Investors Are Looking Toward Plant-Based Food—But What Are They Seeing?

The plant-based food sector has been thriving in recent years, with exciting product launches every month.  In 2019, Burger King teamed up with Impossible Foods to bring us the Impossible Whopper. And last year,  it was announced that McDonald’s had developed a new plant-based platform, which could give way to a line of vegetarian products. And then just recently, in 2021, Taco Bell announced plans to test a menu item made with Beyond Meat’s beef substitute.

Becoming a thriving plant-based food company, however, isn’t easy – there’s some stiff competition, and developing tasty and healthy recipes can cost a lot of money.

This is where venture capital comes in, financing for early-stage businesses. Consider that plant-based companies in the U.S. raised $741 million in the first three months of 2020. Indeed, investors are becoming more and more interested in helping the sector thrive – and they have some interesting insights from their vantage point.

There have never been so many options when it comes to eating plant-based food – and the sector’s success is exactly what’s piqued the interest of investors, according to Matthew Glover, managing director of Veg Capital, because success breeds more success.

“Increasingly, investors are seeing the success of companies like Beyond Meat and Oatly, and wanting a piece of the vegan pie,” he says.

Curt Albright, managing member and founder of Clear Current Capital, says the rise in funding in plant-based food is due to growing consumer demand for transparency across the food supply chain.

“Consumers want to know where their food comes from,” he explains. “This is shining a light on animal abuse issues, environmental issues, unsafe business practices, and dangerous working conditions within the legacy meat industry.”

Stephanie Dorsey, co-founder of E²JDJ alongside Corey Jones, also believes consumers are helping to drive this trend: “From our perspective, animal welfare, sustainability, health and environmental concerns drive demand within certain consumer groups, particularly vegan, millennial, and Gen Z consumer groups, who tend to be the early adopters of plant-based food alternatives.”

But Lisa Feria, chief executive and managing director of Stray Dog Capital, emphasizes that companies who want to attract funders need to show they have the potential to last, and that hanging on the coattails of this recent wave won’t be enough. After all, around 20 percent of new businesses fail within the first year.

“Right now, the marketplace is bullish on plant-based companies,” she says, but they must remember that “building a sustainable competitive advantage and profitable companies is the end goal.”

As with any sector, start-ups in the plant-based sector face several challenges when building their businesses, which investors aim to help mitigate. One of the biggest challenges of course is funding.

Eat Beyond offers a hands-on mentor approach to the companies in its portfolio, and Patrick Morris, its chief executive and director, says money is almost always a challenge for new companies in the beginning.

Scaling up quickly enough to meet growing demand, according to Morris, seems to be one of the biggest challenges in this sector, especially if they have capital-intensive operations, such as research and development (R&D) – although, he adds, surging demand is a good problem to have.

“The majority of the capital we’ve provided goes towards supporting the scale-up of production capacity to meet growing demand,” he says. “This is very encouraging, not only for our portfolio companies, but also for the industry, as we look at the growing demand for more sustainable and plant-based food.”

The increase in the availability of funding across the plant-based sector in recent years helps, says Ashley Hartman, senior principal of Bluestein Ventures – but there’s a risk that this funding could actually be detrimental to start-ups looking for a helping hand. She warns that too much competition too soon might make it more difficult to raise funding when the market is more saturated.

“At some point, there’s a risk that the [financial] constraint could remerge if too many start-ups flood a plant-based market that hasn’t yet fully developed,” she says.

However, Robert Boer, program director of Blue Horizon Corporation, argues that there will always be investment available for companies with potential.

“For good vegan companies, money is not a constraint,” he says. “There is currently a lot of capital available in the market looking for impact and return.”

Investors are seeing funding going to a range of different products within the sector, including meat, egg, and dairy alternatives. But many agree that there are still various untapped areas.

The sector needs experienced food consultants and entrepreneurs focused on manufacturing, branding and marketing, influencers, finance, and sales, argues Albright. There is also room for more convenience, which, he says, can be solved by the sector continuing to attract dedicated co-manufacturers.

Boer agrees, and would like to see initiatives that inspire more scientists and engineers to enter the sector and apply their experience and knowledge to the challenges start-ups are facing.

However, Arif Fazal, founder and managing director of Blueberry Ventures, sees a move away from heavily processed foods.

“The newest wave of innovation in plant-based alternatives to animal products seems to be around clean labels with natural and easy to understand ingredients, conceptually moving away from lab-based food to food-based food,” he says.

According to Feria, there is a need for more plant-based seafood companies, while Hartman sees room for more cheese-based alternatives. For Hartman, it’s important that investment helps to raise the nutritional profile of plant-based foods.

“There’s still white space around the trifecta of taste, price, and nutritional profile,” she says. “There’s been considerable development in the first two – but the nutritional profiles have left something to be desired. We’d love to see more tasty products that are also highly nutrient-dense.”

“Plant-based has always had a strong halo with healthy, but the products and brands weren’t yet up to par,” she adds. “With improved products, mainstream brands, and more accessible price points, there is no longer a stark trade-off for health.”

And Boer says there’s a lot of room for companies to veganize local and regional products, which will require heavy investment, and he sees several challenges for start-ups.

“One example is the formulation and texturization of the end product. This is still often more art than science and requires R&D in ingredients and processes, as well as investments in CAPEX heavy facilities,” which are funds used by a company to acquire, upgrade and maintain physical assets.

As companies expand and scale up, and investors line up to help them, it’s important to not lose sight of animal-based industries, Glover says.

“The main challenge for vegan companies is scaling up production to be able to compete with animal-based industries on price, taste and availability,” he says. “As the global population increases, and developing nations consume more animal products, then we’re likely to be losing ground in the short term.”

“We have to be prepared to partner with and infiltrate the existing supply chains and infrastructure,” he adds. “We can’t operate in a vegan vacuum, and should enthusiastically help change the existing food system from within.”

This means becoming as competitive as animal-based sectors, Feria says, so the sector can compete on affordability and accessibility. As it stands animal products are much cheaper to produce than plant-based alternatives, as they benefit from economies of scale and government subsidies.

“We need more access to a variety of proteins, farmers to grow more diverse crops, and the government to support these crops and products… As companies develop new processes, inputs, and systems, they will drive the prices down and as they scale (or get acquired into a larger company) those prices will continue to decrease. The question is: how can we accelerate this process so everyone will have equal access to better food?”

Hartman says getting prices down requires continued investment across the supply chain, from ingredients to product development, technology and manufacturing processes.

Despite all the challenges facing start-ups in the plant-based sector, it’s safe to say that investor interest is growing, and this will play a key part in the future of the sector. It certainly helps that many in the investment space are guided by the same principles as those looking for funding in the sector.

Paresh Patel is chief executive and cofounder (alongside prolific plant-based investor Sebastiano Cossia Castiglioni) of publicly traded acquisition vehicle Natural Order Acquisition Corp (NOAC), which raises capital to merge with or acquire a business and make it a public company.

Alternative protein companies, he says, are increasingly drawn to the special purpose acquisition company (SPAC) pathway, a kind of publicly traded acquisition vehicle, in part because it may offer certain advantages over a traditional initial public offering (IPO).

“The SPAC process is significantly easier for the management team than the IPO process,” Patel explains. “Companies are attracted to the partnership, transparency, mission alignment, speed and lower average total costs of SPACs.”

NOAC’s mission is to play a role in accelerating the ongoing disruption of the animal protein sector. Their hope is to bring alternative protein companies to market, generate excess investment returns, and thereby attract more capital to the space. Since launching NOAC, they have observed more investors are becoming informed about the benefits of supporting plant-based food. 

“This process has been a satisfying journey of educating institutional investors as to the problems in the traditional food system, highlighting the issues of animal welfare, human health and the environment,” Patel says. “As we describe these issues in plain, unemotive economic and scientific terms, open-minded investors often have a light bulb moment. This aspect of our mission resonates with our investors and, more importantly, with the management teams with whom we seek a merger.”

Feria has noticed this, too.

“Most investors who are investing in this space are on the flexitarian continuum. They range… but all are aware of the opportunity, challenges, and upside potential of changing the food system,” she says. 

As more plant-based companies go public, Patel predicts that the approximately $10 billion in market capitalization – the market value of a publicly traded company’s outstanding shares – in the U.S. plant-based sector right now – which includes the three public plant-based companies Beyond Meat, Tattooed Chef, and Laird Super Food – will triple in 2021.

But start-ups must remember that this growing interest from investors is reserved for companies worth their salt.

“As a company, the core will be whether your products replicate or improve upon the taste, cookability, cost and nutrition of the products they seek to displace,” Patel says. “The complexity of the industry is rising every day as more entrepreneurs enter the space and more consumers seek healthier, tastier and more humane options.”

It seems investors and plant-bases companies alike are aligned on what they want to see in the sector—sustainable growth, and more accessible, affordable, healthy and tasty plant-based food.

Competition is raising the stakes, but investors largely agree that financial investment will remain available to companies who have the ability and drive to improve the sector and make plant-based eating a realistic choice for more and more consumers. Judging by the outstanding talent and innovation driving the sector already, it doesn’t seem like that will be much of an issue in the future.