The new wave in tech start-ups: you just may eat it
What if the next big thing in tech does not arrive on your smartphone or in the cloud? What if it lands on your plate?
That idea is enticing a wide group of venture capitalists in Silicon Valley into making big bets on food.
In some cases, the goal is to connect restaurants with food purveyors, or to create on-demand delivery services from local farms, or ready-to-cook dinner kits. In others, the goal is to invent new foods, like creating cheese, meat and egg substitutes from plants. Since this is Silicon Valley money, though, the ultimate goal is often nothing short of grand: transforming the food industry.
“Part of the reason you’re seeing all these VCs get interested in this is the food industry is not only massive, but like the energy industry, it is terribly broken in terms of its impact on the environment, health, animals,” said Josh Tetrick, founder and chief executive of Hampton Creek Foods, a startup making egg alternatives.
Some investors say food-related startups fit into their sustainability portfolios, alongside solar energy or electric cars, because they aim to reduce the toll on the environment of producing animal products. For others, they fit alongside health investments like fitness devices and heart rate monitoring apps. Still others are eager to tackle a real-world problem, instead of building virtual farming games or figuring out ways to get people to click on ads.
“There are pretty significant environmental consequences and health issues associated with sodium or high-fructose corn syrup or eating too much red meat,” said Samir Kaul, a partner at Khosla Ventures, which has invested in a half-dozen food startups. “I wouldn’t bet my money that Cargill or ConAgra are going to innovate here. I think it’s going to take startups to do that.”
In the last year, venture capital firms in the valley have funneled about $350 million into food projects, and investment deals in the sector were 37 percent higher than the previous year, according to a recent report by CB Insights, a venture capital database. In 2008, that figure was less than $50 million.
That money is just a slice of the $30 billion that venture capitalists invest annually, but it is enough to help finance an array of food startups.
The venture capital firms helping to finance these businesses are some of the valley’s most prominent names, in addition to Khosla: SV Angel, Kleiner Perkins Caufield & Byers, True Ventures and the Obvious Collection. Celebrities from Hollywood (Matt Damon), pro football (Tom Brady) and the tech world more broadly (Bill Gates) have also joined in.
“Consumers are interested in sophisticated experiences that are beautifully delivered, which we’ve seen happen on the Web and with products like the iPhone,” said Tony Conrad, a partner at True Ventures, which was an early investor in the coffee company Blue Bottle. “Now, we’re seeing that happen with food and beverage.”
Still, some tech analysts and venture capitalists are skeptical that these companies, with their factories and perishable products, can reach the scale and market valuations of big Internet companies.
“I don’t see a multimillion-dollar business coming out of any of these companies,” said Susan Etlinger, an analyst with the Altimeter Group, a firm that advises companies on how to use technology. “The majority of Americans will not likely be able to participate, they’re simply too expensive for them.”
Venture capitalists have strayed from pure technology to food before. Restaurant chains like Starbucks, P.F. Chang’s, Jamba Juice and, more recently, the Melt, were backed by venture capital. Recipe apps and restaurant review sites like Yelp have long been popular.
But this newest wave of startups is seeking to use technology to change the way people buy food, and in some cases to invent entirely new foods. Investors are also eager to profit from the movement toward eating fewer animal products and more organic food. They face a contradiction, though, because that movement also shuns processed food and is decidedly low-tech.
“It’s not Franken-food,” Kaul of Khosla Ventures said. “We’re careful not to make it sound like some science experiment, but there is technology there.”
Hampton Creek Foods, based in San Francisco, uses about a dozen plants, including peas, sorghum and a type of bean, with properties similar to eggs, to make an egg substitute.
Tetrick, its founder, started the company after working on alleviating poverty in sub-Saharan Africa. He hired a protein chemist, a food scientist, a sales executive from Heinz and a contestant from the television show “Top Chef.” Two large food companies are using the egg substitutes in cookies and mayonnaise, and he said he planned to sell them to consumers next month.
Unreal, based in Boston, makes candy that the founders say has no artificial colors or flavors, preservatives, hydrogenated fats or genetically modified ingredients, with at least 25 percent less sugar than similar candy on the market and added protein and fiber. The candy is sold in stores including CVS and Target.
Lyrical Foods makes cheese from almond milk and macadamia milk under the name Kite Hill, which is the first nondairy cheese to be sold by Whole Foods. Nu-Tek Salt uses potassium chloride instead of sodium chloride to lower sodium. Beyond Meat and Sand Hill Foods are making veggie burgers that their investors say taste and grill more like beef than others on the market.
Yet some investors say the projects have a better chance of success if they steer clear of selling actual food. “The food category has been a hard nut to crack because it’s a perishable item,” said Mark Suster, an investor at GRP Partners. “The No. 1 thing VCs are looking for are scalable and repeatable, high-margin businesses. You can create those in food, it’s just harder.”
His firm, for instance, is tapping into the food industry by investing in Internet services like ChowNow, an online restaurant ordering company.
GoodEggs, another Web service, is a marketplace for local farmers and chefs who make artisanal goods like cheese, honey, jam and olive oil. Another company, Farmigo, is taking a similar strategy.
Kitchensurfing is a site that lets people hire private chefs to give pasta-making lessons or prepare an authentic Thai meal, just as one might book a room on Airbnb.
“Chefs spend all of their time working and at farmers markets,” said Chris Muscarella, a chef in Brooklyn who helped to found the site. “They aren’t sitting in front of a computer. So the fact that you’re finally getting more chefs online through mobile devices is actually a big deal for the culinary world.”
Still, food startups have their own challenges that are unfamiliar to tech entrepreneurs and investors, like a broken-down delivery truck or a bad oyster. These setbacks can be more difficult to recover from than a software malfunction.
In the early days of Plated, for instance, which sells ready-to-make dinner kits for recipes like Greek lamb burgers with cucumber salad, the founders sank $15,000 into building a customized refrigerated warehouse in Queens. Then they discovered that it would not cool lower than 70 degrees, unsuitable for food handling and preparation.
“We just had to walk away from that investment,” said Nick Taranto, one of the founders.
Bill Maris, a partner at Google Ventures, the search giant’s investment arm, has not yet put money into any food-related companies. But he said he was closely watching the trend.
He said, “Startups are unpredictable and all these companies are trying to take advantage of new technology and markets that are changing.”
But, he added, “in 2000, the same questions were asked about YouTube and no one knew how it would even work, let alone become a business.”MORE IN World/National BusinessPricey specialty drugs are helping CVS Health thrive after kicking tobacco sales, with revenue... Full Story
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