- Early-stage investor Nordic Foodtech VC has announced the first close of its second fund at €40 million ($45.2 million). The final target size for the fund is €80 million ($90.4 million).
- The fund, which is backed by institutional investors such as Tesi and Elo Mutual Pension Insurance Company, and food industry stakeholders such as Valio Pension Fund and Heino Group, will cut checks of between €500k ($572k) and €2 million ($2.3 million) with a significant sum reserved for follow-on investments.
- The fund aims to lead early seed and pre-seed rounds in the Nordics and Baltics and co-invest in the rest of Europe.
‘We are not hunting for unicorns’
“VC funds have not really been returning capital in the past few years,” Nordic Foodtech VC partner Lauri Reuter, PhD, tells AgFunderNews. “At the same time, interest rates have been going up. And then add to the mix that everybody is being a bit more careful now with long-term investments, and all that makes for a hard time to raise capital.
“But we see light at the end of the tunnel and I think people are feeling slightly more optimistic about the future now.”
One thing that is “pretty clear,” however, is that “We are not hunting for unicorns in foodtech and agtech,” says Reuter. “Sure, there might be some unicorns in this space, that would be fantastic. But agrifoodtech is a different model than the traditional VC tech game and the exits will be smaller.
“In our thinking, it’s a case of keeping our expectations realistic, but at the same time counting on slightly more of the companies [that Nordic Foodtech VC invests in] actually making it. In this field, you are often better protected with a technology because it’s not just another app or SaaS investment that competes with many similar technologies, so there is less competition.”
He adds: “We’ve learned a lot over the past five years, but our fundamental hypothesis has remained the same. Since the beginning, we wanted to support the industry with new technologies and understood that big things need to be co-developed. We also decided early on to stay away from consumer products and brands and stick with the b2b tech side of things, which turned out to be a really good decision.”
Working closely with academia
Another key focus for Nordic Foodtech VC is working closely with research institutions and universities, he says.
While there is a strong culture in the US of spinning out companies from academic institutions, there is a different mindset in parts of Europe, according to “scientist-turned-investor” Reuter, who spent seven years at Finnish state-owned research institution VTT before cofounding Nordic Foodtech VC in 2019.
“The culture for spinning out companies from universities here is very different, so we felt from the start there was a big backlog of really good technologies that were just lying around not being put in use. That turned out to be true, and we still believe there is a lot more to harvest there.”
He adds: “Back when I was in the lab, I was quite frustrated because it was obvious that they [some of the technologies VTT was working on] needed to be out there [in the commercial world]. But somehow spinning them out just seemed really difficult. So I stepped out from research and joined VTT’s strategy unit to figure out how to get these companies out more efficiently.”
Biomanufacturing
When it comes to biomanufacturing, Nordic Foodtech VC is focused on b2b companies that make specific products (colors, aromas, fats etc) but not on some of the more foundational technologies designed to make the whole segment more efficient.
That’s not because innovations in this area are not critical, but because they may not fit a venture model, says Reuter. “We need to be mindful about timelines. Many of these enabling technologies that plan to serve the growing biomanufacturing industry might be absolutely fantastic, but if their customers are not doing much business yet, it will take time for these companies to build a business.
“You see that for example in the cultivated meat segment, where you had companies created to serve this industry, but unfortunately, that industry is not there yet and the timeline is simply too long. We need to have a product and a line of sight to being able to sell it.”
Precision fermentation and unit economics
When it comes to food ingredients produced via precision fermentation, “Being vegan or more sustainable is not an argument [for paying more],” he notes. “In this climate, you have to be at price parity or provide some kind of advantage [that warrants a premium].”
With this in mind, he says, the higher the value and the lower the inclusion rate of your ingredients, the better. “For example, one of our companies, Ironic Biotech, is making hemoglobin-like proteins as a bioavailable source of iron. In comparison to Impossible Foods [which makes soy leghemoglobin via precision fermentation to add a meaty color and flavor to plant-based beef], this molecule is extremely stable and can be used at very low inclusion rates. And that is the key to a profitable business.”
“[Portfolio company] Chromologic’s colors also absolutely make commercial sense,” he claims. “They’re not on the market yet, but the moment they can ship product, it will be profitable.”
Lactoferrin, a high-value low-inclusion-rate ingredient with sought-after health benefits, may also make commercial sense, he says, along with certain aroma compounds “where you use only small quantities but the price per kilo is quite high.”
Portfolio company Evodia, for example, is “solving a critical problem for the brewing industry that is struggling with hop prices and availability,” he claims.
‘We need to see that viability from day one’
At the other end of the spectrum “are things like whey and casein [dairy proteins that several startups are now making via precision fermentation],” he says. “Animal whey is a byproduct [of cheese making] so it’s very cheap, so trying to go head-to-head with that on price is very hard.”
He adds: “Caseins have a bit more functionality but are way trickier to manufacture [via precision fermentation]. And if you want to make cheese, you need a lot of casein, so we’re talking about a high inclusion rate. I don’t see [the economics of] that adding up anytime soon.”
For animal-free egg proteins such as ovalbumin made via precision fermentation, meanwhile, the value proposition is a little different, as buyers may be prepared to pay a little more for peace of mind and a steady and consistent supply of product in a market that is being constantly disrupted by avian flu and other supply shocks, he says.
“Against this backdrop, you can afford to have something that is a little bit more expensive, but is consistent, plus you can use a little bit less of it and achieve the same sort of functionality, so the cost of use is similar. So when you look at animal-free proteins, some of it makes sense and some of it just doesn’t make any sense to me at the moment, at least.”
Fats via fermentation, an area in which Nordic Foodtech VC has invested via ÄIO and Melt&Marble, are “slightly tricky,” he says. “You need to have a very specific function and higher value use cases in areas such as personal care and cosmetics; you can’t compete on price with something like straight palm oil.
“I think what we saw in something like cultivated meat is the belief that costs will keep on dropping, and one day it will be viable. But we need to see that viability from day one.”
‘If you’re developing technology for farmers, put your boots on, go visit a farm’
Stepping back, one of the biggest lessons from agrifoodtech failures in recent years is the failure to work closely with the food industry to address real pain points, says Reuter, who says investors have become a little jaundiced by pitches from inexperienced entrepreneurs on a mission to “disrupt” the broken food system.
“We need to involve big food and ag companies earlier in our due diligence, figure out if there’s an actual problem that needs to be solved, and help startups collaborate with the existing industry to fix them. I get a slight allergic reaction when somebody says they are going to come in and ‘disrupt’ or ‘revolutionize’ the industry.”
When it comes to food, he says, just because you eat every day doesn’t mean you understand how the industry works. “It should go without saying, but if you’re developing technology for farmers, put your boots on, go visit a farm and talk to farmers. If you’re building a solution for the dairy industry, hire people from the dairy industry.”
Focusing on the ‘food’ in foodtech
As for foodtech more broadly, he says, we can often get a little carried away with the ‘tech’ part and forget that food is woven into our culture, politics, habits, and rituals.
Take cocoa, a food industry staple under threat as demand outstrips supply. There’s clearly an opportunity here for ingredients that can fill the gap, so we can expect to see more cookies and ice cream made partly or entirely with chocolatey-tasting inclusions that do not come from cocoa beans.
But that doesn’t mean consumers are actively seeking out ‘alternative-chocolate,’ he says. For now, at least, the opportunity is around helping manufacturers address a pain point.
The same goes for cultivated meat, he says. “I do believe we will get there eventually on costs, but there is also the cultural and emotional aspect that I think is underplayed. We might be surprised by how many people will be reluctant to eat it no matter how good it is because it’s not the ‘real’ thing.”
