It was 2018 and the plant-based protein world was on fire. Global meat companies were spinning up corporate venture capital divisions and ultra-high net worth investors were putting their money behind the latest technologies in creating meat analogues from vegetables, lupins, sunshine and even carbon dioxide. It was a glorious time.
For better or worse, the US consumer is the bellwether for fast moving consumer goods, or FMCGs. But US consumers do not make purchasing decisions with the same considerations that consumers in Canada, Mexico, Europe, Asia, or Australia do. Sadly, we have not done any market research in Antarctica. I am a consumer in the US so I will provide my perspective. The current offerings of plant-based meat products do not perform well. They do not taste, smell or chew like meat.
Now some of you will say well of course not Tom, they aren’t meat, and I agree. However, the brands many of us invested in were built to be 1:1 replacements for animal protein. No offense to the vegan and vegetarian consumers out there but you are not a large enough piece of the consumer pie for venture capitalists to get excited about. VCs invest in massive total addressable markets. We invested in the plant-based space because we saw the potential to take a meaningful bite out of the animal meat market which stood at $1.3 trillion in 2021. To do that, the products must taste, smell and chew like meat.
“Pragmatism is not something to shun in projecting the growth of companies, but should be embraced as sanity returns to capital deployment.”
As with all new technologies, the products were not 100 percent there. That gap is where the value is. We expected technology to accelerate and those three critical KPIs to catch up to animal meat. They have not and there are three clear reasons.
1. Venture Capitalists – Yeah, I said it, it’s my fault. VCs demand results with limited capital and in an unreasonable amount of time. We want your next product to be the final draft and ready for full scale production tomorrow because, for the most part, we do not understand what it takes to manufacture food safely, in full compliance with local and federal regulations and get that food in front of consumers. We are now faced with mounting piles of humble pie and will have to start digging in as companies begin to struggle.
2. Brand Proliferation – You could probably lay this one at the feet of the VCs funding all these start-ups, but the founders need to share in the humble pie buffet. There is no reason for the market to “need” thirteen (I’m hyperbolizing) brands of plant-based chicken nuggets. I cannot think of thirteen ways to differentiate that product besides color of the packaging and the name. At some point, the market went crazy for brands thinking the next one would be better than all the ones that came before it. Now we are faced with a hypercompetitive market where startups are fighting a marketing war with global conglomerates and the race for eyeballs is off and running. Zero brand loyalty allows consumers to change brands weekly chasing the best deal and companies end up spending as much on marketing as they do on raw materials.
3. Identity Crisis – I should have put this one first. Companies that make plant-based alternatives to meat, please hear me. You are food companies, and not technology companies. You will never grow revenue like a technology company. Stop taking unrealistic valuations that doom you to future flat or down rounds of financings. What should be equity rounds that are turning into high-yield debt instruments with 2x liquidation preferences and stack crushing seniority clauses?
I believe the challenges the plant-based food sector is facing means we are faced with equally great opportunities for investment. There is an incredible opportunity to invest in the infrastructure to support the production of plant-based protein products. Ingredient solutions and texturizing technologies that improve the mouthfeel of these products will lead to consumer satisfaction and revenue growth.
And then there’s affordability and the inspiration of this piece, Back to Basics. Founders and VCs need to return to the fundamentals of making food and investing, respectively. Gross margins should not be things we expect to expand in the future. They need to be present now. Scale alone is not enough to create compelling margins. Scale should be the thing that expands margins. And to my fellow investors, let’s return to our basics. Pragmatism is not something to shun in projecting the growth of companies, but should be embraced as sanity returns to capital deployment.
