The need to provide nutrition for a growing world population—and make food systems more climate friendly and healthier—is creating opportunities for private equity investors to fund innovation in a global market worth trillions of dollars. As consumers increasingly consider the impact of food on their health and the environment, that's opening the door to change in a heavily-regulated industry traditionally focused on safety and cost.
At RBC Investor & Treasury Services' Private Equity Summit, held in Paris on January 9, 2023, investors and entrepreneurs discussed long-term trends and opportunities in food technology (FoodTech). Here are nine key takeaways from the discussion.
1. The size of the food market offers billion-dollar opportunities
The trillion dollar market value for food services globally means potentially huge rewards for startups and investors, according to Philippe Goldman, former CEO of robot-pizza startup Pazzi Robotics, adding that the significant scale separates FoodTech from other areas of technology. Food-technology startups operate “in markets where 1% or 0.5% market share already represents huge amounts. The markets in play for each food product are huge."
Meat substitutes alone promise “enormous" returns, said Tristan Maurel, co-founder and CEO of Umiami, a French startup developing plant-based meat alternatives. While substitute beef has gotten much attention, the market for plant-based chicken substitutes is valued at $5 billion and is growing 25% a year, he said.
2. Investment in FoodTech has a long-term horizon
Sticky food habits mean innovations can take generations to implement, said Augustin Sayer, a partner at Newfund Capital. The early-stage venture capital firm based in France and the US is betting on meat alternatives and urban farms replacing traditional farming.
“We know that it will be several generations before we get there. But if we are able to crack something in the meantime, we will manage to find a good return for our LPs (Limited Partners)."
Fund-performance requirements can make it difficult to wait for new ingredients or disruptive food-service innovations to go mainstream, said Alexandre Neuvéglise, Investment Director at family investment firm Creadev, which invests in food and sustainable consumption.
While things can move “very, very fast" in technology, where a successful new app might gain a billion users in three to five years, FoodTech is different, according to Goldman.
“Food, you have to understand, is cultural and existential. We don't eat tech, we eat food. And these topics take a long time to implement. We don't change our eating habits overnight. But when it happens, it lasts."
3. Food-technology investors have multiple exits
Interest in all forms of protein, milk or meat—new or alternative—means there are plenty of potential buyers for startups in that space, said Anne-Valérie Bach, Managing Director at Capagro, a venture capital fund dedicated to AgTech and FoodTech. Catering services are another area with an appetite for acquisitions, she said.
“We can achieve our returns, and we have people who can take over, because we are after all in fairly massive industries, with players who haven't innovated much and need to reinvent themselves. The exits are quite varied, for players who have the means."
FoodTech IPOs could offer significant returns for investment funds in the coming years, said Maurel at Umiami.
4. Purpose-led FoodTech companies attract talent and customers
Many FoodTech companies are created to address environmental or societal issues, and their purpose-driven nature helps them attract talent.
“Founders of the companies we invest in often do what they do because of convictions regarding the environment, regarding social issues, regarding health," Bach said. “That attracts very high-level talent, and we are seeing a real talent acceleration in our sectors. For our investors, that's a guarantee for returns."
Purpose-led companies could take business from existing food-industry players that miss this shift, according to Neuvéglise, “in particular from new consumers who are particularly picky about their purchasing criteria."
5. First-generation plant-based meat hasn't fulfilled its promise
The first generation of plant-based meat proved less healthy, affordable and tasty than marketing promised, Maurel said.
“From the consumer's point of view, we have a product that is not as good as meat. We have a product that doesn't appear healthier. And we have a product that is expensive.”
6. Fundamentals arguing for plant-based meat alternatives are unchanged
The drivers for plant-based meat substitutes remain valid, with concerns around the meat industry's impact on the planet, animal welfare and human health.
“In order to be able to feed the planet, we will have to consume less meat," Maurel said. “We have products that taste better, that are better for your health, coming to the market."
7. Meat substitutes may only fill a demand gap
Growing populations and a need for higher-quality nutrition may require doubling the world's protein intake, which can't be achieved by current agricultural methods, according to Bach. That means plant-based meat alternatives will be needed to meet rising demand for protein, rather than replacing today's animal-meat industry.
“All the alternatives that we're producing will just be able to bridge the gap between the long-term need and our capacity to produce today, and that's already huge."
8. Automation is coming to the food services industry
Hundreds of thousands of people in Europe and the US left food-service jobs during the pandemic, and the industry has been unable to rehire enough staff for what is considered arduous work, according to Goldman. That may drive automation, especially in repeatable tasks such as making standardized food and dishwashing.
“Those who have worked in a fast-food restaurant will know that catering is hard work and so, inevitably, automation of these tasks will happen,'' Goldman said. “It's a fundamental trend that will gradually take hold in all food-service professions."
9. Food-delivery and quick-commerce startups may need to raise fees
The business models of many food and grocery-delivery services don't cover sufficient costs and scaling up or robotization will not necessarily fix the problem, according to Neuvéglise. Fees may have to go up, reducing the appeal to consumers.
“As a result, it will probably not be as big a business as we imagined. We're seeing it now on the platforms. Prices are gradually increasing, slowly but surely."
While returns will vary within the sector, food technology addresses a basic human need. And FoodTech is set to tackle some of the world's biggest challenges, by helping provide adequate nutrition to a growing population and cutting food systems' share of greenhouse gases. That puts FoodTech startups and investors in a good place for growth.