Why Foodtech Investments Are Declining

Foodtech initially attracted significant investment, with global venture capital (VC) funding peaking in 2021. However, investor interest waned in 2023. This decline is due to challenging market conditions, including high inflation, rising interest rates, and limited exit options. Despite this downturn, certain segments like e-commerce and alternative proteins show promise. As startups adapt and improve their products, there is potential for renewed investor interest.

Foodtech, a sector once showing high potential, is posting a significant downturn in VC investments. According to a recent Pitchbook report, the global VC funding for foodtech dropped to $9.2 billion in 2023, down from $22.5 billion in 2022, and significantly lower than the peak of $39 billion in 2021. The number of deals also declined, with only 1,393 transactions in 2023 compared to 2,052 the previous year. So, what is driving this decline?

Foodtech, a sector once showing high potential, is posting a significant downturn in VC investments. According to a recent Pitchbook report, the global VC funding for foodtech dropped to $9.2 billion in 2023, down from $22.5 billion in 2022, and significantly lower than the peak of $39 billion in 2021. The number of deals also declined, with only 1,393 transactions in 2023 compared to 2,052 the previous year. So, what is driving this decline?

A challenging market environment is a primary factor behind the fall in foodtech investments.

• Inflation - High inflation rates have been a major hurdle for foodtech investments. The higher cost of raw materials, production, and distribution, squeezes margins and makes it harder for startups to achieve profitability. 
• High Interest Rates - Rising interest rates add another layer of complexity to the investment landscape. Higher interest rates increase the cost of borrowing, which can be particularly burdensome for startups that rely on loans to finance their operations and growth. 
  
• Limited Exit Options - The ability to exit investments through acquisitions or initial public offerings (IPOs) is a crucial factor for venture capitalists. However, the current market conditions have made these exit strategies less viable. A slowdown in Mergers & Acquisition activity and cooling IPO market mean that foodtech startups have few opportunities to provide returns to their investors.
  
• Funding Shifts - New entrants in the foodtech space are facing tough conditions, as a greater proportion of deals are occurring at the late and venture-growth stages. This shift indicates that investors are becoming cautious, preferring to back established companies rather than taking risks on new ventures.
  

Despite the overall downturn, the e-commerce segment within foodtech is resilient. Companies in this sector attracted $478 million in investments during the fourth quarter of 2023 alone. A standout performer was Marc Lore's delivery and ghost kitchen startup, Wonder, which secured $100 million from Nestlé in November. However, many other ghost kitchen startups either failed or are struggling to stay afloat.

Promising Trends

While traditional plant-based protein companies’ sales stagnated due to health concerns and taste issues, the Pitchbook report highlights several promising trends. Fermented foods, alternative proteins, and products made from algae are gaining traction. The demand for these innovative food products is expected to grow, especially as their quality improves. For example, the US Army recently started offering Impossible Foods plant-based products in its dining facilities, signaling a potential shift in consumer acceptance.

In the last quarter, alternative protein companies, particularly those focused on plant-based and fermentation innovations, and online grocery platforms accounted for the largest deals. Notable investments included a $73.3 million Series A round for plant-based dairy producer, Oatside, $50 million in Series C funding for fermented protein manufacturer, Meati, $26 million in seed funding raised by plant-based seafood brand, Konscious Foods, and $35 million round for cultivated meat company, Meatable. Key market exits in the third quarter involved the Target Research Group’s acquisition of Spoonshot, a food intelligence and development company, and plant-based protein developer Shore Seaweed’s acquisition by Scotland-based Aquascot.

While the current trend in foodtech investments posts a significant decline, there are indications that this may not be a permanent state. Market conditions, such as inflation and high interest rates, are challenging, but they are cyclical and could improve over time. Moreover, the continued interest in innovative segments, like e-commerce and alternative proteins, suggests that there is potential for growth and recovery in the sector. As startups adapt to the new financial landscape and improve their product offerings, investor confidence may return. The foodtech industry, with its capacity for innovation and resilience, could very well see a resurgence in the near future.