The investment director of CPT Capital believes alternative protein investors with robust ESG metrics will generate significantly better returns
By Murielle Gonzalez
Alternative protein investor Costa Yiannoulis says he is in for the long haul. The investment director of CPT Capital explains that backing new technologies to remove animals from the supply chain is fundamental to tackling climate change and a broken food system while providing health benefits and food security to billions of people in the future. “We’re banking on the technology,” he says. “We look seriously at ESG and sustainability metrics for our investments. We have strong return metrics, and we believe that companies with solid ESG fundamentals will outperform.”
Formed five years ago, building on the assets of Jeremy Coller’s family office, CPT Capital made its first investment in Beyond Meat and Impossible Foods. Today, the company is an international player backing food entrepreneurs in the US, Israel, and New Zealand.
CPT Capital invests in pre-seed up to Series B funding rounds for brands with the potential to produce an advanced plant-based replacement, a recombinant protein, and cell-cultured meat. Redefine Meat, Geltor, Perfect Day, Clara Foods and BlueNalu are some of its portfolio companies and are a fair representation of the gamut of technologies on CPT’s radar.
“I’m very excited about Redefine Meat. The company is trying to make plant-based steaks,” says Yiannoulis. “Think Beyond Meat and Impossible Foods, their extrusion technology is perfect for sausages and burgers [where you need ground beef], but it can’t make the perfectly marbled steak – the 3D printing technology can.”
Perfect Day, Clara Foods and Geltor are under the umbrella of recombinant protein. They produce casein, whey, and gelatine through a fermentation or brewing process.
“Now that we can read and write DNA very cheaply, companies are using CRISPR-Cas9 to modify yeast and bacteria to produce animal protein using existing fermentation equipment,” says Yiannoulis.
Memphis Meats, Aleph Farms, and BlueNalu are in the cell culture space. Yiannoulis says investments in cell-based protein also go to non-animal cell-based products, for example, algae, mycoprotein, and food ‘from thin air’ – Susewi, 3F Bio, and Solar Foods are companies tapping into these areas, respectively.
CPT Capital: Deal flow in Covid-19 lockdown
“We led the Series B round for Geltor, which in July closed in $91.3 million – that tells you that Covid-19 hasn’t stopped us,” says Yiannoulis, noting the round started in February, and that interest picked up a couple of months afterwards.
“In the middle of the Covid-19 crisis, people realised that [alternative protein companies] are building a resilient supply chain for the future – there was no meat on the shelves in the US!” says Yiannoulis.
He explains the shift in mindset with one of Warren Buffet’s quotes. “‘Only when the tide goes out, do you know who’s been swimming naked’ – that’s what happened when the animal supply chain broke down,” he says.
Yiannoulis knows that people may see Geltor’s Series B as a one-off, but explains that fundraising in the Covid-19 world is changing. “A lot of our portfolio companies that had planned to do equity raises in this period didn’t go for it as they wouldn’t get the valuations they want. Instead, they raised convertible notes or other bridge instruments to shore up the balance sheet, and give them some extra cash and runway.”
Yiannoulis says that most companies are planning their funding rounds by the year-end or early next, hoping to get a better valuation. “For good companies like Geltor, there’s no problem getting funding,” he says.
80% of CPT Capital’s portfolio is in the US, mainly on the West Coast. Yiannoulis says that’s where he sees ‘trendsetters’ cropping up, and that seeing Europe falling behind food technology innovation “is disappointing”.
“The regulatory regime in Europe hampers a lot of innovation,” he says, noting that Israel came onto the scene with a fast-track approach. “From our perspective, Israel is the world’s second-best country to leading innovation – Redefine Meat, InnovaPro, and Yofix are good examples.”
Singapore ranks third in Yiannoulis’ world’s innovators. “Singapore wants to produce 30% of its nutritional needs by 2030, and is fast-tracking regulation, and sovereign funds are making food investments. This policy is dictating the pace for other places in Asia to pick up,” he says.
Call to regulators in Europe
Yiannoulis knows that the venture capital landscape in Europe is slightly different from the US, where securing funds for an idea is straightforward – it’s always been an entrepreneurial environment. That aside, he argues the regulatory regime in Europe is hampering innovators.
He explains: “Look at Perfect Day, for example. The company is genetically modifying bacterial flora to produce animal protein. What comes out is an ingredient – whey and casein. In the US, the regulatory agencies, the FDA for example, look at the end-product: yoghurt, cream, etc. For them, it’s non-GMO because the ingredient is a string of amino acids identical to the animal counterpart.
“European regulation looks at the production process, and if you modify a yeast or bacteria at the beginning of your process, it takes you through the GMO track. As you know, GMO in Europe is like a ‘death word’.”
Yiannoulis believes that regulators know the paperwork and the stigma surrounding GMO products are a disadvantage. He recognises that new organisations, such as EIT Food, are good initiatives supporting food entrepreneurs in Europe, but it’s not enough. “I think European regulators need to think about how they can fast-track the innovation process,” he says.
Impossible Foods is on track to becoming a case study for foodtech companies in the future. Last November, the plant-based giant applied for a novel ingredient approval for its soy leghemoglobin – the world is eager to see what comes out of it.
“All stakeholders should take on the mission to educate consumers about what these new technologies are, what they do, and why they are beneficial,” says Yiannoulis.
To the point
What industry players can do to overcome the GMO burden?
The first step needed is transparency from everyone involved. From a company perspective, whether it’s cultured meat or fermentation protein, the consumer should be able literally to walk into the factory and see how products are made in a sterile environment. Be transparent about how it’s done, what the output is, the health benefits, and so on.
The regulators need to get it right because the worst that could happen is having a weak regulatory framework and a cowboy company raising a bit of money do something stupid that tarnishes the sector for everybody.
The media can do a great job by explaining both sides. Studies say consumers’ top concerns are health, the environment, and animal welfare – in that order. So, give all the facts and let people make up their minds over time. You see millennials and the Gen Z population with disposable income making these choices anyway.
Governments and regulators have a role to play. If we want to have a habitable planet in 50 years, we need to start looking at these new technologies now.
The overarching theme is to change the food system, but are investors mindset also changing?
Good investors understand that you don’t have to sacrifice return for nutritional and sustainability performance. If you do it right, you should get a high return.
I think investors are demanding this, whether it’s because the pension fund manager has a daughter that became vegan or a family member that died because antibiotics don’t work anymore. People backing these funds are demanding ESG and sustainability goals.
What does it mean to do it right?
Five years ago, investing in this space was about backing companies getting the message [of replacing animal protein] out. Now, it’s no longer OK for a food company to simply say it’s producing alternative protein for animal welfare or sustainability – companies need to ensure they are setting proper ESG goals. Investors should have ESG metrics and make sure they are hitting those goals.
Do you think the reallocation of capital to alternative protein and the future of food is good for the sector?
I think that makes perfect sense because this is where the return is going to be. There’s a lot of heavy lifting to do to shift this whole broken food system. What worries me is to see people coming just because they are desperate to get a deal, giving ridiculous valuations to companies. In the next two rounds, those companies are going to struggle to follow up.
With so much more available capital, is it getting more competitive for investors?
Investors that don’t have a defined investment thesis will get lost in a sea of brands in agtech, foodtech, and so on. It’s better that you decide what are you going to go for.
The new capital coming into this space is chasing the next ‘Beyond Meat’, but the way we see it is that start-ups control the whole supply chain. As they become big, you’ll see companies with a focus on specific areas of the supply chain.
When Memphis Meats and Aleph Farms started, they were doing everything from cell line to media formulation and scaffolding, but it’s such an inefficient way to do it! That had to happen because they were creating something new.
Now we are very encouraged to see companies providing the picks and shovels along the way. There are super interesting companies on the bioreactor side, on media formulation, on scaffolding. So it’s about identifying the need within the value chain and finding the company that is most likely to be able to solve that in the cheapest and most efficient way.
Yiannoulis speaks with passion about the challenges and opportunities in the alternative protein space. He sits on the board of plant-based food start-ups Good Catch, 3F Bio, Redefine Meat, and Geltor, playing his part in the collective effort to create the food of the future.
Date published: 28 October 2020