'We are genuinely looking for technology': Investment drivers in plant-based meat and dairy

Plant-based meat and dairy have seen something of a decline in recent months, despite the uptick in the overall number of vegetarians and vegans. With key brands such as Beyond Meat seeing revenue declines , some data suggests that the overall sector may be past the halcyon days of its early success. However, some investors still see a strong potential for growth in the sector. In the right circumstances, plant-based has a lot of potential. What are the current trends leading to growth in plant-based? In the short term, plant-based meat and dairy have seen significant challenges. However, long-term trends may not be quite so negative. “The past eighteen months have been particularly challenging, in the sense that there was a peak in aspirations and in enthusiasm, especially in meat alternatives and dairy alternatives, . . . and then we saw in a big inflationary environment that it was the consumption of those products particularly that suffered,” said Kathleen Martens, partner at consultancy firm McKinsey and Company, at Upfield’s Future of Food conference in Wageningen last week. During this time, the deal volume in the category has halved, and multiples have come down quite significantly. However, this is partially due to the contrast with what came before. “The peak before was so high,” she said. The macro-trends over the past ten years, she suggested, have been towards growth in the category. “The underlying trends, especially in developed markets, in terms of 'we want to eat healthier' or 'we want to produce more sustainable' . . . you see a very positive tailwind on all dimensions.” The fact that dairy-free milk continues to grow, and even plant-based meat is recovering from its previous downturn, supports this point, she suggested. What issues have prevented growth in plant-based? Plant-based has seen significant barriers to growth in recent times. “One of the challenges that we've seen in our portfolios [is] companies that came to market with really innovative ideas or with interesting products, and frequently [have] had a series of problems relating to their ability to finance their trajectory forward,” said Kim Odhner, co-founder and partner of asset manager Unovis Asset Management, at the event. A key issue is infrastructure, he said, and capital around the Series B phase of development for start-ups. In order to scale up, businesses need the sort of capital and infrastructure not currently available to many plant-based companies. “There's a real dearth of capital now in that series B growth capital phase, and that's presenting some headwinds for this space right now.” Another reason, suggested Odhner, is a ‘mismatch’ between the capital invested in plant-based businesses, and the capital that suits them. “The expectations around how quickly those companies would scale was not really aligned with the realities of the food industry. I think one of the culprits there was the use of the term ‘food tech.’ ‘Tech’ implied some kind of rapid scaling, along the lines of digital scaling. It just wasn't ever going to happen.” Ron Guy from investment bank Goldman Sachs agreed. “What happened where funds dried and the market became more difficult [was that] this pocket of capital immediately became more restrained. People stopped investing into these businesses, which put them in a lot of constraint. [This] basically led them into consolidation, part of it forced consolidation,” he said at the event. What do investors want from plant-based companies? In order for plant-based companies to grow, they need investment. Thus, it’s not just about what consumers want, but what investors want. “People like to invest in great businesses, and great businesses, for the purpose of investing are . . . profitable and cash-generating businesses, because if you don't have those then the business would fail,” said Goldman Sachs’ Guy. There are two types of investors in these companies, he suggested, who want very different things. The larger investors look for “businesses that are mature, and these businesses will have a very solid foundation from an infrastructure standpoint, from a brand positioning standpoint.” These larger investors want a business that already has assets that are producing something sustainably, that they can then scale up to “really make an impact on society, the environment and nature.” Then there is the second type of investor, who wants businesses that they can scale as well, but from a smaller starting position. They aim at “helping the business move from a great idea into a very practical company,” said Guy. A key difference, he suggested, between the two investors, is that this second kind is looking for disruption. “The disruption element needs to be more important than for the other more mature, larger size businesses.” Giulia Stellari, director at private equity firm Fall Line Capital, stressed at the event the importance of technology in attracting investors. “When Fall Line Capital is looking for investing in the food space, we are genuinely looking for technology. We're looking for hard IP that is protectable, that leads to some kind of functional or economic advantage that can be gained through the incorporation of this technology into a food product, into a process or into a brand.” The firm does not look at investing in brands, Stellari stressed, but in technologies that can help existing brands. “The future for scale for these companies must be through partnerships to some degree. Because ultimately, they are enabling technologies for companies with existing brands with scale to be able to enhance their product offering to the consumer.” Unovis Asset Management’s Odhner suggested that the future for plant-based may be as an ingredient, integrated into the protein market, rather than separated out. “So many of the things that we are producing have taken on a polarised sort of hero status or villain status depending on whether they're plant based or animal based. But at the end of the day they're just ingredients. The power of the meal comes from the combination of flavours. “The normalisation and the integration of these plant-based options into circulation and usage is something we can do that doesn't necessitate policy and decision making.” He used the example of how, while plant-based proteins were once in their own section of the supermarket, now they are positioned alongside other proteins.