Global VC investment in foodtech drops 31% in Q3

Start-ups producing bio-engineered foods and food suppliers account for 70% of the $2.6 billion invested in foodtech in the last quarter

Foodtech companies raised $2.6 billion from venture capital investors in Q3 across 144 deals, a 31.3% drop compared with the previous quarter, PitchBook has revealed. Both deal values and volume have declined following the initial Covid-19 pandemic spread, which has made it harder to evaluate opportunities and redirected investment toward existing portfolio companies.

PitchBook analysts believe activity will return to normal as investors get used to evaluating start-ups in a virtual world.

Most of the quarterly investment activity focused on start-ups producing bio-engineered foods and food suppliers – together account for 70% of the total deal value for the quarter.

Online grocery, plant-based meat and dairy, and cultivated agriculture have outperformed, with investors putting capital into technologies enabling consumers to buy and experience foods under pandemic conditions.

For the first time, the bio-engineered foods sector attracted a majority of investment capital, suggesting the increasing importance of food products within the venture landscape.

Bio-engineered foods

The global bio-engineered foods market is expected to reach $65.5 billion this year. Growing at 10% annual rate, the market could reach $104.6 billion by 2025. Novel ingredients make up the bulk of PitchBook’s estimate, followed by meal replacements and plant-based foods.

Analysts believe cell-based meat and dairy products could enter the market by 2022, provided a regulatory framework exists, which could expand the size of the market even further.

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The knock-on effects of the Covid-19 pandemic have not been factored in the projections; however, significant disruption to the investment environment are expected to negatively affect start-ups’ ability to raise funding in the space.

Start-ups producing bio-engineered foods attracted the highest quarterly venture capital investment in the past decade with $1 billion invested across 35 deals – that brings year-to-date totals to $2.6 billion across 101 deals.

The largest deal in Q3 was a $300 million Series C investment in cultured dairy company Perfect Day.

The pandemic is accelerating already strong tailwinds by highlighting vulnerabilities in the meat supply chain and the importance of healthy eating, increasing investor appetite for bio-engineered foods and supporting technologies.

Impossible Foods raised the second mega-funding round this quarter, closing a $200 million Series G at a $5 billion pre-money valuation. This is the company’s second mega-deal this year, and its total funding now tops $1.5 billion.

Despite rapid growth in the sector, exit activity remains limited. Year-to-date, $1.4 billion has been exited across three deals.

However, the competitive landscape has exploded in recent years, especially among cultivated and plant-based protein companies. Market consolidation is expected as larger incumbents seek to enter this market.

Market outlook for bio-engineered foods

Consumer adoption of plant-based foods will continue to rise, and the increased production and marketing activity from meat industry giants such as Tyson will help expand the market and appeal to new consumers.

Product variety on shelves is set to expand as well – innovations around chicken and fish are leading the way.

The regulatory framework is one area of concern. PitchBook analysts believe that as the benefits of consuming plant-based meat and dairy become more widely known and calculable, regulation will encourage growth in the industry.

Year to date, $923.2 million has been invested in cell-based agrifood start-ups, and more than $3.6 billion cumulative has been invested in the past decade.

However, the lack of a path to regulatory approval for cultivated culture products, venture capital investment is likely to remain focused on seed and early-stage opportunities.

Food suppliers

Consumer adoption of food supplier services, such as online grocery, ghost kitchens, and meal kits has spiked during the pandemic; however, this has not translated into a comparable increase in investment. The quarter saw 22 venture capital deals with food suppliers, totalling $745.1 million, down from $1.8 billion invested in Q2.

At the end of Q3, year-to-date VC investment in the segment totalled $3 billion, significantly behind pace to match 2019’s decade-high $6.1 billion annual total raised.

The largest deal of the quarter was the $495 million later-stage VC investment in Chinese online grocer Miss Fresh. The company differentiates from other online grocers with its distribution model, which consists of many small fulfilment centres positioned near consumers, allowing for rapid delivery.

Although meal kits have seen an uptick in sales and VC investment since the beginning of the pandemic, Q3 venture activity slowed considerably, with only one investment – start-up CookUnity raised $4.7 million in its Series A. The previous quarter saw 11 deals in this subsector and $106 million invested.

Exit activity is also pacing behind previous years, with only three exits year-to-date, down from a peak of 11 exits in 2018.

Online grocery is a nascent but rapidly maturing sector. PitchBook analysts expect to see consolidation in the medium term as larger grocers look to acquire e-commerce capabilities or to expand market share and geographic reach – Nestlé’s acquisition of Freshly proves the trend.

The coronavirus pandemic has affected PitchBook’s forecasts, leading to projections of elevated sales in online grocery and meal kits, and a delay in the growth of ghost kitchens.

Overall, analysts expect that stay-at-home orders will be a net positive on growth in the food supplier market and estimate the global food supplier market size will reach $88 billion this year.

PitchBook forecasts the market will grow at an annual growth rate of 25.8% over the next five years, reaching $278.7 billion by 2025.

The data underlying the report is available upon request at PitchBook.