Investing in cultivated meat and seafood

The idea of replacing our favourite meat and seafood products by clean alternatives grown without animal cruelty is fascinating. It comes with challenges that an increasing number of entrepreneurs and corporates are addressing as these alternatives offer a more sustainable production blueprint able to dramatically reduce the impact of the food industry on today’s environmental challenges. Despite these challenges, the market opportunity remains considerable and investments have continued to accelerate in the last 5 years to an all-time-high in 2020[i]. In the last 2 years, we saw a production shift from lab scale to pilot scale, driving a second wave of innovation. In this article, I explore the investable innovation landscape of this new wave through interviews of founders, a competitive landscape analysis and a review of thematic research.

1.???Introduction to cell culture in food

Defining cultivated meat

Cultivated meat and seafood is known under different names (cell-cultured, cell-based, slaughter-free, lab-grown, synthetic, cellular agriculture) that can be used interchangeably, we’ll use “cultivated” by default and avoid “lab-grown” as recommended by GFI due to the fact that it does not reflect the reality. The terms “cell-cultured” and “cell-based” are also popular, and the FDA is currently preparing a guidance for “cell-cultured” seafood[ii]. Objectives of cultivated meat and seafood is to produce clean, cruelty-free and animal-free food-grade products.

Enabling technologies

Cell culture in food is the process of growing an animal product from a few cells taken from a living animal by using a nutrient-rich cell culture media in a bioreactor. It has been subject of R&D in the biotech sector for a long time, and the processes and methodologies are now being applied to food-grade products. The technological enablers are both ingredients (cell lines and culture media) and process related (scaffolding and bioprocess design):

Sources: GFI, own analyses

Full stack

Instead of focusing on one particular enabling technology, full stack companies are involved across the whole culture process. They may outsource parts of the process, in particular the development of cell lines, but build proprietary IP through the development of a complete culture process. The end result is a food-grade product or a technology that can be used for other applications or proteins. Full stack companies usually replicate red meat or chicken products and include the likes of Upside Foods (fka Memphis Meats, US), Aleph Farms (Israel), SuperMeat (Israel), Mosa Meat (Netherlands), etc.

An industry in its infancy

The pace of technological innovation is pushing regulatory bodies to get organised, albeit at different rhythms, and startups to accelerate on the innovation path. The path to mass commercialisation is underway but remains a long journey with several challenges:

• Regulation. Despite very favourable events in 2020 such as Singapore’s regulatory approval to sell Eat Just’s cultivated chicken and the collaboration between FDA and USDA in the US to build a regulatory framework for cultivated meat, food regulatory authorities do not allow the commercialisation of cultivated meat and seafood yet (except in Singapore). This is evolving differently country by country and lobbying groups are starting to get structured, but for now there is no clear guideline to understand what will be authorised, in particular what the labelling requirements will be. For the latest regulatory developments, I recommend reading the excellent State of the Industry report published by GFI[iii].
• Technology. The most advanced startups are currently building their production process in pilot-scale bioreactors, much smaller than commercial-scale ones but already a step further from lab-scale. The inputs and processes used differ from company to company, and may change in future. Some companies use suspension as an alternative to scaffolding, others may find non-stem cells that are better suited, all these potential breakthroughs will provide a competitive advantage and come at a risk for many others who will be pushed to adapt or shut down. Other alternative protein technologies, outside of cultivated meat, can also have a disruptive impact, for instance if extracting protein from non-animal cells ends up proving more successful (eg plants, microorganisms, air).
• Consumer adoption. Taste, texture and cost will be key for consumers to buy cultivated meat. Food scientists are working hard to improve these parameters and reach cost parity with regular animal products. Nevertheless, there is very little data to understand consumers’ feedback other than small-scale tastings organised by the most advanced startups. Additionally, to build trust with consumers, a very high level of transparency will be required from businesses commercialising their products in the cultivated meat space. That may prove difficult and / or costly, in particular to prove the provenance of cell lines and media.

Startup landscape

Leveraging different data sources, I compiled and analysed a list of startups in cultivated meat and seafood, excluding large corporates and university initiatives.

Sources: GFI, Pitchbook, own research

This graph shows a substantial acceleration in the creation of cultivated meat startups in recent years, in particular around 2015 and 2018. Using enabling technologies developed either by established biotech players (not represented on the graph) or startups, full stack companies started to blossom after 2015 and now make up for the majority of startups.

Sources: GFI, Pitchbook, own research

What this graph doesn’t show is the new profile of entrepreneurs behind this innovation wave.

As Benjamina Bollag, founder of full stack startup Higher Steaks, puts it: “I created [Higher Steaks] to have an impact on the world”.

A motivation that is common to many entrepreneurs I had the chance to interview for this article. This new generation of entrepreneurs is relatively young and cares about a healthier and more sustainable food production system.

Out of the 110 startups analysed, the Americas (mainly North America) and European regions both represent 1/3rd each, with the balance mostly in Asia (1/5th). This highlights how the challenges these startups are tackling are equally important across the globe, and although Asia is more advance from a regulatory standpoint, Europe and the Americas are catching up very quickly.

2.???Cracking the code

As we prepare for the first cultivated products to be commercialised, startups are focused on the scaling up their technologies. In this paragraph, I touch on the underlying complexity and surrounding barriers.

Cell lines can be of different types and are particularly complex to develop. I will not attempt an explanation of the science behind but if you are interested, I recommend GFI’s deep dive on the topic[iv] and Jim Mellon’s excellent Moo’s Law[v]. Biotech companies are funding the R&D of this segment and work on optimising the quality of these cell lines.

“There is a luck factor that comes into play when growing cells. Cells extracted from an animal may take months before ‘waking up’ – they may even never do so. At each stage of the growth of the cell, there are new risk factors.”, says Nicolas Morin-Forest, co-founder and CEO of Gourmey, a France-based startup producing cultivated foie gras.

Gourmey have developed high quality duck cells using cells already scaled by the pharmaceutical industry, thereby reducing their time to market and de-risking the process.

In seafood, there is less medical research than proteins like pork, beef or chicken so companies engaging in cultivated seafood need to experiment themselves with several protocols through trial and error.

“Working with some of the mammalian cells protocols in fish, we had mixed results”, explains Carrie Chan, co-founder and CEO of Avant Meats, a cultivated seafood startup with operations in Singapore and Hong Kong. “We learned a lot in our first two years. It would be easy for us to go back to mammalian cells, but for someone in mammalian cells to get into fish cells, they will probably have to go through a similar kind of timeline”.

Another challenge for cell line producers is to develop non-GM cell lines, something the EU and China are very strict on.

In cell culture media, one of the challenges is to find an alternative to FBS (Fetal Bovine Serum), a widely used serum for in vitro cell culture. FBS comes from bovine fetus and is not animal-free nor cruelty-free. One key element to monitor will be the cost of FBS and alternative growth factors, a critical factor in reaching cost-parity with mainstream proteins. “We already stopped using FBS in our processes”, claims Avant Meats’ Carrie Chan. A key success factor of these companies therefore lies in the IP built through iteration of highly complex variations of cell lines and cell growth process, something costly and timely to replicate.

The food industry is undergoing a fundamental change whereby R&D becomes increasingly longer and costly, and requires specialised players to focus on technological breakthroughs such as the ones mentioned above. In his book Moo’s Law, famous investor Jim Mellon advocates for investment in companies that are trying to crack the code of cultivated meat under various forms as they become part of what he calls the “New Agricultural Revolution”.

3.???Business strategy of full stack companies

If science was the only challenge, we wouldn’t see that many entrepreneurs setting up their own cultivated meat and seafood ventures. Some of these entrepreneurs have a scientific background, but plenty others don’t. In my interviews with some of these entrepreneurs, it became clear that not only their scientific understanding is extremely advanced (regardless of their backgrounds) but their commercial acumen too. Most of them are driven by a strong sense of purpose that technology can help achieve great outcomes to improve the food industry.

Before regulatory approval and consumer adoption, business strategy is key to ensure long-term commercial viability of these projects.

“Full stack companies combine two hard skills: being a biotech firm and an FMCG[vi] company at the same time”, explains Owen Ensor, ex strategy consultant at Bain and plant-based food expert, founder of advisory firm Plant Powered Consulting.

On the biotech side, strategic decisions revolve notably around the insourcing and outsourcing of parts of the process, such as having an in-house cell line or scaffold solution, or buying more advanced ones from specialised players. As the industry matures, we can even expect co-manufacturer offering an end-to-end production solution in a few years’ time, allowing entrepreneurs and businesses to focus on branding and distribution. But outsourcing comes with limitations, in particular on the technological learning curve by not being able to control the process and therefore the critical IP mentioned earlier that leads to a competitive edge, for instance through superior texture or taste.

Another consideration startups are facing is around “licensing” their technology. If the production process is so complex, why build a brand instead of selling it to the entire market? Building a platform play is Giuseppe Scionti’s choice. Giuseppe is a former professor in Bioengineering and the founder of Novameat, known for being the inventor of the world’s first 3D printed plant-based meat substitute. The scaffolding technology he and his team developed at Novameat is applicable to many industries, even to produce vegan leather.

“By building enabling technologies as a platform, we can help companies solve part or all of their [technological] obstacles. We help both specific startups we collaborate with as well as the overall industry. It’s like providing an operating system.”.

This is a way to de-risk the commercial side of a cultivated meat project, by multiplying possible applications.

However, brands will be needed to secure consumers’ trust and foster adoption of cultivated meat and seafood products. Then the question of positioning arises: given higher costs than mainstream food, should the product be positioned on the premium end or for mass consumption? Premium positioning will ensure healthy margins to reinvest in R&D and branding, but longer-term may end up representing limited volumes. Mass-market positioning, on the other hand, may command much lower margins but focus on huge volumes, requiring long-term capital to support the R&D cycle.

“The whole industry calls for more sustainability, so I think cultured meat innovation has to cover it all, not just the premium end of it” argues Anthony Chow, co-founder of clean meat VC fund Agronomics (Jim Mellon is also a Director in Agronomics).

4.???Investment landscape

Funding and valuations

In line with the rise in new startup creations, funding for the sector is accelerating and has reached an all-time high in 2020 despite a challenging fundraising environment. There is no major sign of deceleration in 2021.

Investments in cultivated meat startups are usually funded by VC funds and require specialist knowledge. Due diligence focuses on the defensibility of the IP, safety of the products, consumer acceptance and scalability of the business. Corporate VCs are also active – meat giant Tyson launched a dedicated $150m fund in 2016.

For Gourmey’s Nicolas Morin-Forest, investing now is a way to avoid paying higher valuations when any major regulatory approval is granted. When asked about sector valuation, Agronomics’ Anthony Chow believes that “valuations aren’t outrageous given the total addressable market”, although he recognises that valuations have started to increased recently.

In my view, there are two main risks to valuations: adverse regulatory decisions and appetite for the broader tech sector fading (eg all-time high multiples contracting).

Exit

For Avant Meats’ Carrie Chan, investors can also view two different time horizons in mind for large-scale commercialisation from a process optimisation angle. The first one is short-term, 2-3 years, to focus on technologies and cell lines that have more simple cell proliferation processes that can be optimised more easily, eg rank well on KPIs like population doubling time and cell density. The second one is longer term, 3+ years, to focus on more sophisticated multi-type and multi-step cell growth proliferation processes.

Large food groups are already starting to think about integrating such technologies into their portfolio. Some of them already made substantial investments in cultivated meat startups, like Tyson and Cargill. The number of collaborations with startups has increased in recent months and denotes strong interest from large incumbent players in the animal protein sector:

• BlueNalu / Nomad Foods joining forces for commercialisation of cultured seafood
• Meatable / Royal DSM focusing on creating affordable growth media
• Aleph Farms / Thai Union & CJ CheilJedang to accelerate Asian expansion
• MeaTech / Tiv Ta'am for R&D and production

Given the high barriers to entry, we can expect a wave of acquisitions by large food groups in coming years, providing an exit path to early-stage VC investors and an entry point for growth stage / late-stage investors.

The most mature startups are eyeing public markets:

• 3D printing company MeaTech listed on NASDAQ in March 2021
• Cell programming platform Gingko Bioworks listed for $15bn via a SPAC merger in May 2021
• Egg alternative and culture chicken producer Eat Just is rumoured to IPO late 2021

Conclusion

I believe that the problems cultivated meat and seafood startups are trying to solve will keep on driving interest from both strategics and investors. 2020 was a test year, and the momentum for cultivated meat has grown stronger. Consumers are becoming more conscious of their impact and increasingly spend their money on brands and products that align with their values, eco-friendliness being often top of the list. Shifts in consumption are reinforced by large investors’ renewed focus on ESG in the last couple of years, pushing VCs and startups to act on ESG KPIs and be more transparent.

These macro drivers support the development of startups led by mission-driven founders. Cultivated meat and seafood will be in competition with other alternative protein businesses, but given the focus of half of the startups in that space on enabling technologies, collaborations will likely multiply and so will breakthrough innovations. In particular as the future looks increasingly like fermentation techniques, cellular agriculture and other processes used in developing alternative proteins will converge and create “hybrid” products (within alternative proteins, not mixing animal protein and its alternatives but plant-based and cultivated meat, for instance) to solve for taste, texture and cost, eventually offering tasty products and cost parity.

From an investor’s perspective, the main challenge remains asset selection (and subsequent in-depth, technical due diligence) as diversification is hard to achieve (unless you invest in a fund like Agronomics) and there are limited actions an investor can take to de-risk the regulatory aspect.

Acknowledgements

Special thanks to all the people who helped me structure and write this article: Costas Kalisperas for giving me the idea of and inspiration for this article, Nicolas Morin-Forest (Gourmey), Carrie Chan (Avant Meats), Benjamina Bollag (Higher Steaks) and Giuseppe Scionti (Novameat) for their insights as entrepreneurs, Owen Ensor (Plant Powered Consulting) for his expert views on the sector, Anthony Chow (Agronomics) for his views as pioneering investor in the space and Emma Ignaszewski (Good Food Institute) for her support and role in modernising meat production.

PS: have I missed anything? do you want to take the discussion further? I would love to hear your feedback. Feel free to message me at: [email protected].

Note: the views expressed in this article are my own and are separate from Kharis Capital’s views.

[i] 2020 State of the Industry Report, Good Food Institute (2021) – page 26

[ii] https://www.natlawreview.com/article/comments-summary-labeling-cell-cultured-seafood?amp

[iii] 2020 State of the Industry Report, Good Food Institute (2021) – pages 44 to 49

[iv] https://gfi.org/science/the-science-of-cultivated-meat/

[v] https://mooslawbook.com/

[vi] Fast Moving Consumer Goods