01Potential Company Buyers Look for Big Growth Opportunities
The first questions a venture capitalist will ask when listening to a startup pitch for investors:
What's the potential return? How quickly? And what is the exit strategy, for getting out of the business and getting rich?
Adam Sah, tech startup veteran and co-founder of online wholesale food marketplace Buyer's Best Friend (BBF) also points out "Both tech and food startups are usually founded to change the world, not just make money."
We've all heard about the big money in tech. For food brands who land on the right mix, the money Let's take the yogurt aisle for example. Noosa, an Australian-style yogurt from Colorado, looks like a new brand. But Forbes reported that after starting five years earlier, "the company is already on track to make over $100 million in revenue in 2015."
02Mission-driven Food Startups are the Hottest Thing Since the Internet
How similar are food startups and tech startups these days? Venture capitalists who have made their millions in tech are investing in food and food tech startups in record numbers.
In food startup pitch competitions, a compelling business model and passionate team solving a big problem — like Feeding Forward's pitch to solve event food waste — is more important than experience.
The big food companies are not standing still. General Mills famously acquired Annie's (for $820 million), recognizing the trend in consumers wanting "real food."
General Mills then announced a business development and venturing unit, called 301 INC, to find, invest in and develop new food startups through CircleUp, an online angel investing platform through which food businesses have raised millions of dollars.
Retaining great employees is a big challenge for all startups these days. "Food and tech startups are more likely to try crazy things like unlimited vacation days, yoga in the office, and more," says Buyer's Best Friend's Adam Sah.
03Good Products and Experience Hold the Power of Attraction
"Who's the technical co-founder?" is among the first question investors ask tech startups seeking cash. Thankfully, the food and beverage world is not so set in its ways that a potential investor expects a certain structure to a company seeking funding.
Still, there's a reason big, older food companies are acquiring long-time natural foods companies in record numbers.
"We are so much better together." -John Foraker, Annie's President
Growing is a big goal for Annie's whose mission is to build a $1 billion business that is in 30 million+ American households. In a panel discussion, Foraker mentioned that today about 10 percent of U.S. households buy Annie's natural products. He believes increasing Annie's reach to 30 percent of households is not unrealistic.
General Mills has the ability to make this happen. At the same time, Annie's helps General Mills keep up with changing consumer preferences. If there was ever a time to use the phrase "win-win," this is it.
General Mills assigned a Vice President to be dedicated to Annie's success within General Mills. "We have not been asked to compromise one single thing," Annie's President John Foraker told me, at an event.
04The Company's Products Must Be Scalable
Successful food manufacturers must be able to deliver the goods, literally.
Ocho Candy, an organic candy bar brand based in California, experienced the tension between using an artisan production process and the joy of big customer sales. Founder Scott Kucirek talked shared a "good" horror story of how Ocho was working on building a new candy factory when an order for several hundred thousand candy bars came in from a supermarket.
At the time, the factory could produce only 8,000 candy bars a day. This is the equivalent of a website crashing due to popularity.
Similarly, food entrepreneurs are sometimes so eager to launch their food brands that they exhibit at the big food tradeshows before they are ready to fulfill orders. Big no no. On the other hand, tech startups may launch "minimum viable products" to gauge user interest in their functionality which works because a tech service is a lot simpler than producing food.
05Food Startups Can Outsource, Just Like Tech Startups
The trend in outsourced labor to quickly build tech companies is nothing new. Many an enterprising solopreneur hire creative and technical contractors through websites like Upwork and Fiverr, as I do for my clients.
What aspiring food entrepreneurs may not know is that the most efficient way to build a food and grow business is by contracting out production with a co-packer (as with these grocery store product line and Clearly Canadian examples).
Most of the world's biggest food companies outsource production. Before you get too excited, know that is isn't as easy as pushing a button to order a production run. Food business owners ideally should oversee production and have detailed specifications to hire the right co-packer — just as tech entrepreneurs should be hands-on managing development of their app or web service.
To learn more about scaling production with your own facility vs. a co-packer, read:
- Good Food, Great Business: How to Take Your Artisan Food From Concept to Marketplace, which leads you through the decision making
- The story of POP Gourmet, which decided to produce some food themselves and outsource other foods
- Finding a Co-packer
06They Often Say Nothing Will Change After the Acquisition
More than one tech company has acquired a beloved online service or app then changed the business model or functionality, alienating its passionate users in one swoop. (An 8-year old even complained about Microsoft's acquisition of and changes to the popular game Minecraft.)
Often companies like Google, Yahoo! and Facebook will acquire startups as a way to snag the talent behind the companies. Even changes that seem to make sense can backfire, as when the non-profit Couchsurfing become for-profit, in an effort to survive and grow. Oops.
In October 2015, a German investment group acquired both Stumptown Coffee Roasters, based in Portland, Oregon, and Intelligentsia Coffee, based in Chicago. The Stumptown blog announced: "Peet’s and Stumptown will continue to operate as two completely independent companies."
Now that "the Internet" has a microscope on the practices of big food companies and ingredients labels, there's less chance big sourcing and nutritional changes will happen. Much as with acquired tech startups, the younger food companies are educating the big companies on how to adapt to cleaner, simpler ingredients to appeal to today's food-savvy consumers.
07Just When You've Got It Right, Things Can Change
Pivoting business models is the key to success in the tech and food industries.
Whole Foods Market was on top of the world. Now the New York Times and the company's numbers tell a different story, one of a grocery chain struggling to not only keep relevant but grow. Some articles as if the 365 by Whole Foods Market convenience stores will be "too little, too late." Then again a little and very knowledgeable bird tells me he thinks Whole Foods will do very well with those stores that cater to shoppers seeking convenience — as we and millennials all are seeking.
In the meantime, startups like Farmigo, which is a neighborhood community supported agriculture (CSA) startup, raised $15 million so people can skip to the grocery store trip for their fresh produce.
08Solve a Problem, Save the World, See Success
For both tech companies, food startups and the entrepreneurs in the sweet spot of food tech, the key is to solve big problems for people and the environment, in a scalable, sustainable way. Proof: EXO, the cricket-based snack bar, was named one of Fast Company's most innovative food startups. (Crickets are a cheap and plentiful source of protein.)
Are we in a food and food tech bubble?
Maybe. But just like the first Dot Com era, learning will come from all of these new experiments that can only lead to better solutions like the Daily Table non-profit that's solving the food desert problem.