Innovation in food: The rise of start-ups, incubators and internal venture funds

The pace of innovation in food has never been higher. It is revolutionising the way we produce, process, sell and experience our food.
Innovations are coming from non-traditional places; through the rise of food start-ups, high levels of venture capital activity, and the widespread establishment of internal venture funds and incubators. With record levels of investments and high-profile investors such as Richard Branson and Bill Gates[1] now backing innovative food companies, has food become the new tech?

What does all this mean for food businesses seeking growth through innovation? And how will increased investment in start-ups and venture funds impact traditional internal R&D functions? Is there a role for them going forward? And if so, how do we balance these investments?

What is driving innovation and where is it coming from?

This wave of innovation isn’t happening by chance. It is being fuelled by changing consumer preferences, food sustainability concerns, regulatory changes, technology advancements and lower barriers to entry. These trends, coupled with the surge in investment, are spurring innovation across the entire value chain, from supply chain innovation to reimagining the experience and providing new services and channels. Innovation is no longer just about new product formulation such as healthier versions, free-from, smaller pack and snack sizes.

At present, a key source of innovation is the start-up scene. Funding channelled to food and beverage start-ups is on track to hit a record high this year with hundreds of deals globally with a forecasted value of US$2.2bn in 2017[2]. This is in addition to global investment in ‘food-tech’ companies peaking at US$5 billion in 2015[3]. This activity has been fuelled by the rise of food-focused venture funds such as Cavu Ventures and S2G Ventures[4] and Big Food companies such as General Mills, Kelloggs, Campbell Soup[5] and Unilever[6] who have all launched their own venture funds or incubators. General Mills’ venture fund, for example, has anticipated that plant-based protein will be king, investing in a startup producing dairy-free protein bars[7]. And meat producer, Tyson Foods, used its venture fund to take a stake in plant-based protein company Beyond Meats to diversify their portfolio and drive innovation[8].

So what does the emergence of venture funds mean for businesses and their R&D departments?

Food and beverage companies increasingly feel the need to make choices on whether to invest in their R&D teams or into ventures and incubators. The challenge for traditional R&D is that it is often seen as biased towards growing the core and product innovation rather than new services and business models. And research has shown that companies who stretch innovation beyond product formulation are seeing disproportionate returns from their investment.[9]

So could these attractive returns, rapid change in consumer preferences and advancements technology, drive businesses to favour ventures and redirect their investment away from R&D? Will one model prevail or is there a place for both?

We believe companies should take a diversified approach to innovation and should resist placing too many eggs in their venture funds. Nurturing the core with disciplined R&D and new product formulations will remain critical to ensure growth is achieved in the short to medium-term and capital is available to make longer term investments. The key is finding the right balance. Successful businesses will find ways to build on the strength of their core and leverage their scale and access to capital to take measured risks on disruptive products, channels and business models.

It is clear that the rise of start-ups, incubators and internal venture funds is shifting the basis of competition. It is no longer just economies of scale. It is winning on diversity, differentiation and adaptability. Those who will embrace various types and sources of innovation will be best placed to thrive in this new world.

[1] Fortune, 23 August 2017, Bill Gates and Richard Branson Are Investing in This Clean Meat Startup

[2] CB Insights, 24 March 2017, Visualizing Where Food & Beverage Investment Is Going

[3] CB Insights, 10 May 2016, Has Food Tech Lost Its Flavor? Investors Dial Back On Funding Food-Focused Startups

[4] CB Insights, 24 March 2017, Visualizing Where Food & Beverage Investment Is Going

[5] Fortune, 20 June 2016, Kellogg Launch VC Fund to Invest in Food Startups

[6] Fast Company, 5 March 2014, Unilever Looks to Forge New Partnerships with Startups with the Launch of the Foundry

[7] Fortune, 28 February 2017, General Mills’ Venture Fund Invests in 20-Year-Old’s Startup

[8] Fortune, 10 October 2016, Why Tyson Foods is Investing in a Vegan Startup

[9] Deloitte, 2016,  Deep-dive on innovation in Consumer Products New insights on how innovation leaders are creating value despite industry headwinds

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