Can alternative protein startups justify their climbing valuations?

Editor’s Note: Yanniv is an investment associate at AgFunder.

It’s hard to miss the investor enthusiasm for meat-free animal products these days. Beyond Beyond Meat’s epic IPO, we continue to hear about mega valuations in the space and it was certainly a topic of conversation at the Good Food Institute’s (GFI) Good Food Conference on and off the stage.

On the first day, GFI hosted a panel with five leading corporate and VC investors in the plant-based and cell-based sectors. This panel, entitled “Capitalizing on Change: How Investors Accelerate the Plant-Based and Cell-Based Industries” and moderated by Nathaniel Popper of The New York Times, revealed that, overall, investors are bullish about alternatives to animal products. However, they also made it clear that there is now an increasing point of contention between founders and investors: startup valuations.

“Every company in this space just saw or imagined that their valuation tripled at the same time as Beyond Meat,” said Popper, to which the panel reacted with signs of approval and amusement. “What do you do about all the startups that now want three times as much money or give you three times as little of their company?” he asked.

What to do about startups wanting three times more money?

For James Joaquin of Obvious Ventures, while Beyond Meat is remarkable evidence that it’s possible to disrupt the trillion-dollar animal protein industry, a startup would need to show a significant R&D advantage and a strong moat against competitors to warrant such numbers. On top of that, he believes that there is danger in raising too much money: “one of our favorite lines at Obvious is that most startups die of indigestion not of starvation.”

According to Costa Yiannoulis of CPT Capital, part of the blame should be placed on new investors that have flocked into the sector despite their lack of understanding of the space. He calls it a “quality problem to have” but a problem nonetheless. “The startup industry is littered with companies that raised a lot of money and never went anywhere,” to which he added that “it doesn’t necessarily mean that because people offer you money at higher valuations that you are going to be successful.” The advice he gives to founders is that picking the right investors to have onboard is paramount to their success 

“There’s a lot of dumb money right now,” said Lisa Feria from Stray Dog Capital. But “dumb money freaks out really quickly,” so as soon as a startup hits a bump in the road, it will be “the first money out the door.” As a result, follow-on investments will be rare, and startups are likely to see demotivating and bad term sheets in their next funding rounds. Tom Mastrobuoni of Tyson Ventures summed up the debate by asserting that, for investors, there is no choice but to walk away when faced with excessive valuations. “There is no glory in investing at too high of a valuation.”

The arguments that were made during this panel are far from being fringe positions among investors. For example, as AgFunder (yes, that’s us!) is preparing the launch of a new fund dedicated to the market opportunity presented by alternative proteins, one of its founding partners, Rob Leclerc reflects: “We’ve seen lofty valuations in the sector driven by a trifecta of investor inexperience in biotech, food, and venture capital. The fact is that most startups are still years away from even multi-kilogram scale, and major industry-wide technical hurdles still need to be overcome. Raise too much money from the wrong investors now and subsequent funding will evaporate.” For this reason, he believes that founders should be focusing more on getting the right investors on their cap tables and less on valuation.“These are investors who can prepare them for the biggest challenges and who have reputational capital to open the right doors.”

So how do entrepreneurs justify these valuations? 

To answer this question, I interviewed the CEOs of SuperMeat, Wild Earth, NOVAMEAT, and Bond Pet Foods on the sidelines of the Good Food Conference 2019.

For Giuseppe Scionti, CEO and founder of NOVAMEAT, one of six new startups to be showcased at the conference’s pitch session, we need to distinguish between plant-based and cell-based meat startups. On the plant-based side, he believes that because it is faster to get to market and because the success of Impossible Foods and Beyond Meat proves that consumer demand is there, a high valuation can be easily justified. On the cell-based side, while there is a bigger longer-term reward, he believes that there will also be an additional expense. He argues that these high valuations are related to the necessary funding requirements of scaling up. “In my specific case, I think that I can do it gradually but in other cases, it’s impossible”.

“These startups should command a premium. They are not just seasoning a new type of TV dinner. They are completely revolutionizing the market,” Rich Kelleman, CEO and founder of Bond Pet Foods told me. He believes that these emerging startups have multiple first-mover advantages and that they currently hold a large megaphone. That being said, he also suspects that eventually we’ll see a correction, which he argues will actually be good for the market.

Ido Savir, CEO of SuperMeat, tries to stay away from investors who don’t understand the market. “There is currently a lot of hype, and dumb money is very problematic,” he told me. When he talks to investors, he prioritizes those who are more strategic and well-versed in the sector. A key criterion for him is that these investors need to be able to follow-on in later rounds. When he raises money, he already thinks about the next couple of rounds.  

But perhaps the most intriguing perspective is that of Ryan Bethencourt, who has been sitting on both sides of the negotiating table throughout his career. Ryan Bethencourt is both an investor in some of the most well-known companies in the animal alternatives space, and an entrepreneur in the plant-based sector. During his tenure at IndieBio (which he Co-Founded in 2014), he invested in Clara Foods, New Wave Foods, Mycoworks, and Memphis Meats. As an angel investor, he invested in Shiok Meats, and as a Partner at BABEL.Ventures, he invested in Finless Foods. In parallel, Ryan Bethencourt is the CEO of Wild Earth, a startup that develops plant-based pet foods, and which many Americans will recognize from the company’s appearance on Shark Tank and related deal with Mark Cuban earlier this year.

“Valuations are the age-old question in Silicon Valley. We go through boom-bust cycles all the time. What we saw in all previous cycles is that some companies are highly overvalued, and some companies are very undervalued. We just don’t know who’s who. When we look at large emerging markets like the original internet boom, there were clearly some companies that were undervalued. Amazon. Google. And in 2008, Facebook was undervalued. They seemed expensive at that time, but they were actually undervalued. In many cases, companies like Pets.com were obviously overvalued because they didn’t survive. So, the market is pricing for the market opportunity, not necessarily the individual companies. That’s the hard part.”

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Image: “Capitalizing on Change: How Investors Accelerate the Plant-Based and Cell-Based Industries” panel at Good Food Conference 2019.