Food Tech Investors Need to Look at the Farm to Transform Industry in China, says Temasek MD.

Editor’s Note: Bits x Bites is 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.

Here the Bits x Bites team offers four key takeaways from the recent 2050 China Food Tech Summit.

“Startup activities in China today are much more focused downstream [on the consumer], but unless companies can solve supply chain issues and produce more food using novel technologies, I don’t think the Chinese food industry will change tremendously,” Anuj Maheshwari, managing director of Singapore state fund Temasek told delegates at China’s first food tech summit.

Organized by Bits x Bites, the Shanghai-based food tech accelerator and VC platform, 2050 China Food Tech Summit gathered startups, investors, multinational and Chinese food companies, as well as retail brands focusing on China, to talk about the state of agrifood innovation and investment in China.

Investor speakers also warned the audience about the need to liaise closely with the government on agriculture issues, and to take a long-term investment approach to avoid fads and effect lasting change.

Tackling upstream issues is key to transform China’s food industry

The food innovation opportunity is largely led by two forces: on one side is the need to sustainably produce enough food to feed a growing global population, and on the other side is the consumer demand for better food that is safer, tastier, and healthier.

“The world is trying to solve these two problems,” said Temasek’s Maheshwari. “And sometimes these two problems are at conflict with each other, but that doesn’t necessarily need to be. Technology is the key to solving that.”

In AgFunder’s recently released Chinese AgriFood Startup Investing Report, data revealed that the vast majority of agrifood startup investment activity (94%) took place downstream to service consumers’ increasing demands for convenience and taste preferences. Only $106 million out of a total $1.8 billion of investment in 2017 went to startups developing technologies upstream, for the farm.

Local adaptation is essential to scale agtech

The Chinese government has put the pedal on the accelerator of investing in agricultural modernization compared to 15 years ago, pledging to invest $450 billion by 2020. As a whole, the Chinese market offers agtech entrepreneurs immense opportunity to bring innovation at scale, especially technology that can demonstrate production efficiency, food safety improvements, and help alleviate rural poverty.

Technology that aligns with government priorities and can prove science-based merits has good potential. But it will take companies that can adapt to all of China’s nuances and can act as excellent liaisons with regulatory agencies and supply chain partners to succeed. This is especially true for those bringing the most advanced technology such as gene editing, speakers told the audience.

“It is as much about the market potential as it is about the team’s ability to adapt and execute on a local basis,” said Jack Chen, senior investment manager at IFU Danish Investment Fund for Developing Countries, an equity fund active in Chinese agricultural projects with positive environmental and social impact.

Chinese food entrepreneurs move quickly but market gaps remain

With its growing middle class and rising discretionary spending, more Chinese consumers are willing to pay a premium for new food experiences and healthier ingredients. Local food startups are quick to respond with new brands capturing consumer excitement, from healthier snacks to artisanal tea chains such as Naixuecha, which raised $15.2 million in Series A in 2017 at a valuation of $900 million, just shy of unicorn status. The category that encompasses these startups – Premium Food Brands and Restaurants – raised $283 million in 2017, according to the China AgriFood Startup Investing Report.

And there is still tremendous need and demand for more new food products in China, according to investors.

“In China, we haven’t yet seen a dairy product for elders; and dairy products for children are only just beginning to develop,” said Gary Zhu, managing partner of Tiantu Capital, a leading Chinese VC focusing on the consumer sector. “These are both new territories that are already mature in the US and European markets but are still wide open in China.”

Consumers in China are presented with new food concepts every day, and trends rise and die quickly. Investing in China requires the foresight to understand whether a popular product will move beyond a trend that disappears in time.

“The key question is whether a new product in demand could develop into a major category in China,” said Zhu.

AgriFood investors need to embrace the value of patience

Having experienced how quickly the entire e-commerce tech ecosystem has developed in China—with its largest food delivery player Meituan-Dianping serving 10 million people each day—local tech investors and startups are biased toward business and investment strategies with shorter time horizons. But this contrasts the food sector’s long-term return timeline, speakers warned.

When new food startups and investors have unrealistic goals for explosive growth, supply chain operations tend to be overlooked, and food safety issues arise.

“One interesting thing about the food industry is that things don’t happen overnight,” said Erich Sieber, founder of new agrifood VC PeakBridge Partners and long-time partner at Nestle-supported VC Inventages. “If anybody thinks that they can have an all-night success, I would not invest in them. Food requires long-term thinking; you have to deal with volatility, supply chain issues. You are creating a product that needs to be felt, tasted, and provided to the customer on a consistent basis, all the time.”