The State of Alternative Protein Investing in Food Tech
The case for Smart Proteins: Growing population, growing demand for proteins, diminishing (and stressed) natural resources
Written by:? Maximilian Von Poelnitz , EFF Ventures
We live at a time when the Earth’s natural resources are being pushed to their limits by population growth and over-consumption. This is contributing towards a climate crisis of immense magnitude. It is therefore imperative that we find new, efficient and realistic solutions that will enable us to provide sources of protein to our growing population while tackling some of the biggest challenges we face, by minimizing the burden on our environment and limiting the strain on our planet’s limited resources.
The smart protein[1] industry represents 2% of current global protein consumption — a mere US$20Bn in top line revenue. However, over the next decade and a half, the industry is expected to scale exponentially with projected global revenues in excess of US$500Bn. To get there, producers will need to attain product ‘parity’. Parity refers to taste, texture, and price. For successful commercialization, products will need to drive towards the parity trilogy. Governments will play a key role in the journey to parity, with direct and indirect subsidies, in a similar way that they today subsidize the farming industry.
The increasing role of technology
Innovative technologies are enabling us to produce high quality proteins for human consumption without the corresponding climate footprint of industrial factory farming. New technologies such as fermentation (biomass, precision, and gas), cultivated (meats and seafood) technologies, plant-based assets (including molecular farming) are all tipping the scale towards more sustainable protein production.[2]
Hybrid — the application of several technologies to enable product go-to-market strategies
The alternative protein industry’s holy grail is a pure cultivated meat substitute produced at scale with both nutritional values and price parity. However, as many in the industry have begun to make plans to commercialize, a hybrid product has become the key go-to-market strategy. This is true for both plant-based and cultivated products and we envision hybrid products to dominate the competitive landscape over the next 5–8 years.
Impossible Foods has a hybrid product that contains a fermented heme protein and a plant-based dry mix. Most plant-based offerings are exploring different forms of protein and fat substitutes in order to up the nutritional load as well as the texture and taste profile. However, in the cultivated meat space the cell inclusion ratios tend to be sub 7% . This means that the cultivated cell compounds represent only 5–7% of the mass which still allows for high protein inclusion but a much cheaper cost profile. The remaining product might be a plant-based protein or a form of filler given that most of the nutritional goals are met with the cultivated protein cells.
In the alternative fish space, cultivated cells need to make up over 51% of the end product to be defined as tuna or salmon. There will be regulatory hurdles associated with this cell mimicking but with the FDA already fully engaged with a number of start-ups we see further definitions arising over the next 12–18 months. This will only further strengthen the case for hybrid products in the short term.
As hybrid products attain commercial scale and consumer receptivity (recall ‘parity’), so too will the production facilities combine the enabling technologies in their processes further driving towards sustainable competitiveness and ESG objectives.
Infrastructure
The greatest hurdle the alternative protein industry will face over the coming decade is the imminent shortage of available manufacturing capacity. Tailwinds from both the end-customer as well as the maturation of the supply chain (typically?venture-backed smart protein start-ups that have product market fit) are creating an exigent mandate for commercial manufacturing to keep pace. This paucity affects all three smart protein verticals: from the sheer lack of fermentation capacity to the geographic and supply chain impediments that many of the plant-based companies face.
For fermentation, just 1% of the conservatively forecasted 600,000 cubic meters (M3) of capacity required for food proteins is available today, and only 10% is available if all existing CMO capacity could be converted. The bulk of today’s fermentation capacity is already under contract (mostly for non-food applications, i.e.: active pharma ingredients 58%; chemicals 24%; amino acids 13%).
Plant-based consumer packaged goods companies face different barriers, namely finding one place to produce and package their products. Many companies are forced to use several geographically disparate co-manufacturers to get products to market. This increases the total cost, putting significant pressure on market price parity. It should also be noted that infrastructure includes human resources: the need for operators, scientists, and engineers experienced in manufacturing and scale-up of processes from bench to commercial scales. This dearth of capacity for all three verticals and across the supply chain can be solved, but it requires considerable, deliberate, and expeditious funding coupled with industry expertise that can best allocate investment dollars to accelerate industry growth.
For the industry to scale, multiple sources of capital and differentiated risk profiles will be required
The smart protein industry raised close to $6Bn in 2021, following approximately $3Bn in 2020. For 2022, the amount raised fell back to 2020 levels. The lion’s share of those funds went to R&D, pilot facilities, and a few commercial facilities. This represents a far cry from commercial-scale production from almost all sectors, save that of the plant-based companies with the likes of Impossible Burger, Beyond Meat, and Oatly already producing reasonable quantities of plant-based alternatives.
To produce vast amounts of alternative proteins that would make any significant difference and contribution to our overall protein production, the industry will require hundreds of thousands of tons of capacity over the coming years. This, in turn, will require billions of dollars in new infrastructure investments. In addition, the industry needs fit-for-purpose equipment most of which will need to be built. This is not a role that is suited for venture capital firms.
Part of those infrastructure needs will come from a handful of co-manufacturing companies launching in the smart protein space (e.g., Liberation Labs, Planetary, Synonym) and part will need to come from alternative sources of funding: real estate funds, REITs, brownfield and greenfield construction with credit mitigators and/or offtake agreements, partnerships with large F&B players and commodity trading firms (i.e., Unilever, Nestlé, Cargill, ADM) — and increasingly what appears to be government-subsidized loans and grants for construction and production facilities, as well as bank lending facilities as commercial scale becomes evident.
For the industry to scale to relevance, multiple sources of capital and differentiated risk profiles beyond venture capital will be required to deliver the true impact we are all driving for — a cleaner, healthier environment with lower GHG emissions and alternatives to our animal protein-centric diet at scale.
Smart proteins represent a big climate impact
Reducing animal agriculture in the food value chain is an exceptionally high-impact solution to the global climate crisis.
The U.N. has projected that GHG emissions will reach 55 gigatons (Gt) by 2030, absent any change in current government policies. BCG’s 2021 Food for Thought report estimates that the shift to alternative beef, pork, chicken, and egg alternatives will save more than 1 Gt of CO2e by 2035 — or about 0.85 Gt CO2 in 2030. This is equal to decarbonizing most of the aviation or shipping industries or about 22% of the building industry.[3] BCG’s upside scenario (which envisages alternative proteins capturing 22% market share) expects decarbonization of 2.2 Gt CO2e, or 4% of emissions under the U.N.’s current policies scenario, by 2030. If alternative proteins were to replace the total addressable market for animal proteins with like-for-like alternatives, building on current technology, global emissions would fall by 6.1 Gt CO2e — 11% of projected current emissions in 2030.
Regulations — a constructive environment in general and the U.S. government becomes the ‘Big Gorilla’ for the ‘green’ economy and synthetic biology (smart proteins)
Since 2015 when Israel announced that its novel framework for regulating food would apply to alternative proteins, other regulators have followed suit. New and revised procedures address issues ranging from biotech hubs (Middle East and Singapore) to the evolving needs of startups (U.S. and Israel) to resource scarcity, supply security, and independence (Middle East, Singapore, and China) to protein deficiency (India and some major African and Latin American countries) to food safety (China) to climate goals (Europe and others). Approval procedures for plant-based products are generally well established, and procedures for fermentation-based and cell-based products are accelerating.
It is a widely held view among alternative protein stakeholders that strong government policies to support the industry will enable alternative proteins to represent at least 22% of the total protein market by 2035. The greater the share of alternative proteins the greater the benefits in terms of healthy, nutritious protein-rich foods, important reduction in GHG emissions, and a greener and bluer Planet.
Consolidation and restructuring — survival of the most adaptable
The investment horizon and fund availability dramatically changed for food tech players in 2022. In 2022 Q2, global food tech investments dropped by over 45% to levels last seen in Q3 2019 and pre-pandemic. Much of this reduction can be attributed to a significant drop in later stage deals (series C and above). In addition, global public traded food and agricultural companies are down 18% — 22%, putting downward pressure on valuations in the private market. Specifically in the smart protein space we have seen valuation resets that equate to 50% reductions or flat insider rounds (rounds that do not involve valuations as the existing shareholders continue to fund the company).
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The current environment means growth stage businesses will fail to find investors or valuations based on their 2020 or 2021 multiples. Given that the M&A and IPO markets have frozen as well, we envision many consolidations and/or technology transfers from bankruptcies. More importantly, businesses seeking capex or working capital rather than pure growth capital will be further hindered. It is important to differentiate different types of food tech investments and where most of the consolidation will occur. (Refer to chart below for VC Investment by food tech category.) We believe significant opportunities exist in alternative proteins, farm management such as molecular farming, and online marketplaces; all areas heavily impacted by the recent downturn in investments.
About the Author:
Maximilian Von Poelnitz , EFF Ventures, is an experienced entrepreneur, CEO, and venture investor excited by innovation in digital health, food tech, and supply chain technologies. With over 15 years of experience across Asia and the US, Max has built numerous start-ups, founded a venture capital firm, invested as a CVC, and joined multiple boards. He is an eternal optimist and supports and fights for the entrepreneurial journey as a force for good.
In-depth reading on the Food Tech & Smart Proteins sector
EFFV has made a selection of research materials on Food Tech & Smart Proteins. EFFV closely collaborates with certain of these authors; for example, the Good Food Institute (GFI) is a global partner of EFFV in developing smart protein businesses in certain Emerging Markets.
1. Industry report on fermentation and cultivated meats — GFI — overview explaining science and industry:
2. On the Environmental impact:
3. Green Queen APAC Report — Given the size of the file, please find below the link so you can register and download as convenient. A great site too for additional information.
4. Agri Business contribution to GHG emissions
UN FAO: GHG emissions from agrifood systems; global, regional and country trends (2000–2020)
UN FAO: Food wastage footprint & climate change
5. The Untapped Climate Opportunity in Alternative Proteins
[1] In this brief, the terms ‘smart proteins’ and ‘alternative proteins’ are used interchangeably. They both refer to protein that is produced without animals (i.e., plant-based and fermentation) or without animal slaughter (i.e., cell-based meats and seafood).
[2] For example, gas fermentation is being designed to use carbon in the atmosphere or directly from industries as a production input, thereby promising a direct link between the technology and decarbonization. Some gas fermentation companies are even aiming for methane as a production input.
[3] This ‘base case’ scenario assumes that alternative proteins will represent an 11% share of the total protein consumption by 2035.
Maximilian Von Poelnitz, thank you for this insightful and comprehensive post on the potential of smart proteins to address the increasing demand for proteins, resource constraints, and climate crisis. It's impressive to see the expected growth of this industry, and the role of innovative technologies and hybrid products in paving the way for a sustainable future. However, as you rightly pointed out, infrastructure and investment challenges pose significant barriers to scaling the smart protein industry. I'm curious to see how alternative sources of funding, partnerships, and government involvement will shape the future of this space. It's also interesting to consider the potential for consolidation and restructuring within the industry in response to changing investment landscapes. Ultimately, the environmental and health benefits of smart proteins cannot be overstated, and it's crucial to continue supporting the development and adoption of these innovative solutions. ??