Tom Malengo

Natural products entrepreneurs and investors seek nirvana but eye risks

The industry is booming, but is there any bad karma lurking? Entrepreneurs and investors must be aware of the risks.

Traditionally, August is the vacation month. Summer sports are over, and fall term will begin in a few weeks. Now is the time to pack the station wagon and take that classic 1950s drive through the great American West, perhaps visit Disney World or spend a wonderful relaxing week sitting on the beach with a waiter bringing a steady flow of Mai Tais. But we all seek that week or two of idyllic summer bliss—nirvana!

The term nirvana comes from Buddhism and represents a state of spiritual liberation, free from the (often nasty) effects of karma and the cycle of birth, life and death. For most of us, nirvana simply refers to that idyllic peaceful place. The research and statistics suggest that the natural and organic industry is in a state of nirvana, but is there any bad karma lurking?

There is certainly endless product innovation! Superfoods, taste combinations and the use of healthy ingredients make every new product worth investigating. There are innovative uses for pulses, high omega fats and oils, ancient herbs and grains, frequently ignored fruits and vegetables, probiotics and cultures. These ingredients are used in cookies, cereals, snacks, beverages, soups, spreads and sauces. The sources for these ingredients are broadening. More farmland is turning organic. Economically struggling countries are working to shift their societies from bullets and illegal crops to plowshares and organic farmland. Investment in agricultural technology grows each quarter. The strong U.S. dollar gives great buying power to young companies that source globally. Retail outlets—brick and mortar, electronic, and delivery—for organic products are rapidly expanding. All consumer demographics are buying more organic and see the benefit of eating and living healthier. The entrepreneurs are creative and passionate, and seek to better the planet through food. The infrastructure to support industry expansion is growing. This includes incubators, marketing and branding firms, research and media outlets, and equity investors. Big Food is involved from incubation and investment to acquisition. Yes, this appears to be nirvana!

But is there any bad karma lurking? As investors ourselves, we have to be aware of the risk—to a particular investment and to the industry as a whole. The industry depends on an expanding consumer base, which will only come about with real middle class job and wage growth, something not presently occurring. There needs to be appropriate government regulation, including a real GMO labeling requirement, that allows states to regulate pesticide use and sensible FDA actions. The increasing availability of organic ingredients will lower supply costs, but when coupled with the limited shelf space as more products are introduced and Big Food gets more involved, margins will shrink and smaller players will be squeezed. The strong U.S. dollar will limit international expansion. Entrepreneurs will need to learn how to manage expenses and operations. There will be failures and losses!

Should we worry about these risks, this bad karma? Of course, but in every innovative period, from the Industrial Revolution to the technology bubble of the 1990s, entrepreneurs were seeking nirvana to escape the karma associated with the business birth, life and death cycle. Then and now, entrepreneurs and investors need to manage the bad karma to find their nirvana!

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