“Some investors are taking a picks-and-shovels model in which they're looking at food manufacturers or even extruding equipment players to play in the space without having to take a lead horse to the brand side, whereas other investors are taking more of that VC approach in which they're making a lot of bets on different brands,” said Jen Wu, managing director of L.E.K Consulting.
Understanding the new capital dynamics
As many investors are questioning where they put their dollars, many are also looking more critically at brand valuation and whether the company has a sustainable business model for the future, said Brandon NG, VP of Houlihan Lokey.
“Every company needs to drive EBITDA and cash flow. And for something that is worth a billion dollars on paper, you need to have at least $50 million in EBITDA and cash flow, and a lot of these businesses don't happen.”
For brands, today's market "is definitely a return to fundamentals," where companies are questioning where to best allocate their money, Anne Palermo, CEO and co-founder of plant-based seafood company Aqua Cultured Foods. For instance, Aqua Cultured Foods invests a large amount in product development, but “it’s not R&D for R&D’s sake,” instead its focused on developing a platform to deliver on customer needs, she added.
When it comes to returning to the fundamentals, brands need to focus on profitability and how they're growing for the long haul, Palermo said. “It's not just to get fundraising; it's not just to get through this market. It's to have a viable business that has the best opportunities to succeed," she added.
The plant-based market still has room for innovation
In addition to focusing on financial fundamentals, companies and investors still are looking for innovation across the plant-based space in a range of categories. And while some companies are questioning how many plant-based alternatives they should have in their protein and dairy portfolio, many other CPG brands are still investing, as they see a strong future for the overall category, Wu said.
"If I pulled this group, and I said, 'In 10 years’ time, will Americans be eating and drinking less animal protein and dairy?' The answer will probably be a resounding yes. The question is what are they eating instead? Because some part of that share of stomach is going to be plant-based proteins, some of its going to be fermentation-enabled, and some of that is going to be intentionally cultured, ... and a big part of it could just be more vegetables."
In terms of specific categories, the plant-based cheese segment is “one of the final frontiers" given its different uses from melting to stretching and how it's included in range of products. For plant-based cheese, “there's a higher bar than fluid milk, which has to thaw and has to be blended, but otherwise, with a certain degree of viscosity, it's getting there in terms of texture,” she added.
“I always think of it from a technology perspective, if its precision fermentation, or it's better nut-butter based or oil-based plant-based cheese, there's a real gap there when you think about that penetration.”
And though there is a host of areas still to innovate in the plant-based segment, companies need to conduct their due diligence in developing products to ensure that they are only releasing the best, Palermo noted.
"There's just so many avenues for different kinds of innovation. I think that we have to perfect each one before we really go on because, with inferior products on the market, it hurts the industry in general. And so, I think that we just have to allow industry and time to mature in order to really meet the needs of the customers across all the channels and needs that they have whether it's the price or taste or the texture."