After working in food tech and interviewing dozens of people in the space, I’ve been noticing some interesting disconnects between a certain type of person. No, it’s not the CEO or the leadership team. Rather, it’s the investor. The people who really don’t understand the difference between food tech and food. Of course, not all investors. But when you’re a startup, money is money.
Though Motif Foodworks went through layoffs, I’ve heard in the shadows that many other food tech companies are also laying off a bunch of people. It may be the smartest move they will make during this time. Cutting costs in a scarce environment allows companies to extend their burn rate, realign priorities, and essentially rip the cancer out in certain situations.
Anyways, what’s been ruminating in my mind is when a friend told me: You just have to accept that you’ll be valued as a food company rather than a biotech company, so lower valuations.
And I was thinking, ok. Why doesn’t food work compared to tech? Though the answer might be obvious, when the world is blinded by money, it might not be as easy to spot at first until the rain stops. My thoughts.
Burn Rate
(note, not a finance guy)
In this article, the definition of food tech is essentially deep IP (enough of a case where you need a lot of funding before starting, take that as you will) for the purpose of creating new food products, materials, or brands. Food is just less funding. The issue with the word Food Tech is that investors who don’t have a firm knowledge base can get their metrics jumbled and have the expectation that a food company should be like a tech company.
The good news about food is that it’s easy to make and doesn’t really require massive amounts of R+D. The bad news compared to non-perishable industries is you’re dealing with COGS that rot, shelf-life, and a product that has to be decently affordable. The hidden factor that will probably screw over most food tech companies? The physical space and specialty it requires to scale up this tech is scattered around the world. Bloomberg’s Beyond Meat’s recent article mentions that product was shipped from North America, to Europe, and back again. This happens often because the rational is always, speed over efficiency.
With tech, that’s not necessarily the case. You deal with bits that don’t rot, don’t really cost anything, and can be scalable with little impact and requires little physical space.
So when the word food tech comes out, investors believe the same rules can be applied from tech into food. Leadership has a hard time convincing investors that it’s food, not tech, so they will do whatever it takes to deliver. When problems occur, investors don’t really understand the scale economics to food. A common line when we hear problems? Don’t worry, we’ll fix it next time.
To understand the differences between food and food tech, I’m going to talk about burn rate first. Once you realize food has a lot of factors that eat up potential profits, that’s when things get hairy. We are only seeing the surface of the repercussions of investors not understanding the difference between food and tech.
All funded startups calculate burn rate for the sole purpose of maximizing capital to get to essentially the next round of funding. During that period between one series to the next, you have to accomplish goals that are a sign of you being profitable. Generally, food tech startups in a bull market have had the excuse to burn through their cash for the sake of either marketing or R+D. Why not? The fountain of money is endless.
In hindsight, this is a bad idea but humans are irrational and when boom times happen, people believe they will never end. Money is addicting, some would say the root of all evil.
So when funding dries up and investors are pulling back, this sends a disruption to the financial model of a startup and so startups have to adjust. If the target for the next funding round is pushed back a year, then startups have to analyze their financials and shallow up their slope to survive.
Generally, a good board/investors does a double-check with the financials and say things to the leadership team they don’t want to hear. In most cases, this is layoffs.
Deciding to lay off people is the most viscerally hard thing to do. Not only are you halting the progress of potentially great technology, but you are upsetting people’s livelihoods. However, it might be necessary to save a company.
Food Tech Words that don’t work in Food
TAM – Total Addressable Market
Most novice investors only care about TAM. For alternative meat, it’s easy to talk about TAM. Meat’s a more than billion dollar industry. Beef, pork, chicken are big markets. Therefore we’re targeting this because you’ll get more money eventually.
This is a giant trap for startups because investors really don’t get it. They want their money yesterday and the fastest way to get that is to make a mimic of the most popular category in the sector.
The simplified charts and the easy-to-read numbers and the 10k research papers for SPINs or Mintel fills in enough trust and data for investors to nod their head that you’re choosing the right category to tackle.
There is a fine line between a giant TAM and truly innovating in categories that don’t get enough love. However, this is a HARD SELL to investors, who will complain that you won’t penetrate the market and stuff, and you need to educate the consumer or something.
Most likely, due to everyone launching a chicken nugget mimic at once, this will convince other alt-meat startups to re-evaluate differentiating their potential products. Jury is out in terms of how the chicken nugget wars will play out, but the rumor mill has it there is one clear winner.
TAM is an easy metric for investors to understand the ability for a food tech company to essentially make a quick buck. In a rational sense, this makes sense but in general, investors that only care about TAM generally don’t know what they’re doing and generally are in it for the disastrous short game.
No Network Effects
Network Effects
I read the Cold Start Problem by Andrew Chen about how he was able to grow Uber and one thing hammered in the book is that tech companies can create network effects. Essentially, an app like Uber, or Facebook, or LinkedIn exponentially gets stronger the more users there are on it. For example, more drivers and riders on Uber allows it to lower cost, time to get a ride, and overall convenience.
So I like reading tech startup books and apply it to food and guess what, you can’t for network effects. Food does not have a network effect. Sure, a bigger customer pool helps with scale up and cost reduction, but the consumer doesn’t really benefit for having more people like your product. In fact, one can argue that as food scales, the inherently worse it gets quality wise. They can talk about it to people, but it doesn’t exponentially benefit the product when more people eat it.
However, food has an advantage in that it is deeply community driven.
Very similar to a podcast versus a tweet, a podcast allows a deeper audience that a reaction from a bot. You want depth, not spread.
Though there is no network effect in food, there are ways to improve the community and build it, and then perhaps create a network effect. Unfortunately, current food tech practices focus more on force-feed marketing than truly understanding the consumer. Why? Cause understanding the consumer takes a lot of time, and a lot of energy. Surprisingly, the best business model for showing a network effect in food/CPG? Multi-level marketing, which is generally a profit incentive for the consumer which is how the network gets stronger.
Most companies say they do their research and understand their customer, but to be honest, with investors breathing down their necks, this becomes a secondary factor that honestly becomes sloppy data because leadership and investors have other things to worry about. Even in great companies, there is a struggle of alignment between marketing, consumer insights and leadership. Generally, it’s an ego thing on all sides.
Food is a Long Game
Everyone says it, no one wants to hear it.
A lot of smart, well-educated people with whom I respect and have interviewed always seem to like to post on LinkedIn about how a certain category is failing and they act really smart saying “I told you so”. Grow up. Or realize you’re out of touch.
In any case, food adoption is really hard.
My friend, Minh Tsai runs Hodo Tofu. A small 20 year old tofu brand and he still has trouble educating people about this 2000 year old dish. We’ve done our own research as well. Most people don’t know how to cook tofu. If people are having trouble being educated about a 2000 year old product, how hard is it to educate them on a 20 year old one?
We need to level set this with food: everyone sees food differently, everyone has an option on food because everyone is an expert in food. If there’s one thing we are good at, that we are fortunate that we have control of eating whatever we want, it’s that we get to choose the food we can put in our body. We can do research on it, we can customize it, we can bond with it. It’s highly interactive, but there’s so many options. You are dealing with a millennia of history when you convince someone to eat something that looks like something. It will take a while.
External Factors
We all like to predict trends on a timeline with no changes. COVID-19 accelerated the concept of remote work to a degree where it’s ubiquitous. This was something no one predicted. As environmental disasters are getting worse and worse, factory farms are a hot spot for something bad to happen. We have concentrated a lot of our meat production in very few places. There might be a point where things get so bad, the scarcity of meat will go up and people might have to choose between animal-based meat or other types of meat. What does that look like? A disease? a heatwave? A flood? All natural disasters that I am hearing about right now,
This is not to scare you and I really don’t want this to happen but I guess this gives me solace as an alternative protein scientist that my skills might still be useful.
As we scale down from food tech to food, realize that this decision is really a financial decision from people with a lot of money who don’t bother to understand how to sell a loaf of bread. Time will tell if this is going to be a good thing or not. If we look at history, great companies are started at rough times. Today’s world is unpredictable, but maybe that’s the beauty of it. All I know is that I want to cherish the choices I already have.
As we begin the shake-up in food tech, companies who have raised money in boom times are in for a bumpy time as now they have to justify a lot of things to investors who don’t understand the food industry. In an ecosystem point of view, this is probably a good thing. It shakes out the wannabes and boils down to fundamentals but it will be a rough ride.
For the food tech companies who may be in this predicament, I do think that what you do is important to push the future forward. There’s nothing more spineless and cowardly than people who will criticize others for taking risks and making companies with the environment and situation that they are in. We’re all trying to figure it out and there’s nothing more exciting than trying to pursue a brighter future together.