Chile-based NotMilk may be alluring to investors because of its plant-based product traits and its de facto celebrity endorsement by Jeff Bezos. Not all food-tech companies are so fortunate. The key to capturing investor capital may be found in answering a basic question: Among potential competitors, what are the barriers-to-entry?
In food tech, direct-to-consumer businesses proliferate in part because of the lifestyle impact of the pandemic, but also because the barriers-to-entry are relatively modest. These businesses include meal-kit and food-delivery companies. Their tech stack is framed by an app for ordering and fulfillment software for shipping. While this technology is impressive, it can—in truth—be replicated by knowledgeable professionals with reasonable access to seed capital.
At the other end of the spectrum are the lab-based companies where food is produced using alternative proteins. One notable example is Beyond Meat. Their popularity is based on the idea that their products are more environmentally-friendly than traditional farm-based output. Also in play is the assumption that these firms can “feed the world” at a materially lower cost to consumers, at least eventually. In these businesses, the barriers-to-entry are relatively high because of patent protections and regulatory requirements.
Food tech is a broad segment. Other components include vertical farming, smart kitchens, and even food-waste management. When it comes to investor perceptions, those firms with a less robust tech stack may be jockeying to ride on the coattails of those with hardened, proprietary technology. We see a similar quality among fintech companies. In the venture world, this me-too mindset is framed by the simple fundamental that investors favor firms with matchless, tech-oriented qualities, or at least the perception of such qualities.
From a valuation standpoint, the issue may be short-fuse versus long-fuse. Valuations in direct-to-consumer businesses tilt toward sales expectations and brand franchise; valuations in the lab-based area are supported by concerns about environmental stewardship. Consider the notion that Beyond Meat has seen its sales plateau in the second quarter 2021, but its stock price remains firm. ■
Our Vantage Point: Lofty valuations among startups are common in an era of cheap capital, all the more given pent-up demand for deal flow among qualified investors. One litmus test on whether those measures can be sustained is astutely measuring barriers-to-entry.
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