Food tech investment in China fell off a cliff in 2022: what can we expect in 2023?

Editor’s Note: Matilda Ho is founder and managing director at Bits x Bites, China’s leading agrifoodtech venture capital firm with technology investments across the globe, ranging from gene editing and drone-based imagery to biosynthesized ingredients and alternative proteins.  

The views expressed in this guest article are the author’s own and do not necessarily represent those of AFN.

2022 was a grim year for agrifoodtech investment, with funding down 44% year-on-year globally, in part driven by an 81% drop in funding in China. So why did funding fall off a cliff?

If you drill deeper into the figures, you can see that China’s agrifoodtech investing went through a major structural transition in 2022, with upstream investments — those to startups operating closer to the farm and in the midstream — accounting for almost all (96%) of the funding in a category historically dominated by downstream, consumer-driven sectors like food delivery.

So what prompted this reshuffle, and what can we expect to see in 2023 and beyond?

eGrocery moves aside, biotechnology steps in 

Back in 2021, eGrocery was China’s biggest funding story, drawing 75% of total investments. The country’s strict Covid lockdowns made delivered fresh food ubiquitous across generations and lower-tier cities. But investor optimism was not sustainable.

Covid’s supply chain challenges and increased logistical costs put these companies’ strained growth models under new stress: high cash-burn, growth-at-any-costs, and poor supply chain management. NiceTuan, having raised over $1 billion in total, closed in 2022. Nasdaq-listed MissFresh, which had a market cap of $2.27 billion at IPO, is on the verge of bankruptcy.

In contrast, biotechnology in agriculture has been riding on important top-down tailwinds, with investment almost tripling to reach close to $1 billion in 2022, instantly making it the single largest growth story for China last year.

As China races to meet its dual goals of food security and food sustainability, biotechnology has become a centerpiece of its innovation-driven growth strategy. Startups addressing gaping issues in China’s supply chain are able to leverage government-backed funding and a regulatory environment that increasingly favors these biotechnology companies.

Pig breeding company Zhongxin Breeding raised a $372 million seed round, making it the first upstream deal to top China’s agrifood funding. This deal speaks to the government’s high priority of boosting self-sufficiency in seeds and genetics.

Imported pig breeds account for 80% of China’s pork supply. This reliance was most pronounced during African Swine Fever when 60% of its pig population was wiped out and sows had to be flown in from Europe to fill the gaps.

Zhongxin’s record raise was supported by three government-backed funds. In segments that align with China’s top-down priorities, we can expect to see more state-associated investor participation to fuel startup ecosystem growth across funding stages.

Other biotechnology companies closing large raises are in line with helping China meet its 2060 carbon neutrality goals, in particular, feed and ingredient companies combining biological production methods and chemical synthesis to deliver cost-competitive alternatives to traditional chemicals

China sold $1.5 trillion in chemicals in 2017 and has the largest chemical industry in the world. Tightened environmental regulations have opened the door to newcomers such as biomaterial and feed companies BluePHA, which raised $125 million in 2022 and Moija Biotech (a Bits x Bites portfolio company) which raised a Temasek-led $80 million Series B.

In 2023, we anticipate growing biotechnology activities to ride on these tailwinds:

• Growing traditional industry participation: As traditional chemical synthesis transitions to bio-based, more state-owned corporations will heed top-down priorities to join the new bio-economy. Early signals can be seen through SinoChem’s acquisition of Syngenta; China National Petroleum Corporation’s recent $51 million A+ investment in synbio startup PHABuilder.
• Enthusiastic public market reception to profitable biotech companies: China remains one of the most attractive public markets for startups to list. Chinese companies Cathay and Huaheng maintain their strong PE ratios of over 50x and market capitalizations of $5.2 billion and $2.7 billion respectively, delivering $79 million and $46 million in net profit in 2022.
• Growing ecosystem around China’s fermentation capacity advantage: China ferments 66% of the world’s amino acids and 77% of its vitamins and dominates the construction of fermentation equipment. In this 2022 article, we shared our view that China could help solve the global fermentation shortage.

Animal ag tech to surpass animal-free protein in momentum

Chinese alternative protein companies raised just over $80 million in 2022. The sector’s global slowdown also has an impact on ingredient players in China.

As plant-based meat company Beyond Meat reported a net loss of $366.1 million in 2022, Shuangta, the largest pea protein provider for alternative meat, reported a net loss of $28.2 million for the first nine months of 2022 compared to a net income of $33 million a year ago.

We are optimistic that the next-generation protein ingredient companies will improve in taste and function, especially those with in-house protein strain and texture capabilities. But given the Chinese market is stubbornly unwilling to compromise on taste, it will take some time before the segment sees growth again.

China has a much more urgent demand for improving its animal production, however.

High-density swine and poultry productions have surged with farm consolidation in the last few years. These compact operations have arguably increased the frequency of new viral diseases and the need to manage the risks of the next African Swine Fever. The ban of growth-promoting antibiotics in feed provides another trigger to stimulate animal health innovation.

Keep an eye on animal biologics, from new vaccines to antimicrobial peptides, RNAi, and probiotics.

Nutrition sector gets a demographic boost 

We predict that China’s doubling down to course-correct its reliance on imported biotechnology may have an impact on nutrition startups.

Today, China imports 70% of its enzymes and 85% of its probiotics. Two companies raised substantial rounds in 2022 to fill these gaps, including Enzymaster, an enzyme company for API intermediates and chemicals, and Zhiyi Pharmaceutics, which produces probiotics and biotherapeutics.

This self-reliance drive will boost young domestic companies advancing nutrition solutions.

What to watch in 2023

Several themes will be important to watch in 2023.

China’s population declined for the first time last year. Its aging population, coupled with urbanization, make chronic health concerns a growing threat. Its spending on diabetes is expected to rise to $460 billion in 2030. Solutions to address gut, brain, and bone health, diet interventions, and weight management will be high in demand. There is also growing momentum in foods for special medical purposes (FSMP).

In spite of the challenges in today’s funding climate, signals point to ample opportunity in chaos, especially for companies solving the right problems.