Chinese AgriFood Startups raised $1.8 billion in funding in 2017, according to a new report from online venture capital investor AgFunder and Chinese accelerator and VC Bits x Bites. The data show at least 198 investors participated in 177 deals over the course of the year.
The fledgling startup industry looks different to other global markets such as the US with the vast majority of innovation and investment ($1.7 billion) taking place downstream – at the consumer end of the agrifood supply chain. Just $106 million of investment went to 28 farmtech startups as scattered farmland and complicated supply chains make it difficult for upstream startups to gain momentum in China.
But China’s agrifood startup scene has something the US market does not: concerted investment and acquisition by the country’s largest technology companies. China’s three tech giants, Baidu, Alibaba and Tencent (“BAT”) invested at least $741 million (41%) in agrifood startups during the year. They were also responsible for more than $6 billion of agrifood acquisitions as three transactions in the Restaurant Marketplace category — ele.me, Waimai Baidu, and Meituan & Dianping – sold for $5.8 billion collectively.
While M&A picked up for US agrifood tech startups in 2017 – with John Deere acquiring robotics startup Blue River Technology and DowDuPont acquiring digital ag startup Granular – acquisition activity has been lackluster.
“Many of the agrifood corporations are looking to Google and Amazon as an existential threats, but their investment in agrifood tech is nothing compared to BAT. If the US agrifood corporations don’t get more aggressive with M&A they could see their positions threatened by China largest tech companies who are more nimble and aggressive,” said Rob Leclerc, CEO of AgFunder.
The majority of investment in Chinese agrifood startups was less strategic, however, with 79% of investors active during the year making just one deal each.
Three dominant sectors in 2017
Deal activity was heavily concentrated in eGrocery, In-Store Retail & Restaurant Tech, and Premium Branded Foods & Restaurants. Startup investment in the three categories accounted for 92.7% of total investment.
Following its transformative GDP growth since the 1990s, the Chinese economy is now largely driven by a booming middle class willing to pay more to improve their quality of life. (Middle class is defined as household income $9,000 – $34,000). Named “consumption upgrade” this is a key theme in China’s agrifood industry as well as a major driver for the overall economy. For this reason, startups addressing this trend are included in this report — even if they lack a technological element per AgFunder’s usual focus – in the Premium Branded Food and Restaurants category. This category of startups, which represents the largest number of deals in 2017 (60), seeks to reform the food landscape by introducing a wave of food and beverage concepts that were foreign to China until only recently, including craft beer and soda.
Chinese agrifood startups were also upgrading products and experience through better ingredients, cleaner labels, more traceability, and new food experiences. For example, Yizhibi, a pear juice company that’s reinventing the brand’s image as a healthy drink, successfully raised $140 million. Another high-profile deal was $15.2 million Series A for Naixuecha, a luxury tea store, potentially the first unicorn in tea.
China’s e-commerce lead
Chinese agrifood startups related to the sale of food and beverages raised the largest sums during the year as eGrocery and In-Store Retail & Restaurant Tech startups collected $1.38 billion between them, representing 77.7% of investment.
This is unsurprising considering the strength of China’s e-commerce market; in 2013, China surpassed the United States to become the world’s largest e-commerce market. Today, China accounts for more than 40% of the total value of global e-commerce transactions. The total value of its mobile payments ($11.8 trillion in 2017) was 11 times the size that of the United States. These technology-driven network effects make the country’s food industry ripe for disruption, which often occurs when you have a new, faster, and cheaper distribution channel.
In eGrocery, Yiguo, the earliest fresh food e-commerce startup backed by Alibaba, completed a $300 million Series D. MissFresh, funded by Tencent, secured $330 million in Series C.
Demand for convenience in China rose to new heights; Chinese agrifood startups offering easier ways for consumers to purchase food became the new darling of investors. More than half of the total 55 deals in the In-Store Retail & Restaurant Tech category were unmanned stores and vending machines. Xingbianli, an unmanned snack and beverage store chain, secured $57 million in Series A funding just five months after its establishment. However, 90% unmanned stores and vending machines were on the verge of bankruptcy toward the end of 2017.
These trends are not necessarily reflected in other parts of the Asian market, according to Michael Dean, CIO of AgFunder. “Whilst there has certainly been a lot of capital directed at the consumer end of the food system with food e-commerce offerings in the Asia Pacific, we have also seen a relatively more balanced approach to investing across the supply chain with decent volumes in the agtech and midstream technologies.”
This focus on Chinese consumer food purchasing trends will start to reach back into the supply chain, however, creating a need for traceability and transparency technologies all the way to the farm, he added.
“The explosive growth of food e-commerce combined with growing consumer expectations for quality standards have made it much more urgent to address the gaps in food supply chain supervision and integrity,” says Matilda Ho, founder and managing director, Bits x Bites. “This leaves an open field for technology startups such as contaminant detection, cold chain monitoring, blockchain and other solutions that can effectively address food safety concerns.”
Three jumbo M&A deals consolidate food delivery
Three jumbo M&A deals backed by BAT finally consolidated the Restaurant Marketplace category. Alibaba led an investment round of $1 billion in Ele.me, the second largest food delivery player that later in the same year acquired its trailing rival, Baidu WaiMai. This deal drove Tencent to lead a $4 billion additional investment in Meituan-Dianping, the only competitor of Ele.me. Behind the three deals are BAT’s priority for data, traffic, and logistics and this level of activity among the three companies signals the opportunity for more potential exits for entrepreneurs and early investors in the sector.
“The exits led by BAT are bringing a lot of new energy to China’s food startup space,” said Joseph Zhou, investment partner at Bits x Bites. “While most of the 2017 early-stage investments were still addressing common themes such as convenience and consumption upgrade, these large investments capture the imagination of new entrepreneurs, new corporate investors, and VCs, all of this providing a positive signal for the healthy growth of China’s food investment ecosystem.”
Download the 32-page report on Chinese AgriFood Startups for free here.