Where Has Venture Capital Money Gone Over the Past Five Years The flow of money and recent movements in the food and beverage industry reflect a series of hotspots and trends in venture capital investment. While they are not competing with Silicon Valley, investing in food and beverage is becoming increasingly attractive for those seeking high-growth opportunities across industries, as it can have a sustained and significant impact on consumers and their lifestyles. Looking back at venture capital investments flowing into the food sector over the past five years, their moves indicate why certain industry categories are breaking the status quo today and where carefully calculated future bets should be placed... 1. Plant-Based Foods and Beverages Examples: Kite Hill (301 Inc division, CAVU Venture Partners private equity); Rhythm Superfoods (301 Inc division, CircleUp private equity) Overall, over the past five years, investments by venture capital firms and manufacturers in plant-based foods and beverages have topped analysts' lists. Analysts say that because plant-based products resonate with consumers at different levels, this category attracts many venture investors. First, the plant-based category's "fresh and organic attributes are rooted in ingredient authenticity," said Zach Grannis, business manager at CircleUp. These attributes have become increasingly important to consumers of all ages. ▲ CircleUp Zach Grannis Plant-based products also offer sustainability benefits. Concerns about the impact of meat production on animal welfare and the environment have led some consumers to turn to plant-based products. This has spurred the rapid development of plant-based meat alternatives such as Beyond Meat and Impossible Foods, as well as plant-based egg and dairy alternatives like Hampton Creek (which is currently seeking a $200 million investment) and pea-based dairy producer Ripple. Compared to traditional categories (such as dairy), plant-based alternatives can also reduce costs, said Adam Lowry, co-founder and CEO of Ripple, at Fortune's Brainstorm E summit in May. He said that plant-based product manufacturers can achieve growth through venture capital and expanded distribution, and they can pass these savings on to consumers, making the category more attractive and disruptive. 2. Protein Examples: Impossible Foods (led by UBS, with Viking Global Investors); Exo (AccelFoods, Collaborative Fund) From startups to multinationals like General Mills, there is interest in alternative protein sources such as edible insects and algae. Portable proteins, such as protein bars and shakes, have also become highly attractive venture investments. From rapidly growing sports nutrition to breakfast sandwiches, products in various categories are evolving to meet consumer demands for health and convenience. Grannis said that today, protein-fortified products carry a "halo" in consumers' minds. Consumers are looking for protein as a primary functional attribute of food, which has spurred development across the board, from artisan producers to algae-based ingredient producers like TerraVia (formerly Solazyme). Interestingly, according to recent Mintel statistics, the number of new protein-based products decreased from 481 in 2013 to 265 last year. However, according to the latest research from Natural Marketing Institute and Informa, 38% of American adults say they want to increase their protein intake, and 57% say they consumed more plant-based protein products this year than last year. The protein market is still active, but with such market saturation, manufacturers must continue to innovate to stand out. 3. Snackification Examples: Dang Foods (Sonoma Brands); Crunchsters (AccelFoods) Much of the venture capital focus has been on startups, which has led to the description of the "snackification" of the food and beverage industry by Lauren Jupiter, co-founder and managing partner of AccelFoods, and other analysts. Snacking is not a new category, but sub-segments such as savory snacks are continuously innovating to meet modern consumers' health-related expectations. ▲ AccelFoods Lauren Jupiter Grannis also called snackification a manifestation of other popular trends in venture capital. "We are witnessing a continued awakening of the traditional three-meal framework. If you snack all day, you need highly nutrient-dense products to sustain energy." And snacking is not limited to solid foods. Liquid meal replacements are another rapidly rising category, as nearly 40% of American consumers say they find it easier to get their morning nutrition through liquids compared to solid foods. The drive for convenience is forcing manufacturers to explore internally to make current products more convenient and healthful, such as pairing milk with cereal. Hormel tried Spam Snacks but discontinued the product last month after a disappointing six-month run. Sometimes, manufacturers must look beyond innovation inside and outside the package, and consider the brand's influence on product innovation. 4. Indulgent Foods That Are Good for You Examples: Il Morso (AccelFoods), Hungryroot (Lightspeed Venture Partners, Lerer Hippeau Ventures) Although health and wellness often take center stage in corporate and manufacturer venture investments, both investors and consumers have overlooked the enduring appeal of indulgent foods. While soda sales have declined due to consumer concerns about sugar intake and obesity, candy sales continue to rise. The balance in these venture investments often focuses on startups' pursuit of higher quality products and the use of healthy ingredients. Jupiter said, "We see people ignoring these health trends and still enjoying indulgent foods daily, and investment focus follows those trends." 5. Natural and Organic All the above categories share a common feature: their use of natural and organic ingredients. ▲ Anthony Valentino "All of this is driven by consumer demand, and the health and wellness craze drives every small decision," said Anthony Valentino, deputy editor at Mergermarket. Where Will Venture Capital Money Flow in the Next Five Years? Overall, these analysts tend to believe that venture capital will remain at its general level, as many of these categories are just beginning to gain traction. "Investors are looking at general market dynamics and category trends, as well as consumer demand, and what we call 'sustainable shifts in consumer behavior' rather than fads," Jupiter said. Sherri Wolf, a member of the Edible Ventures angel investment group and partner at Newport Board Group, said that products and categories serving the millennial market—from natural ingredients to convenience—will continue to attract investors. "At Edible Ventures, we can truly see the overall market performance. The investment community is not currently focused on a specific area; I mean, all investors are seeking valuable food and beverage projects. I once thought we would see concentrated focus on a specific area, but now because more money is invested in food and beverage, investment is becoming more diversified. More types of food and beverage companies are seeking funding, whereas before you had to invest in only one hot area." Grannis echoed this view. "Overall, products that are authentic, focus on quality, and meet more specific needs, unlike many 'big food' products, will receive more investment. In this way, the more a product caters to personalized needs, the stronger the brand power." But beyond specific brands and categories, the future of food and beverage venture capital also lies in making these popular categories more profitable. Jupiter said that food technology and agri-tech, or "considering the product from seed to storage," could be another area where venture capital firms and manufacturers focus their funds. Nestlé's open innovation platform Henri@Nestle may be one way to promote such technological collaboration. "Strategic investors who view their venture capital arms almost as educational platforms will be interested in entering food technology and agri-tech, in addition to the new frontier of packaged foods," Jupiter said. In the past two months, more and more manufacturers have continued to launch venture capital initiatives, including Hain Celestial, Kellogg, and Danone. As they compete with other food and beverage venture capital firms to invest in the same promising areas, some investors may begin to gradually implement exit strategies. This could lead to a shorter lifecycle for startups from funding to investment to acquisition. "You think about brands launched five, six, seven years ago that received investment, but you also wonder if they are now on track and how their lifecycles will differ," Valentino said. "You almost wonder if their paths will be different—whether they have already benefited from these venture initiatives at an earlier stage." 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