The Food Tech Anti-Thesis

For the last five years, I have written a food tech thesis covering the general topics and spaces within the vertical that excite us at Bread & Butter Ventures. We invest in what I call full stack food — from on-farm through the future of food retail. Areas like robotics, supply chain, and manufacturing tech have been staples on this list. To be 100% clear I love the food tech space. It is still one of the most under-invested venture spaces on the planet relative to the size of the prize. However, this year, we are going to do things a bit differently.

This year I am writing an anti-thesis. These are the areas that I don’t think are venture backable right now. There is one important qualifier here. I am strictly looking at this from an institutional seed & pre-seed investing point of view. In some cases you could build an interesting business in the space, just not one that is going to be worth $1b+ in the future, in others there may be growth equity opportunities, but they aren’t things any seed stage investor should touch. I love entrepreneurship and hope everyone building companies in the areas of our anti-thesis prove me wrong and build huge companies, but they aren’t bets we will be making in 2023.

Without further ado, here are what we will be avoiding this year.

Precision Agriculture

Precision ag is not a new concept but since the acquisition of Blue River by John Deere in 2017 there has been increased interest in the space. The logic makes sense, more precision in farming = lower input costs, improved yields and more environmentally friendly farming. All great outcomes.

However, long times to market and slow sales cycles plague the entrepreneurs innovating in the space. Founders have to test, validate claims, adjust, test again, prove ROI before anyone will even think about purchasing their products. Sure, companies can get some early pilots to go through this normal entrepreneurial process, the problem is that in agriculture you only have 1, 2 or occasionally 3 crop cycles a year to test on so it takes longer to validate all of the benefit claims precision ag startups make. Then you have to do it over and over again for different crop types.

To top this off, the size of the prize has always scared me. Yes, I know how big the ag industry is but think about the term “precision” in precision ag. It means you are building something very specific (another word for niche or small!). Technology in the space tends to be very specific and doesn’t transfer to a new crop, environment, or use case easily.

And don’t even get me started on the delivery mechanisms! Visioning technology is tough to differentiate, drones…no thanks, and other precision hardware plays are capital intensive. All of this compounds the issues I have already pointed out.

Look, precision ag is important. You can build cool companies in the space but even if you do well can you drive runaway, fund-making returns? I doubt it. Why not take existing technology and find a way to distribute it to small hold farmers or regions of the world that aren’t as efficient as the developed enterprise ag markets like Toolsvilla is doing. Now that is a big opportunity.

Protein Alternatives

Holy cow, alternative proteins are hot! Plant based companies have ipo’d and we are on the cusp of cell based alternatives hitting the consumer market! Not so fast, my fellow innovators. My hesitation isn’t just because of the beatings our public friends have taken in the space over the last several quarters. We just don’t need a new pre-seed/seed stage alt protein brand that uses the same technology as everyone else right now. Just finding a new protein niche to apply this technology to isn’t exciting. Woohoo! A jellyfish alternative that’s going to save the world. This is basically just a really expensive CPG brand and building a CPG company is hard and multiples tend to be low. No new tech combined with an expensive process = not a winning combination.

Additionally, the entire capital stack for an early stage investor is scary. The space was so hot with new startups and valuations that were running rampant. Add this to a poor macro performance by many of the more visible protein alternative companies and there is investor fatigue right now. Lots of funds are going to be taking markdowns or writing off alt protein investments over the next 24 months. Those fund managers are going to lick their wounds, focus capital on existing portfolio companies and take a pause before they make their next alt-protein investment. For an early stage investor like us who doesn’t have the capacity to float a company forever there is a tremendous amount of future financing risk (ie will the company be able to raise their next round of capital). In other words there is going to be a lot less $ for alt protein startups at the series A and B rounds over the next few years — not good for the entrepreneurs or a seed stage investor.

Now I am a believer in alternative proteins and firmly believe they will be a huge part of how we feed the world, I just don’t think right now is the right time to invest in a seed stage brand that doesn’t have any revolutionary technology behind it. The cultured space also still needs a few significant scientific breakthroughs to make it economically viable. So what are we interested in in this area? Those breakthroughs in technology that help bring the entire industry to scalability, cost parity or allow plant based meats to actually feel and taste like meat — we’re in!

Indoor Agriculture

Indoor agriculture. It has been around for a loooong time, under-glass growing is well established in the US and across the globe. However, vertical farming in shipping containers, warehouses, or other empty spaces is a startup pitch that I have now heard for the last eight years.

Super common pitches that “differentiate” these startups:

• We have a “Keurig” business model
• Growing on location reduces logistical costs and food loss
• We can fully automate an indoor grow environment, removing the need for labor

I understand why people pitch these things and the potential in the space but it hasn’t worked at scale yet and the idea isn’t new. In general the economics or other fundamental assumptions behind these companies have never made sense to me. Things like: mass markets want to grow in their home. Or, the pitch that restaurant owners, supermarkets and other large consumers of produce want to manage a grow process. Or that you can replace the sun (which is free) with lights! It is a capex heavy space and it is hard to be in multiple geographic markets with your product.

Scale is hard here. How many billion dollar farms are there in the world? Sure people buy a lot of food but Startups in the space have raised 100’s of millions of dollars (Plenty closed a $400m round in 2022!). Think of how big that company needs to be for anyone to get a return.

If you’re a founder trying to build a company in the indoor space be ready to answer the question; why now, why you? There is a high likelihood that the investor you’re talking to will have heard the pitch before.

Diet Discovery/Recommendation Engines

Labeling this section was actually tough for me. I didn’t know what to call it. I am a believer that what you ingest has a tremendous impact on your health. Changing diets can change your life! However, the tech solutions in this space leave me wanting more. A variety of challenges plague the space — and at the core of most of these challenges is the consumer.

First, everyone makes health claims! There is a tremendous amount of consumer mistrust. From cannabis to turmeric, no one knows what actually works. Consumer Reports recently put out an article that said the biggest health impact of most of these ingredients may actually be from a placebo effect! Nothing wrong with that, but it is tough to scale placebo effect.

A second issue is that many of the solutions targeting a niche allergy or other food sensitivity are just that, really niche. Sure you can drive adoption in a small segment of the population but most people just don’t care. These solutions don’t have mass market appeal. This issue is amplified because no one wants to pay for it. End consumers may pay small amounts but businesses certainly don’t want to cover the costs. So even when you stack all of the allergies on top of each other it is really difficult to drive revenue!

Since I’m on a roll I’m going to add a subsegment that is often attached to this space. Consumer-facing traceability of ingredients. There are so many consumer app startups that trace ingredients, farms, restaurant menus, and probably so many more things that I haven’t even seen yet. My observation, the majority of consumers just don’t care where their food comes from! Plus you run into all of the same issues as you do in my last paragraph (no one wants to pay for it!).

Other Stuff We Don’t Do (Not Because They Aren’t Interesting — I’m Just Not Smart Enough)

There are several areas in the food system that our fund just doesn’t touch. Partly because we don’t know anything about the space, partly because exit multiples are tough, partly because they often take a ton of capital up front and we are a small fund. Without any commentary here are a few of those spaces. Ag inputs (seeds, pesticides, herbicides, etc), Pretty much anything else that goes in the ground and CPG’s.

As I mentioned in the opening, I don’t think there is a better vertical to be investing in than food. It is the most complex supply chain on the planet and as far as I can tell, we all still need to eat. There are so many huge opportunities in food tech and believe me, I know that no one on the planet can change the world faster than an entrepreneur.

So prove me wrong.