By James Thorne - Pitchbook
Greg Steltenpohl's first act as an entrepreneur was selling orange juice out of the back of a Volkswagen van in the 1980s. His humble effort would become Odwalla, the powerhouse of smoothies and protein drinks that was acquired by Coca-Cola nearly two decades later.
Steltenpohl is now on his next act. He's the CEO and co-founder of Califia Farms, a 10-year-old purveyor of plant-based milk, coffee creamers and yogurt that earlier this year raised $225 million in private funding led by the Qatar Investment Authority.
Plant-based milks have grown to claim 13% of the dairy market, according to data from the Plant Based Foods Association and the Good Food Institute. The gains made by Califia and similar companies come at a time when some of America's largest dairy producers are in freefall. Borden Dairy and Dean Foods have both filed for bankruptcy thanks largely to consumers, who cut their consumption of cow's milk by 18% from 2008 to 2018.
Consumers are now rejecting more than just dairy. Driven by concerns over health, climate change and animal welfare, they're starting to scale back on animal products across the board.
In an effort to exploit the trend, VC investors have more than doubled the amount of money they're plowing into plant-based food startups over the past five years, hitting $659 million in 2019.
Meanwhile, the dairy industry's efforts to hamstring plant-based producers have been futile. Legal efforts to force almond milk producers to adopt labels like "nut juice" provided fodder for late-night comedy, but no action from the courts.
Viewed one way, it's the classic David and Goliath tale: scrappy startups swiping market share from the incumbent. But that's not the whole story.
The world's largest producers of eggs, dairy and meat have taken notice, and most of them are already fighting back.
Nestle, Danone and Tyson Foods are moving rapidly to launch new products, acquire startups and make investments. Their actions are setting up a proxy war taking place on grocery store shelves, at fast food joints and in experimental laboratories.
Like a field of peas, the market for plant-based foods was once a sleepy place, catering to hippies, vegetarians and the lactose-intolerant.
That all changed on May 2, 2019, when Beyond Meat went public and saw its share price triple in value over a single day. Within a few months, the company's market cap had reached more than $13 billion, higher than that of one-quarter of the stocks in the S&P 500.
One of Beyond Meat's early investors, Tyson Foods, elected not to ride out the public offering. Weeks before the startup's debut, Tyson Foods sold its 6.5% stake.
Tyson's stake in Beyond Meat had jumped in value by the time they sold, but the exit was at least partly motivated by Tyson's own big ambitions. Months later, the world's largest chicken processor launched Raised & Rooted, a line of meatless nuggets and hamburger patties. Tyson decided that it would be easier and cheaper to compete with Beyond Meat rather than buying the company, CEO Noel White told Yahoo News in January.
Beyond Meat's IPO proved that plant-based meat companies could brave the public markets on their own. But it also showed how legacy food producers planned to mount their own fight.
The IPO also had a third effect. It changed the calculus by which alternative meat and dairy startups are valued by adding the public markets as a possible exit strategy. Previously, valuations were limited to what big food companies might pay to acquire them in the private markets.
That new mindset helped to pave the way for mega-funding rounds into companies like Califia, plant-based ice cream startup Perfect Day and lab-grown meat maker Memphis Meats. Just a few weeks ago, Beyond Meat competitor Impossible Foods landed a $500 million investment led by Mirae Asset Global Investments.
"Having an additional exit path gave investors a lot of bullishness," said Lisa Feria, CEO of Stray Dog Capital, which invested in Beyond Meat as well as a host of other alternative protein startups. "If you invest in Memphis' round now, and they go to IPO at $3 billion, then guess what? This round size is peanuts compared to that."
Moreover, that money is coming not only from a cascade of VC firms, but also from a diverse set of investors outside traditional VC, attracting the likes of Singapore's sovereign wealth fund, corporate venture arms, PE growth funds, and social impact-minded investors including Bill Gates and Kimbal Musk.
The new money allows startups to compete directly with the food industry's giants like never before. And they can do so without the scrutiny of being a publicly traded company. That freedom has allowed one plant-based food startup, Just Foods, to devote around 65% of its operations to research and development.
The sudden availability of capital is both a blessing and a curse to entrepreneurs, said Dan Gluck, a managing partner of PowerPlant Ventures, another Beyond Meat investor. It helps embolden them to pursue aggressive goals but simultaneously raises the bar for success.
One thing is certain, Beyond Meat's IPO revised the pitch deck for every plant-based company. "In tech, you hear a lot of founders say, ‘We're the Uber of this industry.' We hear a lot now: ‘We're the Beyond Meat of … '" Gluck said.
As Tyson's Beyond Meat investment showed, relationships between food giants and upstarts can run into conflict. But corporations also provide startups with much-needed capital and exit paths in the form of acquisitions.
Danone Manifesto Ventures, the corporate investment arm of the Parisian packaged food group, has invested in plant-based yogurt maker Forager Project. And agriculture powerhouse Cargill has backed Aleph Farms, which grows meat from cattle cells using a 3D tissue engineering platform. Both Cargill and Tyson also invested in Memphis Meats.
Corporate acquisitions have paid off for private investors in plant-based startups. However, those same deals have also helped established companies to grow their own plant-based offerings, upping the competition for new entrants.
Danone owns plant-based dairy brands Silk and So Delicious through its $12.5 billion acquisition of WhiteWave Foods in 2017. Danone CFO Cécile Cabanis has called its plant-based strategy "the biggest pillar of the [company's] acceleration in the coming years."
Nestle used the acquisition of Sweet Earth Foods to launch its plant-based Awesome Grounds and Awesome Burger—a branding decision that no doubt raised eyebrows at Impossible Foods. The company has also launched a veggie-friendly version of meat-heavy frozen food staples in the form of the DiGiorno Meatless Supreme Pizza and the Stouffer's Meatless Lasagna.
Representatives for Nestle, Danone and Tyson didn't respond to requests for comment on this article.
Acquisitions aren't a panacea. Beleaguered dairy producer Dean Foods owns flaxseed-milk and yogurt brand Good Karma, and it was the onetime owner of WhiteWave, which it spun out as a public company in 2013.
For startups, the challenge comes when large corporations decide to lead rather than follow. Some of the largest meat producers in the world—including Brazil's JBS, US-based Smithfield and Europe's Vion—are planning or have already launched their own lines of plant-based products.
Wielding established supply chains and processing operations, large companies can quickly exploit opportunities discovered by up-and-comers. And once they do, those corporations have the scale to more rapidly drive down costs.
"We actually see companies like Nestle and Tyson Foods eventually emerging as the leaders in the space … because of all the resources that they have, and their vast global footprint and supply chains around the world," said Arun Sundaram, an analyst at CFRA who covers consumer packaged-goods companies, including Beyond Meat.
Califia's Steltenpohl remains skeptical of the idea that dairy giants could ever lead a plant-based revolution. "They can't afford to disrupt their own revenue streams," he said.
The growing variety of plant-based foods is dizzying, yet appetizing: Around half of consumers recently bought a plant-based meat or dairy alternative, according to food and beverage research firm Hartman Group.
"We look at it as a spectrum of textures," Steltenpohl said. That range begins with coconut waters, ambles through the mindboggling variety of plant milks, then careens into creamers, creams, shmears, dips and cheeses.
The same is true for meat alternatives, which now emulate the taste and texture of real meat, unlike their veggie burger forefathers. Omnivores aren't going anywhere, but their habits are shifting. Many are driven by the mounting environmental cost of livestock: Around two out of five Americans are eating less meat for environmental reasons, according to Pew Research.
"The shift that Impossible and Beyond prompted—and there are other companies as well—is to look at that broader market segment, the flexitarian consumer that is mostly omnivore and that wants to eat less animal products," said David Welch, director of science and technology at the Good Food Institute, a nonprofit that promotes plant-based alternatives.
The explosion in products creates a land grab for grocery store shelves, and it's here that incumbent meat and dairy producers—with their international scale and ties to retailers—have a clear advantage.
Startups are often the first movers, but not by much. Nestle reportedly plans to launch a plant-based tuna substitute this year, following soon after last year's grocery store debut of Good Catch, a fish-free seafood alternative.
Unlike meat and dairy, plant-based foods aren't pure commodities, so a strong brand can be a powerful force.
In the case of Just Foods, the majority of new customers are first discovering the brand online, not while browsing the aisle. "It's kind of a paradigm shift," said Daniel Scharff, director of insights and analytics at Just Foods. "The old model is: Somebody walks into a grocery store, they look at a shelf and see something that's new and decide whether or not to buy it. And that's actually not what's happening here."
Meatless alternatives had a breakthrough moment last year when Burger King introduced the Impossible Whopper in its restaurants. The burger chain declared it a whopping success.
Just Foods has used a similar tactic on a smaller scale, selling plant-based egg sandwiches through a partnership with Gregorys Coffee chain in the US.
The allure of a novel brand can also be fickle. Burger King temporarily added the Impossible Whopper to its "2 for $6" menu after its largest franchisee complained that sales had slowed. Tim Hortons recently dropped Beyond Meat's breakfast sausage from its offerings.
Despite the rapid rise of investment into plant-based foods, much of the technology used to produce them has been around for decades. That can make it difficult for startups to fend off copycats.
To differentiate themselves, newcomers often embrace underexplored ingredients. "The reason that scientists are exploring some of these other crops like mung bean is that they have different functional properties in terms of a specific taste or texture," said Welch. Just Foods tapped into mung bean for its eggless eggs.
"Mimicking a plant-based meat product is relatively easy," said Sundaram, the CFRA analyst. "But really trying to innovate and take it one step further and being the leader in the space—that's a lot harder."
The technology behind tomorrow's animal-free foods may prove even tougher to copy.
The lab-grown meat industry first got international recognition when chefs served up a burger grown from cells in a lab at a cost of around $300,000. But that was six-and-a-half years ago, and costs have dropped since then.
Cultured meat is likely a long way from a national rollout, but it may not be far from getting into the hands of select chefs.
The advantage of engineered food products is that you can always iterate. Beyond Meat plans to regularly replace its products with better versions, which could deter large corporations from catching up through imitation. All sides appear to be digging in for a long-term race to lead a new segment of the food industry.
"Competition is healthy. I think it's great to have some of these large food companies bring to market their own products and let consumers have more on the shelves," said PowerPlant's Gluck. "Look, it's a big enough market; it's like a trillion-dollar market. There's room for a lot of winners."