Startup Funding in a New Normal: A Rebounding Food & Ag Investment Landscape
If there was a time when the world collectively felt as if the worst of the pandemic may be soon behind us and we could begin to consider a return to a semblance of normalcy, the surge in new cases in the United States and globally has made us rethink that outlook. There is definitively a new normal for conducting business in the food and ag industry. Changes in consumer behavior, as well as the need for solutions across the supply chain, are here to stay.
Four months since the World Health Organization declared the global pandemic, Chuck Cotter, partner at law firm and FoodBytes! Pitch member Holland and Hart, is seeing a rebound in food and agriculture investment. But make no mistake, investor priorities have changed. Likewise, startup strategies for funding and long-term business success have evolved.
Rabobank invited Cotter and Poornima Parameswaran, co-founder and president of Trace Genomics, a FoodBytes! alum that recently closed an early stage round of funding, to share their perspectives and first-hand experiences on the new normal in ag and CPG investment, and how to successfully raise capital in this environment.
Watch below and read on for their perspectives on what’s driving startup success in the food & ag industry today:
How the Investment Landscape Has Evolved – And What That Means for Startups
Chuck Cotter of Holland and Hart, which represents about 100 CPG brands and funds from a legal perspective, shared that on the whole, there has not been a downturn in the firm’s total number of investment deals since mid-March. He described an evolution in the investment landscape across three phases since COVID-19 became a global pandemic. First, a sprint to close deals that had already been in progress, followed by a lull, and then, a substantial uptick in investment starting in late May. Given the uncertainties ahead, Cotter cautioned that it’s impossible to predict whether this rebound in investment will continue, but he cited that the firm has several larger deals expected to close through the summer and into the fall.
Investor Targets: Challenges with Angels, Opportunities with Funds and Strategic Investors
While Cotter is seeing a healthy number of deals close, there are key lessons learned for CPG startups — particularly around which investors to target. He explained that funding from angel investors is now harder to come by, whereas VC funds have committed dollars and continued incentives to invest.
From the perspective of Trace Genomics’ recent fundraise, Poornima Parameswaran also highlighted the need to look thoughtfully at the investors you’re targeting. As a smart soil analytics company whose technology can be deployed to solve a range of problems, she attributed Trace Genomics’ funding success, in part, to their ability to ‘unite investors across the board.’ Parameswaran assembled a range of investors, from those focusing on sustainability to those interested in land and farm inputs – as well as strategics. She advised fellow entrepreneurs to find investors who are going to be with you for the long run, those that will want to take you ‘through Series C.’ To this point, Trace Genomics focused on investors who had a long track record of investing in their space – both from a technology and a market standpoint.
Parameswaran said other startup founders she has spoken to are also seeing success bringing in strategic investors at an earlier stage because they are invested in solving food and ag sustainability problems. Cotter seconded this insight on the CPG side. ‘It’s a win-win because startups get expertise to grow their business, while the strategic gets exposure to innovation’ said Cotter. ‘CPG is historically not good at that. Their structure doesn’t incentivize nimble and innovative thinking.’ He counseled CPG startups to consider involving corporate venture arms, such as General Mills’ 301 Inc., and noted that strategics can also become ‘natural acquirers’ for a startup.
Closing the Deal: Prove you’ve adapted you business to Covid-19
Cotter and Parameswaran agreed that startups need to clearly demonstrate to investors how they’ve adapted to COVID-19 – particularly as it relates to lowering burn, and addressing the changing needs of your end user.
‘Both angels and venture investors are increasingly focused on how scrappy you are. . . how far can you go with less money,’ said Cotter. He cited a striking example from a major angel investor in food whose first question is to ask how much founders are paying themselves. A founder with a chosen salary of $40,000 ultimately closed the deal, while the investor passed on a co-founder duo paying themselves $150,000 because it signaled they ‘hadn’t adjusted to the new COVID reality.’
Parameswaran emphasized that ‘articulating how you’ve changed your strategy is really important,’ including how your customer focus has changed, or not. She highlighted how Trace Genomics has adapted to the pandemic by expanding how they define their customers. While the end user for soil insights had typically been farmers and growers, Trace Genomics has added ‘flexibility in terms of who we serve and how we serve them.’ This has meant focusing on new customer segments, including retail input providers, service providers and data providers who already have existing trusting relationships with farmers. She said this strategy is paying off because ‘during COVID, farmers are relying on these relationships even more,’ and bolstering existing assets rather than investing in new technologies.
In summing up her advice for closing funding, Parameswaran counseled entrepreneurs to ‘articulate your risk mitigation strategy, how you’re lowering burn and how you’re really delivering success for the customer.’ Cotter’s top takeaway for CPG founders was to show investors ‘how your product fits in context of changing consumer behavior.’
Planning for stability in a time of uncertainty
Whether a startup is seeking investment or just working to sustain their business in the new normal, Cotter advises entrepreneurs to pay close attention to changing consumer behaviors – including those that will last beyond the pandemic. For instance, the massive jump in online grocery purchasing during the pandemic is likely to be a long-term behavior, so expanding to e-commerce is critical. And, according to Cotter, ‘people aren’t going to go back to pre-covid consumption of immunity supplements and hand sanitizer. Even with a vaccine, people are going to be used to consuming these things.’
Cotter identified trial as a top challenge based on restrictions on retail sampling. He asserted that for CPG startups, winners will be found among those who can find creative ways online to entice consumers to buy products that they’ve never tasted.
Parameswaran agreed that entrepreneurs must plan for stability in a time of uncertainty.
Trace Genomics made several leadership team moves, most notably adding a CEO with decades of agriculture experience, to signal to investors that the company is built to grow during the pandemic and beyond. ‘It catalyzed a change in the way investors perceive us,’ she said.
Future-proof Innovation: Trends to watch in food & ag investments
When it comes to areas for continued food and ag investment, Parameswaran sees opportunity for entrepreneurs tackling supply chain vulnerabilities exposed by COVID-19, as well as new challenges created by the shift from foodservice to retail. She suggested we will see ‘continued investment in science and technology fueling innovations that can help solve the systemic and logistical issues across the supply chain.’ With the pandemic disrupting the movement of supplies, including chemicals for pesticides that are grown around the world, she believes there will be ‘innovation and funding going to companies focusing on domestic supply.’
Parameswaran predicts a migration of technologies across sectors – particularly human health biotech being applied in food and agriculture. She cited alternative protein made with technologies originating in human labs, as well as her company’s use of genomics toward soil analytics, as examples. Parameswaran is also seeing increased investment in indoor agriculture and online marketplaces that help get food to consumers more efficiently, a trend she expects to continue. As farmers are testing ways to sell directly to consumers, ‘it’s fueling a lot of entrepreneurship,’ she noted.
Cotter believes CPG innovation and investment is going to be resilient as people continue consuming food and beverages at home. He doesn’t think the early pandemic trend toward legacy brands and comfort food is here to stay. Instead, he expects continued investment for CPG innovators that demonstrate they can drive trial. According to Cotter, ‘the arc of long-term consumer behavior is still toward better for you, transparent, sustainable that can also hit taste and price point.’
FoodBytes! by Rabobank has welcomed more than 2,000 attendees from 50+ countries since launching its webinar series in March. To check out past FoodBytes! webinars on leading through change, startup funding, rethinking the produce supply chain, and more, visit our blog.
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