Soup-To-Nuts Podcast: How is the flood of investment funds reshaping the food & beverage space?

01-Mar-2019 - Last updated on 19-Aug-2020 at 07:43 GMT

Whether through multi-million dollar investments in startups or high dollar mergers and acquisitions of larger, established companies, the food and beverage industry currently is being flooded with funding, and with it many opportunities as well as challenges.

In February alone, the moringa-focused company Kuli Kuli raised $5 million in series B funding, the grain-free Mexican American food manufacturer Siete raised $90 million, the direct-to-consumer babyfood brand Little Spoon raised $7 million, on-demand food service DoorDash racked up $400 million in a series F round and the organic food and gardening company Back to the Roots raised $3 million in a series C round. And this is just a small sample.

All this money is opening doors for entrepreneurs and established brands alike, but according to the President of the Specialty Foods Association Phil Kafarakis it also can close doors if the deals aren’t structured strategically or the money is not managed carefully.

In this episode of FoodNavigator-USA’s Soup-To-Nuts Podcast, Kafarakis explains how the current influx of funds is reshaping the competitive landscape, impacting the consumer experience, influencing leadership and changing how both established and new companies operate their businesses for better and worse.

A changing landscape

To best understand the pros and cons of fundraising, Kafarakis says entrepreneurs and established brands need to look first at the risks revealed by activist investors’ and venture capitalists’ early involvement with large brands.

He explains that in the past five years, but especially that last 24 months, venture capitalists and activists investors have zeroed in on big food and are looking for ways to improve their financials through mergers, cost-cutting, streamlining management and to an extent restricting more expensive internal innovation as a way to increase margins and generate higher returns to shareholders.

When this didn’t work, Kafarakis said, the activists decided that the best solution was to make companies bigger and stronger by bringing together iconic companies that together could dominate the shelf and squeeze out the competition.

While this might have sounded good on paper, Kafarakis notes that at the same time all of this was happening consumers’ values also were changing and the only ones to notice were entrepreneurs at smaller companies that were not as focused inwards as larger established brands.

The result was a shift in share from large companies, such as Kraft Heinz, to smaller ones such as Sir Kensington's which unexpectedly stole market share from the condiment king by making a better-for-you version of ketchup.

“There are some smart entrepreneurial people who are capturing consumers’ ethos and values and bringing their brands to market, and it completely turned around the model that big brands had traditionally followed in bringing new products to the marketplace,” he said.

As these brands and others liked them have gained loyal consumers, they also have gained the attention of venture capitalists and venture funds that are creating incubators, accelerators and other brand building infrastructures as a way to get in on the action. And while they have much to offer, Kafarakis warns that if entrepreneurs are not careful they will fall into the same trap that the big brands did with activist investors.

“There are now, I could say, thousands of boutique venture funds specifically in food, specifically in wellness. … The problem becomes you are an entrepreneur, you have this thing going you believe in it, you know what you want, you have some social values, now you have the a guy’s money and the guy is starting to tell you he wants the return,” Kafarakis explained. “Once you starting getting involved with return on investment, the margin structure, the pressure of a quarterly earnings, you will then be at risk as a brand and you can easily get yourself in the same predicament as the big brands have been.”

Choosing the right partner

But, according to Kafarakis, history doesn’t have to repeat itself as long as entrepreneurs remember who they are and carefully select investment partners who share their ethos.

So, how can entrepreneurs ensure they are teaming up with the right investment partners? Kafarakis says they first need to know who they are and what they want and then they need to vet multiple investors until they find someone who shares their goals.

Continually communicate with consumers

Once entrepreneurs have found the right partner and begin to scale up they must continue to communicate directly with their consumers in order to avoid disenfranchising shoppers who initially were attracted to the business because they perceived it as being run by ‘real people’ rather than a faceless giant corporation.

Kafarakis added that keeping an open dialogue with consumers can also help small brands leverage better placement in stores without having to fork over limited resources for slotting fees.

Know when to ask for help

While entrepreneurs and startups can navigate many of these issues on their own at the beginning, at some point they will grow large enough that they will need help and that is when Kafarakis advises founders to team up with an industry veteran who knows the ropes but who is still open to innovation and a new way of doing business.

“You have these great, smart founders … but they need a right hand man or woman,” who can help lift up the business side of the equation, he said.

In the end, he added, change is never easy, but having someone trustworthy to share the burden can help companies large and small push forward and succeed.