When the pandemic was first declared, many investors froze deal-making temporarily as they waited to see the fallout of lockdown orders that virtually crippled many economies and demolished certain segments, including food service, Alex Frederick, senior emerging technology analyst at Pitchbook told attendees at the virtual Future Food Tech Summit last week.
Some venture capitalists also pulled back on new deals in order to ensure they had enough funds to support existing portfolio members or to concentrate on exits that could free up liquidity, Frederick added. However, he noted, the largest and most immediate impediment to new deals was investors were unsure about teaming with entrepreneurs they never met in person – a fear that mostly seems to have abated thanks to video conferencing.
While investors have become more comfortable with the virtual due-diligence process, some lingering concern shines through in their willingness to focus mainly on “hot deals,” Frederick said.
“The deals that are getting done are the quote unquote hot deals. These are deals that have signed contracts, proof of concept, proof of attraction,” he said, adding, “The main takeaway is companies that have evidence of reduced uncertainty have a serious edge in this environment.”
Beyond these basics, Frederick said, “the largest areas of opportunity are in the consumer packaged goods space,” and in particular in bio-engineered foods, including cultivated agriculture, plant-based foods, meal replacement drinks and foods and novel ingredients.
Investor interest in plant-based foods and cultivated meat is being driven by consumer interest in health and environmental benefits of eating fewer animal products, Frederick said. In addition, he noted, the pressure placed on the animal agriculture sector by the pandemic pushed many consumers to try and embrace plant-based options more than before the outbreak.
Investor interest in food suppliers similarly comes from pandemic-fueled shifts in consumer shopping from restaurant to dining at home and purchasing groceries online, Frederick said.
But even before the pandemic, “we were seeing a shift to this sector as consumers increasingly shift to the convenience of online ordering … and variety or the benefit of being able to comply with specific diets,” he added.
Sluggish exits pose challenge to new deals
Even as investments start to pick back up, exit deals still appear sluggish, which could have longer-term consequences on venture capitalists’ ability to broker new deals down the line, Frederick said.
“Exit activity has been down considerably over the past few years, but this year … is tracking to be the lowest since 2016. And if the pandemic extends longer than expected, it could be an impetus for struggles in the VC industry because exits provide a release valve to the massive accumulated value stores in VC backed companies,” he explained.
A closer look at exit by type shows that acquisitions are a significant sticking point, with many on pause likely due to market uncertainty and volatility, Frederick added.
While he expects exit activity to remain muted until the economic climate improves, he said he believes deal-making in general will pick back up in the near future as “a good deal flow and continued investment activity is essential to the success of investors and the entire ecosystem. VCs will need to look outward to continue filling that deal pipeline. So, we don’t see this as being a serious, long-term impediment to venture. We believe investors will find a way to continue making deals.”
Companies are waiting longer to fundraise
Beyond the pandemic, any slowdown in new deals also could be attributed to entrepreneurs having more resources available to them at early stages, such as accelerators, that allow them to delay fundraising, Frederick said, noting that the median age of companies seeking funds has increased at all stages.
In addition, he said, “there’s an increasing sophistication of founders. We’re finding they are more competent on the pros and cons of accepting venture capital and understand that if they wait until their startup has more traction, they’re able to give up less equity for that capital.”
However, Frederick added, this trend also behooves investors who may be less willing to make risky investments during this time of economic uncertainty.