Understanding Factors Driving Investment decisions In The Food Industry

This interview was originally published on Forbes

According to  research reports published by PwC, the world population is expected to increase by 1 billion over a 15 year period leading to a 35% increase in food consumption. Concerns about food scarcity and interest in sustainability has led to emergence of startups adopting different approaches to tackle this issue. Sustainability is not the only factor driving change in the food industry other factors exist.

Are these changes here to stay or simply a hype that will fade with time? How are investors responding to this new wave?

To understand what the future holds for the industry, it is important to explore what drives investment decisions  and how current changes in the industry is influencing that.

Three investors: 2 of whom manage venture capital funds and an angel investor shared their insights for this article.

Jordan Gaspar is the Co-Founder at AccelFoods a venture fund that invests in high-growth packaged food and beverage companies.  The fund is currently operating out of its third fund, with $90 million assets under management  and a portfolio of 36 active companies,

Julia Olayanju: Can you please tell us briefly about yourself and what led you to establishing the fund you have today.

 Gaspar: In my prior life as a corporate lawyer, I advised venture and private equity firms and their portfolio companies on acquisitions, sales, mergers, and financings. In 2013, I met my co-founder Lauren Jupiter, and we launched our initial platform after identifying a white space in the early and emerging growth-stages of consumer packaged goods. I oversee deal origination, structure and investment execution, as well as head-up strategy, retailer partnerships, investor relations and general management of the fund. My early years as a lawyer equipped me with significant transactional experience that I apply every day in my current role. As AccelFoods participated in over 25 financings last year alone, we are extremely active in identifying great new companies, diligencing them, financing, and supporting our founders as they scale.

Julia Olayanju: The food industry has experienced so much change in the past few years, do you find any of these changes exciting? If yes, which one and why.

Gaspar: It’s an exciting and unprecedented time to be investing in the food and beverage space. There is a convergence of highly skilled entrepreneurs entering the space, retailer willingness to make shelf space, and innovative products coming to market that is fueling the disruption we see today. This disruption is compounded by strong consumer demand and interest in smaller challenger brands that meet the better-for-you eating and drinking habits that consumers are adopting. Substantial purchasing power is now being directed towards the types of products that we invest in, with aging Baby Boomers looking for natural alternatives to traditional medicine (and disposable income to apply), Millennial parents prioritizing household spending in healthy-living directed products, and a digitally native younger generation coming of age that is focused on transparency and quality ingestible products that meet their discerning expectations.

To date, many food manufacturers have been slower to meet the expectations of their consumers for authentic, healthy, better-for-you products that align with their lifestyles. This opens the window for young, entrepreneurial brands to step in and meet these evolving consumer demands. In recent years, we have seen major corporations leverage various venture and innovation strategies, as well as seek out growth through M&A . Similarly, retailers like Kroger and Walmart are mobilizing quickly to be part of this dynamic and growing market . Others, like Wegmans, are solidifying their role as market leaders in curating innovation on shelf.

Julia Olayanju: What guides your investment decisions, do prevailing trends play any role?

Gaspar: When evaluating a company we consider everything from management (leadership is the most important factor in earlier stage investing), product approachability and quality, potential market opportunity, revenue metrics (i.e. velocity vs. door count, discounting, etc.), gross margin, scalability and quality controls embedded in the current supply chain, as well as barriers to entry (which often includes intellectual property).

Operating at an earlier stage of the investment cycle, we often identify trends before they have hit the broader retailer data – these companies are category creators driving new trends. More broadly, we look to identify products that fall within larger macro trends such as convenient meal solutions, better-for-you snacking, or products with functional benefits.

As a working mom of two, my personal and professional life can sometimes be inextricably linked. I feel that I have a unique perspective on what products hit a need-state and where I would buy them. My current role as a consumer is just as valuable a tool as some of the more specific investor metrics we apply!

Julia Olayanju: There are a number of trends driving change in the food industry today which ones are here to stay?

GasparPlant-based protein will continue to grow and have a lasting impact as mainstream consumers supplement their historical meat-based protein intake with plant-based options . Advances in technology and processing have allowed for tastier and better quality products to come to market. Looking at the recent success of companies in our portfolio like Koia and Alpha Foods – we have a front row seat in this next generation of brands.

In addition, as consumers are demanding convenient on-the-go eating solutions that can fuel their busy lifestyles, snackifcation continues to grow as a trend.

Lastly, we are continuing to invest in “better for you” and premium food and beverage products that stress functionality. People are investing into products with cleaner nutritional panels that enrich the health of their families. Products like Four Sigmatic offer functionality in coffee and Siete offers a grain-free alternative to traditional Mexican-American platforms.

Joshua Siegel, Partner Rubicon Venture

Joshua Siegel is a General Partner at Rubicon Ventures, New York, where he oversees the day to day activities of the firm. His activities include evaluating early-stage technology companies seeking funding, assisting current portfolio companies with development and interaction with our angels, attracting LP capital, and development of our network.

Julia Olayanju: Can you please tell us briefly about yourself and what led you to establishing the fund you have today.

Siegel: Previously, I was an investment banker with Citicorp Securities in the 1990’s and then transitioned to the electronic banking side of Citibank and oversaw the Eastern European platform for the bank. Following business school at Georgetown, I followed my passion and enrolled in culinary school at the Institute of Culinary Education in NYC. After graduation from culinary school, I worked at Craft restaurant in NYC under Marco Conora (Hearth) and Jonathan Beno (French Laundry, Per Se, and Lincoln). Realizing that chefing is a tough career, I went into the family real estate business and subsequently moved onto angel investing and finally VC. Rubicon Venture Capital was established in 2013 after both General partners  spent a number of years running Georgetown Angels and investing with our own proprietary capital. It was clear that a full Venture Capital fund was needed to make larger investments into companies and use external LP capital in order for us to leverage our expertise in various spaces.

Julia Olayanju: What guides your investment decisions, does prevailing trends play any role?

SeigelIt’s all about unit economics and customer acquisition costs. You have to have a product that appeals to consumers and provides for a net positive cash flow position . Basically you have to make money. We’re looking at products that can scale and scale nationally. It can be a niche product but only if that is a billion dollar market. Coffee is one we have made a play on as well as the frozen food aisle. Low to no sugar is also a big thing. You’d be surprised at how much sugar products actually contain even though they say no refined sugar or even “no added sugar.”  The team is also critical. Hustlers will always win at this game. You need to be able to see and run around. Basically hustle. If you do that and I like your product and I like you then you’ll get our capital. If you have an ego, we’re not the VC for you.

Julie Lerner

Julie Lerner is an  Investor with 37 Angels, specializing in the food and beverage sector. 37 Angels is a group of 80 female Angel Investors that invests in about 10-12 high potential male and female-led early stage startups each year, filtered from 2000

Julia Olayanju:  Can you please tell us briefly about yourself and what led you to joining the investment group you are with today.

Lerner: I love the entrepreneurial/startup ecosystem!  I come from a long line of entrepreneurs. I tried my hand at a couple of startups without success.  I am not alone as about 80-90% of new companies fail. I started a blog called The Failure Report where I interview accomplished entrepreneurs and investors about what NOT to do to be successful.  I also wanted to stay in the startup world, and I decided to join the other side of the equation as an angel investor.  I asked several people I had met while pitching my own company about angel investor groups, and 37 Angels was recommended over and over again.   

Julia Olayanju: You have an interest in the food industry, how long have you been involved & what’s your biggest attraction

Lerner: I have always been interested in food!  My grandmother gave me a travel diary when my family went on a cross-country trip when I was 10.  Instead of writing about what I saw, I wrote reviews for all the hotels and restaurants we ate at during the summer.  As a business, food is not necessarily an easy one. I worked for several years at the New York State Restaurant Association.  I quickly learned how slim the margins are and in New York City especially, the regulations are onerous.

Julia Olayanju:  What trends do you see in the food industry that you find fascinating?

Lerner:  I recently saw the Founder of Bonobos clothing speak at an event.  His company was bought in 2017 by Walmart. He talked about how larger companies are relying less on their own R&D departments and looking to acquire startups instead.  I see this a lot in food consumer package goods as well. Instead of creating brands/products in-house, they are buying companies who have successfully created a brand, business, and following.  Essentially, letting the startups take the risk. Ultimately a win-win for the corporation and the startup.

Julia Olayanju: What guides your investment decisions, does prevailing trends play any role?

Lerner: As with any company in any vertical, it comes down to the founder.  We recently looked at an organic, vegan, gluten-free cookie company. This narrow space is so competitive and overcrowded as well as the general healthy snack sector.  However, the founder has great experience in emerging brands at a major company, been through a well-regarded food accelerator, and had an extensive network. Ultimately, their lead investor swooped in and took the whole round.  They recognized as we did that the founder had the “right stuff” to succeed.

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