China is Ready for an Agri-Food Revolution

Editor’s Note: Bits x Bites recently became China’s first accelerator VC to invest in early-stage food tech startups. Built by a former BCG management consultant and founder of a Shanghai-based online farmers market, the program focuses on fostering transformative businesses to tackle China’s food safety and other systematic food challenges.

After applications close on December 31, 2016, selected teams will join a 120-day program in Shanghai and receive an equity investment. They will be coached by the program’s mentor network as they work towards product market fit and tackle the nuanced challenges of the Chinese market.

Bits x Bites invests across the full supply chain, from agriculture to food production, retail and logistics, and learning and sharing, and is open to applications from startups bringing innovation to consumer packaged goods (CPG), software, hardware, and biotech expertise and products.

So what is the food tech startup landscape like in China? What resources are there to foster entrepreneurs in the space? And what more is needed to put Chinese startups on the global agri-food map?

Here the Bits x Bites team gives us a snapshot of the state of the China food tech space.

A Market Set to Be Stirred Up

China is going through a turbulent time of shifting consumption habits and supply chains. It has a fifth of the world’s population but only 5% to 7% of its arable land. Resource scarcity and population growth have pushed agricultural innovation to the top of the country’s agenda. 

An ongoing string of food safety scandals has shaken consumer confidence in the food supply chain, with 71% of the population expressing serious concern about food safety, according to a Pew Global Attitudes survey. Many in tier one cities are beginning to look to organic and imported foods as a solution. Established food brands are in search of new ways to engage younger consumers. All of these looming factors have created a fertile market ripe for newcomers.

An Administration Hungry for Agri-Food Innovation

To boost agricultural innovation and curb food-related pollution, the Chinese government has taken sweeping steps to nurture technology development.

Across the country, 260 national agriculture and science technology parks are built to serve as part-technology showcase, part R&D pilot farms. Projects run the gamut from plant and animal breeding programs to precision agriculture and water-efficient farming. Some of these entities also provide grants to entrepreneurs.

Top agricultural universities allocate subsidies and working space for student and alumni startup teams such as Cyb-Bot, a robotics and automation company that received investment from a China Agricultural University Fund. Intercollegiate agritech startup events allow students to pitch and win grants.

There is no debate that the government has all hands on deck to boost technology supply in agritech innovation and entrepreneurship. Administrators recognize the need to engage the commercial sector much more deeply in translating these efforts into meaningful agri-food businesses.

Agri-Food Entrepreneurs Lurking in China’s Big Startup Factory

According to a report by UHY International, there are 4,000 startups launching every day. Government-backed VCs raised $231 billion in 2015, and the number of tech incubators has risen to 1,500 and counting.

Food startups make up a small fraction of these startups. Success stories are dominated by online-to-offline (O2O) companies like Ele.me (B2C food delivery with a $4.5 billion valuation) and Meicai (B2B grocery delivery with a $2 billion valuation).

New food brands riding the wave of Chinese consumption upgrades and rising demand for safe, healthy products, are piquing investors’ curiosity. The evidence is everywhere. An online salad delivery brand, Sweetie Salad, raised a Series A investment from JJ Venture Capital and Meridian Capital China. Cold-pressed juice brand HeyJuice has drawn the investment of Chinese celebrity actress Yang Ying.

Other startups are building technology solutions to tackle food safety and food waste issues, from urban farming kits to food waste converters and water purifying technology. This community of purpose-driven startups is just beginning to develop, with some showing great promise.

Investors Taking up Agri-Food, but Sporadically

In recent years, a growing club of capitalists and business leaders are developing an appetite for agri-food projects.

Fortune Ventures is one of the first private investors active in Chinese projects in the sector, having invested in poultry suppliers Fujian Sunner Development and Jiangxi Huangshanghuang. Sequoia joined agribusiness New Hope to close a Series A investment in ACSM [Agriculture Consultant and Smart Management], a Beijing company that has built a digital platform for agricultural management.

Overall, China’s agri-food investment is not yet picking up the same pace as elsewhere in the world. But it will grow due to two main drivers.

Firstly, the premium valuation of the internet and mobile technology sectors are encouraging more venture capitalists to look outside popular tech areas for undervalued businesses for their pipeline. Agri-food is one area that can fill the void, such as the ACSM deal.

Secondly, global investment in this sector has skyrocketed to $4.6 billion in 2015. If global trends offer a hint for the direction of China’s capital markets, agri-food is likely moving in next as a new investment destination as VCs hunt for value deals in promising young businesses.

Why isn’t there a disruptive agri-food startup in China yet? What needs to happen?

A healthy startup innovation ecosystem requires investors, startups, mentors, and a government that encourages it. The same applies to fostering agri-food innovation.

On the investment side, as capital lines up, agri-food capital in seed and development stages like the ACSM deal needs to be encouraged and facilitated. A vast majority of the deals falls in the expansion stages ranging between $1 million and $50 million. A more vibrant scene will materialize if more investors develop a systematic strategy to invest in food disruption in both early and follow-on stages.

The reality is that China hasn’t yet produced cutting-edge agri-food tech startups that are taking the world by storm like Impossible Foods, backed by big names like Horizons Ventures and Bill and Melinda Gates Foundation. Entrepreneurs and students need to be encouraged to take a demand-driven approach to technology innovation, listen intensely to the voice of the market, and be ready to take bold, calculated, and visionary risks.

There is also a strong case here for facilitating ongoing education and engagement in food system issues and opportunities in both startup and investor communities in China.

The food system challenges in China are imminent. And creating an accelerator VC platform dedicated to this community is a timely step to foster meaningful and disruptive solutions. Entrepreneurs who can adapt to the tides of market demands and build a sustainable business model will be rewarded. And if the right startups receive the proper support to grow, the outcome will benefit consumers, farmers, retailers, investors, and all of us who care about the ecosystem of our planet.

Are you a startup innovating for China’s food and agriculture industries? We’d like to hear from you! Email [email protected]