Foodtech venture capital: Drawn to ‘hot deals’

Deal activity in 2020 is down 20% quarter-on-quarter, but signs in the market show an upward trend as investors focus on specific categories across the foodtech space

By Murielle Gonzalez

Concept of food market share

Presenting at the Future Food-Tech Summit 2020, Alex Frederick of Pitchbook revealed the impacts of the Covid-19 pandemic on deal activity in the foodtech space. The two-day virtual event drew to a close on Friday 18 September, attracting 800 people from all corners of the food and drink and agriculture arenas.

In his report, Frederick revealed that global venture capital deal activity in 2020 is down 20% quarter-on-quarter due to the knock-on effects of the Covid-19 pandemic in the sector. Despite this drop, deal activity remains high with a total deal value of €8.3 billion in the six months to the end of June. While still high, deal values are down 37% in this period compared with last year.

Hardware companies such as kitchen technology and robotics are among the most hard-hit by the drop in deal activity. Venture capital, however, is substantial in “hot” categories such as plant-based food, meal kits, and food supply, as well as online groceries and restaurant delivery.

Frederick said Pitchbook’s analysts expect the sector to pick up in the coming months as investors adapt to the new normal.

Europe has seen a robust deal flow of foodtech venture capital deals in the first half of this year, and it’s on track to outpace the deal flow of 2019.

Deal count is 74 in this period, 40% down compared with last year, but deal values are up in Q3, thanks in part to Deliveroo’s €515 million Series G, this year’s top mega-deal. Other high-ticket investments in this period include the €100 million late-stage round of meal delivery Wolt; the €70 million Series C of Swile, the corporate lunch card app; and the €50 million Series A1 of insect protein firm MealFood.

Graphic as presented at Future Food-Tech Summit 2020 by Alex Frederick

In all, deal value in the first half of this year reached €1 billion, a decade high.

“This robust activity says a lot about the resilience of the venture capital ecosystem,” said Frederick. He argued that investors are active in this market and that the level of capital put into the foodtech scene speaks to the growth of venture capital as an asset class and the sheer availability of capital.

Looking at deal activity by size, deals have shifted to larger amounts over the past five years. Fredrick pointed out, however, that mega-deals like Deliveroo’s are still a tiny sliver of the venture ecosystem.

In the first half of 2020, 21.4% of deals were under €1 million, and 10.7% of deals are €25 million-plus.

“Over the past few years, most deals have been under pressure because fund size and valuations are much higher,” said Fredrick. “In terms of deal stages, angel and seed deals have decreased as a proportion of total deals to 20%, which is the lowest proportion since 2012.”

Graphic as presented at Future Food-Tech Summit 2020 by Alex Frederick

The Pitchbook analyst reported a slowdown of investment in early-stage businesses. Deal activity in this space is expected to pick up through the rest of the year “as investors become more comfortable meeting start-ups over Zoom,” he said.

Bio-engineered food is “hot”

One sector that has attracted a lot of attention from venture capital since 2018, but more so this year, is bio-engineered food, everything from cell agriculture and plant-based foods to meat replacements, and novel ingredients.

Deals in the sector this year amount to €88.4 million, up from €83.6 million in 2019. “We’ll likely see deal values come in at the end of 2020 at double’s 2019 activity,” said Frederick, pointing out that a fair share of it is from 13 mega-deals.

Graphic as presented at Future Food-Tech Summit 2020 by Alex Frederick

The uptake in venture capital across categories is global, and the trend is driven by several forces, the growing interest in vegetarian diets, consumer interest in the health and environmental benefits of eating plant-based products, and also the emergence of cultivated meat technology.

Frederick said cultivated meat is attracting increased venture capital competition as it gets closer to commercialisation, and no products are yet available in the market.

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“Covid-19 has caused an overall increase in meat demand and as a result some meat shortages and concerns around the safety of the meat supply chain, which is why consumers are looking for alternatives,” he explained. “Population growth and wealth accumulation are expected to double the demand for meat by 2050,” he added.

Food supply chain

Food suppliers are seeing increased venture capital activity. Segments like online groceries, business-to-business suppliers, meal kits, ghost kitchens (commissary kitchens that host virtual restaurants that supply exclusively to food delivery apps), and catering are attracting venture capital.

Deal activity this year is close to 2019 numbers, and is expected to outpace 2019 deal values by the end of the year.  Frederick said this sector has benefitted from a consumer shift in spend from restaurant dining to at-home eating and buying groceries online.

Frederick explained that the main driver in the food supply chain is the shift towards online shopping and that meal kits have been particularly attractive as businesses are catering to meet the demand from specific dietary requirements.

The valuation landscape

Median pre-money valuations have changed year-on-year. Valuations increased in the early and late stages and plateaued at the angel and seed stage.

Frederick explained this data is somewhat skewed, especially in the late stage due to the proportion of mega-deals and larger deals and fewer deals occurring at the early stage, pushing medians higher. He also pointed out that valuation step-ups are in decline.

He also revealed that the median age at which a company is raising capital at each funding stage is changing. Angel and seed deals are raising capital at 3.1 years, and early-stage at 3.5 years.

Frederick explained: “Companies are waiting longer to raise capital, and there are several reasons for this: there are more resources available for start-ups, such as business accelerators, and less capital is needed to start a software business – many are operating on the cloud.”

Frederick said there’s an increasing awareness among founders who understand that if they wait until the start-up has more traction, they can give up less equity for that capital.

“We expect to see the age [at which a company raise capital] continue to increase if investors continue to focus on start-ups with the most traction, which they may prefer due to this time of economic uncertainty,” said Frederick.

Exit activity

Exit deals have been down considerably over the past few years and 2020 is no exception. This year there have been only three exits, the lowest since 2016. M&A is the predominant exit type.

Frederick explained that the slowdown in acquisitions is mainly due to market uncertainty and volatility, which will remain until conditions improve or buyers adapt to the new environment.

Investor sentiment

Venture capital activity has been challenged by the inability to conduct face-to-face meetings with founders, but since June, companies have started to adapt to the new normal.

As main concerns were about how to value companies in this context, some venture capital firms turned their sights to follow-on investments into portfolio companies.

Frederick noted that deals are getting done, mostly in the so-called “hot deals” – the sign of contracts, proof of concept, and proof of traction. “The main takeaway is companies that show evidence of reducing uncertainty have a serious edge in this environment,” he said.

Looking ahead, the Pitchbook analyst forecasts that venture capital activity will pick up as investors continue to adapt to the new normal.

“Good deal flow and investment activity are essential to the success of investors and the entire ecosystem, and venture capital will need to continue to fill the deal pipeline,” he said. “We don’t see this as a long-term impediment to venture. Investors will find a way to continue making deals,” he concluded.