With the largest population in the world and as one of the largest agricultural economies in the world, China represents a major opportunity for startups and investors alike.
Chinese agrifood startups raised $5.8 billion of investment across 283 deals with 318 participating investors during 2018, according to the 2018 China AgriFood Startup Investing Report released by AgFunder in collaboration with Chinese food tech VC Bits x Bites.
While Restaurant Marketplace Meituan-Dianping’s pre-IPO Series F round of $1.5 billion certainly contributed to the jump, a 60% year-over-year increase in the number of deals highlights that there was considerable growth in the industry besides. There was also a 60% increase in the number of investors participating in the space.
The report includes technology startups operating across the agrifood value chain as well as other non-tech startups disrupting China’s agrifood industry with the addition of the Premium Branded Foods & Restaurants category from AgFunder’s typical reporting, which is focused on technology startups.
All categories of agrifood innovation showed growth except In-Store Retail & Restaurant Tech where the hype around unmanned stores abated as many startups in this category failed. And while the majority of deals focused on downstream technologies closer to the consumer such as food delivery, investment in upstream technologies increased over 800% year-over-year, as innovators strive to boost one of the largest agricultural economies in the world.
“In 2018 we’re seeing quite a fusion of innovations building on the digital ecosystem that has penetrated every aspect of Chinese lives,” said Matilda Ho, founder of Bits x Bites, the co-author of the report. “Some of these companies are creating new business models such as group buy eGrocery, others are advancing different B2B services for the expanding food delivery value chain. This shows China’s digital prowess and how quickly and nimbly Chinese entrepreneurs can adapt and compete.”
While deal activity remains fairly muted compared to other markets such as the US or Europe, China’s agrifood startup scene can be characterized by the huge deals that close each year.
2018 was another record-breaker with Meituan-Dianping’s $1.5 billion Series F beating out ele.me’s $1 billion deal in 2017. M&A and IPO deals were also far larger than elsewhere. Alibaba finally completed its acquisition of food delivery platform ele.me at a valuation of $9.5 billion and Meituan-Dianping’s IPO valued it at a whopping $52.8 billion.
Compare that to Europe where the five highest value food delivery platforms had a combined value of around $25 billion towards the end of last year and you get the picture.
Demands of China’s Fragmented Consumer Base Drive AgriFood Innovation
Overall, downstream technologies raised $4.7 billion in investment dollars representing 176% growth from 2017. The number of deals nearly doubled to 218.
While entrepreneurs continue to answer the demands of the growing middle class for premium food products and experiences–a major driver for the overall Chinese economy– the fragmentation in the population became more obvious as entrepreneurs also started to innovate for lower-income consumers with services that appeal to their specific budget and convenience requirements.
Restaurant Marketplaces — startups with tech platforms for delivering food from a wide range of vendors — was the best-funded category snagging $1.9 billion in funding comprising 33.8% of total funding dollars for the year. That cash was deployed across only nine deals as Meituan-Dianping’s $1.5bn mega-deal represented the majority.
Excluding that deal, eGrocery was the best-funded category including its own large deals such as Dada-JD Daojia’s $500 million from Walmart and JD.com, China’s 4th largest internet company that relies on the subsidiary to help it compete with Tencent and Alibaba for data and traffic. eGrocery startups raised $1.7 billion across 54 deals.
Premium Branded Food & Restaurant Deals, the category encompassing new, higher-end food brands and eating experiences, also saw some large rounds with Luckin Coffee raising a $200 million Series A followed closely with another $200 million in Series B funding later in the year. Competitor Hey Tea snagged $63 million. Other hot flavors in this category included Sichuan cuisines like Spice Temptation and chicken fast-food chain LXJChina.
The only category that did not experience growth was In-Store Retail & Restaurant Tech. Investments in unmanned stores and vending machines cooled off in 2018 to $292 million from $430.57 million in 2017. Bingobox, Aibuy, Aibianli, Xiaofan Cabinet Technology, DeepBlue AI, Yee Coffee, and Bianli24 were among the 42 startups in that segment of retail tech that still raised funding despite the pullback in investor interest.
Upstream Tech Started to Pick Up
Despite the strong focus on consumer-facing technologies, investment and activity upstream increased significantly as startups aim to improve efficiencies for farmers and throughout the broken supply chain. China produces one-quarter of the world’s grain and feeds one-fifth of the world’s population with less than 10% of the world’s arable land, according to FAO data.
Upstream technologies raised $960 million across 64 deals in 2018 up from $106 million across 28 deals in 2017.
Funding activity to startups operating upstream in the supply chain and closer to the farmer increased 129% year-over-year accounting for 22.6% of the number of deals in 2018. The dollar value of upstream deals also increased to represent 16.6% of total funding from just 5.9% in 2017.
The upstream growth can mostly be attributed to the rapid expansion of agribusiness marketplaces, which raised $813 million in funding.
Entrepreneurs in this category are trying to connect farmers more directly to consumers and markets to fix inefficiencies in the supply chain and archaic cold chain systems.
Meicai, the online platform that connects farmers to small and medium-sized restaurants, raised $450 million in Series E funding and was the biggest contributor to the Agribusiness Marketplace category. Cold chain supplier Jiuye also completed a $14 million Series C.
Songxiaocai, a wholesale platform for agricultural product procurement, completed a Series B1 of $32.2m and a Series B2 of $25.2m. Founded by ex-employees of Alibaba, it provides databased demand predictions to help farmers maximize their profits through more informed management and input purchasing decisions.
Haishangxian and Yijiupi are both specialized B2B procurement platforms. Haishangxian focuses on B2B seafood products and Yijiupi is an alcohol online merchant that received investment from food delivery giant Meituan-Dianping and online behemoth Tencent.
“Trends in China can rise just as rapidly as they fall. Some of the models will be refined and improved, others will disappear within a year,” said Ho. “China has no shortage of companies that raise eyebrows with their lightning-fast expansion and massive funding rounds. In most cases, what ultimately will achieve sustainable impact are those companies that are addressing real pain points in the food supply chain and are taking a long-term view in creating value.”
Growing Investor Base
Some 318 investors participated in the agrifood startup investment market in 2018, up 60% in number from 2017 as the category becomes a mainstay for investing communities all over the world.
The most active investor this year was Matrix Partners China, the China subsidiary of the Silicon Valley investor. Matrix backed agribusiness B2B platform Songxiaocai and community- based group buy eGrocer Xiaoqule, among others.
Alibaba and Tencent, the two online giants, continued to play a pivotal role in the industry, responsible for just under half the total funding during the year — $2.7 billion. Baidu was less relevant in 2018 than it was in 2017. The continued support of Alibaba and Tencent will be important for the Chinese agrifood startup ecosystem to establish itself, but it also comes with its pitfalls, as Bloomberg reported late last year.
GaoRong VC was new to the list. With roughly $2.2bn under management, it is one of the investors behind the now publicly-listed group-buy companies Pinduoduo and Meituan-Dianping.
A growing number of Chinese investors backed international agrifood tech startups across Israel, India, Singapore, the US, and UK. The largest international investment made by Chinese investors was Indian food delivery app Swiggy’s $1 billion late-stage round valuing it at $3.3 billion, involving Tencent, Hillhouse, and Wellington Management. The investment shows a desire to replicate the investment return of a business model proven successful in China.
Other offshore investments by Chinese VCs include Sailing Capital’s investment in Impossible Foods, and Bits x Bites’ five investments in 2018, including gene editing, cellular agriculture, chickpea protein, and low GI rice.