NCN report analyzes investment slowdown, explores opportunities

Venture capital fueled the natural and organic product industry’s meteoric rise across the 2010s and into the 2020s. The infusion of cash, novel for the industry at the time, sparked the industry’s expansion into the mainstream.

But in 2023, investors turned off the spigots. Capital swiftly drained away. The evacuation of so much money from the booming industry led to its first substantial bust.

A year later, the bust persists. But industry experts predict it has an expiration date.

“We feel like we hit bottom. That is positive, in a way. When you are going down, you don’t know where the bottom is,” said Michael Dovbish, executive director of Informa Market’s Nutrition Capital Network (NCN). Nutrition Capital Network serves as a vital bridge between active investors and health, wellness and ingredient companies looking for capital, partnerships or acquisitions. “It might take a couple of years to get back to the go-go days, but we believe the path forward is up.”

Nutrition Capital Network took a deep dive into the state of the natural and organic products industry’s investment landscape and released these findings:

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The natural and organic products industry is not alone in its struggles. The shrinking of investment capital also is upending the tech industry: Dovbish recently attended a biotech conference and encountered the same lament, he said.

Meanwhile, the widely predicted recession failed to emerge, and the economy today shows signs of vigor. Why the migration of capital away from so many industries, including natural and organic products?

“Anything venture-related has gotten hit,” Dovbish said. “It’s due to high interest rates. Everything is more expensive. If you are an investor in this industry, then you bring on debt and that debt is really expensive. So, the deals become more expensive.”

It’s especially startling within the natural and organic products industry. Booms and busts dwell at the center of the technology industry’s relationship with venture capital, but it’s relatively new for natural and organic foods. The industry’s last bust, during the 2008 financial crisis, created less anxiety than the latest one.

“It’s more profound now, because there’s more money in the safe,” Dovbish said. “Back then, there weren’t as many investors. So, this time, the slowdown feels very pronounced.”

The venture capitalism pullback has transformed the industry, at least for now.

Two years ago, the food tech slice of this industry's pie was experiencing intense investment effervescence. One formerly heady segment of food tech—companies leaning into fermentation techniques to manufacture meat and dairy alternatives—has significantly pivoted in tone. Now, Dovbish said, when companies in this space issue announcements for funding, “they talk about capital efficiency and how they can do things more efficiently. But that was not the case in the first wave of food tech.”

The investment tracking platform PitchBook tracked eight consecutive quarters of decline for venture capital into food tech, with the third quarter of 2023 down 14% compared to the previous quarter and cratering 70% compared to the same quarter in 2022. In that context, the broader health and nutrition sector is performing much better.

Today, demonstrating solid management teams and paths to profitability are more important than ever, Dovbish said. Growth for growth’s sake—never mind profit—is out.

The investment side of the industry might be exercising extreme discretion. But that doesn’t mean the players have forsaken the industry until money becomes cheaper. Supplements and personal care products, for example, remain tantalizing for investors, Dovbish said. Their appeal hinges on higher margins.

“An organic bread company? That’s probably a harder sell for investors right now,” said Dovbish. “But a direct-to-consumer supplements company for women? That could interest them. It’s not one-size-fits-all in health and nutrition. Products that adjust the microbiome and personalize health, for example, are higher-margin businesses.”

Products related to weight loss, such as those positioning themselves as ‘nature’s Ozempic,’ also are gaining traction with investors, he added.