“A lot of companies were able to survive throughout 2022 and pivot a bit, but 2023 was the year where we saw the companies that weren't able to pivot as quickly, or were not able to ultimately raise future rounds of funding, they started going out of business,” said Steve Molino, principal at Clear Current Capital. “Also, the ones that did exist and did survive, even the new ones, the way they looked at raising money, growing their businesses, and scaling was very different. So, a lot of focus on the fundamentals.”
Alt protein: A ‘symptom of a broader reset ... in the investing market’
In 2023, alt-protein companies faced numerous headwinds, as venture capital dried up and the cost of traditional bank debt increased due in part to higher interest rates, and consumer demand moved away from the category in the US.
These macro-economic changes didn’t just change how alt-protein founders thought about raising money, but VC firms also had a harder time raising money and became more critical of what type of investment they were making, noted Matt Spence, managing director and global head of venture capital banking at Barclays.
“A lot of the [limited partners] were looking for more returns, more exits, and it has become a much more difficult environment for everyone involved, even though the fundamental thesis of alternative proteins — what it could be — remained real. But alternative proteins became one symptom of a broader reset of the broader investing market. So, this is not something that's really unique to alt proteins,” Spence said.
In response to the tighter capital, investors shifted their focus from brands focused on growth to those that with a path to profitability, he added.
“Two new things that we've seen from later-stage investors ... first of all, just a real interest in profitability. I mean, growth is obviously important, but not only the high capital requirements, [but] how do you get the unit economics working.”
Spence added, “The second piece is to start thinking about, given where a number of those valuations have been, which were quite high to start with, but what's a reasonable exit environment for them?”
Food tech valuations are ‘more reasonable’ than CPG
Once-high valuations for alt-protein companies have come down amid the capital crunch, as investors are questioning high valuations, the panel shared.
From her experience, Amira Khatib, VP at Bluestein Ventures — which invests in the entire food and beverage supply chain — has seen that the food-tech side has “much more reasonable valuations because you have mostly institutional [investors] who are focused on investing in this space.”
“In the CPG space, you actually see that valuations have not come back to a reasonable level because you have a lot of non-institutional [investors], whether it's influencers and celebrities or angels, that just don't have the same knowledge of what's required in the venture market and aren't as price sensitive. So, I've actually seen a lot more reasonable valuations in food tech over the last year than I have in CPG, which has led us to invest a lot more on the food tech side, candidly.”
While alt-protein startups might want a high valuation, Khatib stressed accurately estimating valuations was important to attracting the right investor.
“The best founders understand that you do need to give up some equity, and you're getting valuable partners on your cap table, and it's great to be reasonable about your valuation expectations. It saves you time. You'll find the right partners who are aligned. And again, it sets you up for success in the long term, not saying you need to give up a ton of equity and fully delude yourself, but I think it's important to go into fundraising with reasonable expectations.”
Valuations are also important when a company is exiting the market through an acquisition or merger, and today, “a number of large acquirers are waiting for the valuations to come down” even further, Spence said.
“When you're trying to think about exit multiples, it's harder because the traditional tools of valuation and comparing companies ... aren't readily available,” Spence said.
Non-dilutive financing options catch on
While venture capital plays a large role in food-tech funding, founders are also increasingly turning to non-dilutive financing, Molino said.
Molino elaborated, “Instead of thinking of a $10 million equity round a Series A, [founders are] thinking a $10 million round, but maybe six or seven of it is equity, and a couple million is their non-diluted financing.”
Founders in the food-tech space also have several non-dilutive financing options available to them, including government-backed loans to investments, Spence said.
“One of the non-dilutive financing [options] that has become interesting is some of the government sources of funding. So obviously, traditional meat is highly subsidized, so it's not really working in an economically free-market way either, if we’re being very honest about things. So, the Department of Energy loan program office ... put out guidance to talk about alternative proteins that would be of interest for these loans that are non-dilutive, just need to be repaid to the government at a pretty attractive interest rate.”