorillas rather than Farmers Business Network, Apeel or Plenty.
Today, if we want to respect the Paris climate agreement deadlines and avoid a global warming disaster, we have the power to decide which companies to back. And there is a growing number of companies that can return money and generate positive impact for our environment and our health.
At Middleland Capital, we have chosen to invest in companies solving real problems across the food value chain, from food security to biopesticides, supply-chain resiliency, better nutrition via data analytics, and robotics to help farmers solve labour shortages and make better decisions on their farms while restoring soil health, saving water and improving their profitability (FarmWise, Arable, etc.).
Consequently, do you think there should be more attention to profit and less to revenues?
There has always been this dilemma between profit and revenue growth.
Being profitable gives founders more freedom and less reliance on investors’ money, more power when they need to fundraise, as many investors value start-ups that can run a business profitably, and more exit opportunities. At the same time, start-ups focused on high growth can also generate more profit in the long term.
So navigating between growth and profitability will remain a key topic for founders and investors, depending mostly on the sub-sector, technology and business model. Whatever the path chosen, the key element will ultimately be the team’s execution capability: navigating new, uncertain macro trends (inflation, potential recession), managing cash wisely, raising money when needed, recruiting the best talent, building a sustainable company and scaling fast.
With the current correction, profitability will definitely become increasingly important for investors and founders, who will have to be more financially disciplined after years of easy and almost free money, as it will be more difficult for some companies to raise, with the prospect of more down rounds due to valuation resets.
Many start-ups facing this new reality will have to quickly adjust and re-evaluate their growth rate. The new view of growth is not growth at all costs, but growth at a reasonable cost, with advertising and marketing spend going down, as well as headcount and other discretionary spending tied to growth, as start-ups manage cash better and keep a longer runway. This discipline will be good for the sector.
Take the example of alt-protein and faux-meat start-ups: there are around 800 meatless meat start-ups globally today. As money becomes harder to attract and competition raises the stakes, the market clearly can’t sustain that many companies. Building a sustainable competitive advantage and a profitable business model will now become the end goal. And the plant-based companies that have made big progress on taste and price affordability will have to focus more on scalability, and improve their nutritional and health profile if they want to retain customers in the long term.
Do you think the time of hyper valuation is over, so we will see “smoother” rounds?
I think we will see fewer hyper, or insane, valuations, as many investors were genuinely concerned about the exuberance in venture capital and the danger of hurting the performance of our entire asset class after it produced top returns over the past decade.
Some of these very high valuations in foodtech resulted initially from a big inflow of capital into a sector that had been underfunded for a long time compared to biotech or fintech. Then corporates, hedge funds and sovereign funds entered the space and led massive rounds in sub-segments like alternative proteins and indoor ag, inflating valuations, as the fear of missing out often led them to reinvest massively even at very high valuations.
This FOMO nurtured the inflation cycle and drove some of these hyper valuations, with start-ups rising to stratospheric levels while being totally disconnected from reality, with unrealistic growth plans and no serious path to profitability.
Today the public-market reckoning is causing a total rethink in private markets: tech IPOs are pulled or delayed, entrepreneurs are advised to conserve cash longer and manage their businesses more efficiently, and VCs are more cautious. So we should see less FOMO and more reasonable rounds in the sector.
Creadev
Do you think it’s time for a less aggressive strategy by foodtech startups or it would alter their innovative spirit, making the rounds less attractive?
We shouldn’t forget that these companies have brought to market a significant number of food innovations (tasty oat milk and meat alternatives, quicker grocery shopping, food waste solutions, etc.), have created thousands of new jobs and disrupted the entire food supply chain for the benefit of consumers and producers. One may find their growth strategy aggressive, but we can’t ignore the fact that they are bringing very attractive innovations to market.
That being said, the size of a round is all about what a start-up needs to execute its growth plan. Some food start-ups operate in a winner-takes-all market and need to raise big to grow first and fast. Others operate in a capex-intensive context and need to raise big to execute, especially in an industry where factories and capital expenditure are often at stake. In these cases, it is normal that food start-ups raise substantial rounds. More recently, some start-ups also launched rounds feeling the urge to raise before capital withdrew. We did not see this as aggressiveness, but as prudence from the entrepreneurs.
At the end of the day, when use of funds is at stake, it is crucial for entrepreneurs and investors to sit down together and build an investment round that makes sense for the company in its context. At Creadev, we try to help size rounds to fit what start-ups need, so they make a wise and sensible use of the money they receive.
Consequently, do you think there should be more attention to profit and less to revenues?
It is very useful that some VCs can finance start-ups in their early years, when profitability is a distant horizon. VCs fill a gap left by banks, which focus on profitable companies.
However, it is reasonable to assume that a stronger focus will be put on profitability, even if we are fully aware that breakeven will be harder to reach, as inflation and labour shortages remain burdens for the industry. First, because start-ups with positive unit economics have a higher probability of survival. Second, because start-ups with a near profitability horizon will probably be sold at a premium. And last, because companies with a profitable horizon are eligible for LBO strategies, opening new exit doors for VC funds.
Creadev, as a long-term shareholder, has always emphasised companies delivering a plan with a sensible profitability horizon, because our mission as a financial organisation is to help grow profitable and scalable worldwide champions. All the more so in this context, we will continue helping entrepreneurs build growth plans that target profitability.
Do you think the time of hyper valuation is over, so we will see “smoother” rounds?
Without any doubt, the foodtech VC industry experienced a setback in activity in Q1 2022.
On one hand, COVID hit the food supply chain massively, encouraging large investments to support innovation and disruption in consumption habits at a faster pace. This frenetic pace enabled quicker consumer adoption of digital-native brands, encouraged people to shift their diets towards more plant-based food and considerably accelerated the adoption of certain new technologies, such as on-demand food businesses, driving rounds and valuations significantly upwards.
On the other hand, the European economic context now advises caution. The post-COVID consumption boom is almost behind us, COVID subsidies and government debt facilities are coming to an end, the war in Ukraine is adding uncertainty on top of the pandemic’s open wounds, and global inflation is a running train. There might be some changes in VC strategy. Some obvious ones we forecast are a premium on deals with a good capital efficiency ratio (revenues relative to how much a company has raised) and a premium on deals close to profitability.
At Creadev, we still firmly believe we need to keep supporting innovations that address core problems in the food supply chain. We hope our capital will drive change in aquaculture, crops, alternative proteins, food services and food brands towards a more sustainable food system, making food accessible to the many. So, despite the uncertainties, we will keep actively looking for entrepreneurs who need long-term support.
Saskia Hoebée
Do you think it’s time for a less aggressive strategy by foodtech startups or it would alter their innovative spirit, making the rounds less attractive?
I think it could be suitable to have a top-line growth strategy combined with more attention to the cost base. Another important point is how long a runway the current investment round creates: 18 to 24 months should be the new standard. In my opinion, this is what makes a round attractive. Having a low burn rate and securing multiple investors with deep pockets significantly de-risks the company’s profile.
Consequently, do you think there should be more attention to profit and less to revenues?
Obviously, being profitable from the beginning could sound almost impossible and unnatural, but I think reaching break-even in 4 or 5 years, mid term rather than long term, is desirable and absolutely feasible with the right strategy. Every startup in the world burns cash, but needless to say there’s a huge difference between burn multiples and burning 100k.
Do you think the time of hyper valuation is over, so we will see “smoother” rounds?
Definitely yes, and we are already seeing some corrections in the market. In the last 2 to 3 years some foodtech verticals, such as quick commerce and even plant-based, have been overvalued. A correction was definitely expected, and I strongly believe we are entering an era of foodtech with more consciousness and prudence, and more rational and disciplined valuations.
Marco Gaiani
Do you think it’s time for a less aggressive strategy by foodtech startups or it would alter their innovative spirit, making the rounds less attractive?
This is quite a complex topic, with some substantial differences between Italy and the rest of the world. Regarding the latter, the excess of liquidity and the flattening of other asset classes undoubtedly drove a boom in valuations, with easy money and crazy cash burn. Something that definitely has to change. Never more than in this case can we say that the old adage “every penny counts” went out of the window.
Consequently, do you think there should be more attention to profit and less to revenues?
I believe so, but growth KPIs will remain the most important metrics to evaluate a project, although lightning-speed growth may not always be the right choice. It’s self-evident that pushing revenues towards profitability is always welcome, but it depends on many factors. In such an environment, analysis and due diligence will become ever more important, although there are several examples of startups that quickly went from penny-pinching to spendthrift. Beyond that, founders and teams will undoubtedly be more careful in spending money.
No less important is the background of the founders and of the investors sitting on the board, who must bring a reliable skill set in finance, industry or business.
Do you think the time of hyper valuation is over, so we will see “smoother” rounds?
To answer this question I would need a crystal ball. As I said earlier, all markets will probably go down slightly, and this will lead to “smoother” valuations and more “rational” rounds. Nevertheless, it’s too early to say we are at the end of a cycle, as it depends on many factors: innovation cycles, liquidity and the evolution of the geopolitical situation, just to name a few.
Angela Tan
Do you think it’s time for a less aggressive strategy by foodtech startups or it would alter their innovative spirit, making the rounds less attractive?
Considering the global situation, I think we will keep seeing a hectic market for technologies addressing supply chain disruption. In broad terms, I don’t think there will be less audacity from startups, but rather more awareness from investors.
Consequently, do you think there should be more attention to profit and less to revenues?
The path to profitability is very important, especially in early-stage rounds, and it has to be one of the key metrics in the growth process. Consequently, a constant watch on burn rate is mandatory.
Do you think the time of hyper valuation is over, so we will see “smoother” rounds?
Of course, nobody has a crystal ball, but I can say that in the last two years valuations have been very interesting. For some sectors, especially downstream ones (delivery, quick commerce and so on) that grew hugely during COVID, we can talk about hyper valuations. I think a market correction is to be expected, and declining performance will adjust valuations accordingly. But I repeat: what really matters is the increased awareness of investors.
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