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What Can Tech Teach Food & Beverage?What Can Tech Teach Food & Beverage?

Rick Polito

September 1, 2014

15 Min Read
What Can Tech Teach Food & Beverage?

Last week, Apple moved to reboot the wrist watch, a technology that’s been around since the 1860s. That’s the kind of market creation/disruption Silicon Valley is famous for. Food is a different matter entirely.

In the last year, Silicon Valley investors are getting enormous press for pouring money into food with an ambitious mission to change what we eat, how we get it and how it’s grown and prepared. A tech bauble like the iWatch could present more sweeping change than is immediately apparent, but shifting the $1 trillion food industry is far more than asking people to look to their wrist for a weather report. Humans have been going to the market to buy food since Babylonian times. Plant-based protein needs a bigger place on the global plate but meat has been on the menu since man’s ancestors first wrapped their opposable thumbs around a rock.

And yet, the food system is as ripe for disruption as the wristwatch, say investors like VC legend Ali Partovi. Says Partovi: “What Silicon Valley brings more than anything is the mentality of: ‘What if we started over? What if we threw out some of our assumptions? What would it look like if we were designing this thing from scratch?’” Partovi has money in egg-substitute startup Hampton Creek and boasts an entrepreneur and early investment résumé that includes Zappos, LinkExchange, Facebook and Dropbox.

Partovi, named as Hampton Creek’s chief strategy officer earlier this month, calls the food system “broken.” It’s ripe for change—or disaster if that change doesn’t come. “It’s a broken system. It’s not efficient in terms of the use of resources. We’re not getting the food that is best for us to eat, and we are not getting it cost effectively,” Partovi explains.

Mission & infrastructure

Many of the big tech investors would appear motivated more by a save-the-world mission than profit. Partovi has had big shares in deals totaling over $1 billion. Hampton Creek’s most famous investor, Bill Gates, isn’t exactly hurting for cash either. The Microsoft billionaire also put money behind Beyond Meat’s plant-based protein, a meat substitute that comes closer than any product yet to matching meat for taste and texture. One of Partovi’s projects is Farmland LP, a company buying farmland and transforming it to organic, sustainable practices. It’s not exactly technology but it’s a technological approach, he says, using science-based practices to rotate crops and maximize soil nutrients and food production. “It’s technical in the application to farming.”

Indeed, it may be what the customer does not see—changes far from the shelves and freezer space—that will mark the biggest impact tech money and tech thinking could bring to food, says natural & organic industry veteran Brad Barnhorn, who sold his Fantasia Fresh Juice company for a reported $15 million in 2000 and has been watching staggering numbers tally in and on the fringes of the edible sector. “There’s been $3.9 billion invested in food tech so far this year,” he says. Little of that is going to land on the dinner plate, he notes, but food tech may change how products make it from field to shopping cart. “There are so many dimensions of it that ultimately have nothing to do with food. They are not about this lettuce or that mayonnaise,” Barnhorn says. “It’s not the Beyond Meats and Hampton Creeks only.”

Barnhorn says technology related to distribution, delivery and demand modeling are prime targets. “There’s a lot of infrastructure investment around the food space,” he notes, but he is not entirely confident in the direct-to-consumer models developing in businesses like grocery delivery companies InstaCart and Good Eggs. Less ambitious startups delivering organic meals or ingredient kits for consumers to cook their own meals are getting astounding funding. Barnhorn is not sure the models work, but he can see how tech VCs would be attracted to something that uses tech tactics. “I think VCs tend to be attracted to where you can take something from X category and put it in Y category,” Barnhorn says. That can’t work for every company in the space. “I will be shocked to see in five years how many of those still exist.”

Forget Webvan!

Everybody who looks at online-driven grocery delivery can’t ignore the specter of Webvan, a company that went through $800 million in funding and shares Web 1.0 Hall of Shame space with the Pets.com sock puppet, but backers are quick to point out that society is far more connected in 2014 than it was in 2001, the year Webvan went bust. Mobile imposed a new paradigm, they maintain. “I really believe that the underlying technology has changed a lot since then,” says Brendan Dickinson at Canaan Partners, a New York-based venture capital firm.

Nobody is building the huge warehouses that Webvan built. InstaCart has its delivery shoppers picking up ice cream and milk at existing grocery stores. Whole Foods Market announced a partnership with InstaCart just last week. Consumers expect things to happen immediately and mobile apps optimizing the most efficient routes make “right now” more possible. “You have a fundamental shift in the consumer mindset,” Dickinson observes. Still, he says, investors have to realize that the space is tightly targeted to dense urban areas and populations keen to technology. “At the end of the day we are not going to have 100 different billion-dollar companies in these spaces. You are definitely going to have some winners and some big losers,” Dickinson says. “It will sort itself out. Not everybody is going to make it.”

Partovi sees meal delivery as another place where tech thinking can move past conventional assumptions to create a new market.  He has money in SpoonRocket, a company delivering prepared meals with organic ingredients. The convenience factor is the key, he says. Doubters “discount how important convenience is.” Drivers will have warm and ready-to-eat meals in their cars and can get them to consumers in minutes. People want to eat healthy, Partovi believes. They just want it easy. “A lot of people who eat at McDonalds are not doing that because it’s the cheap option. It’s because of the convenience option.”

If those models play out, the benefits roll down the supply chain. Whenever money comes into natural & organic, whether it’s Wal-Mart’s Wild Oats or SpoonRocket, the result is more acreage with less pesticide and healthier food consumers can bring home. That’s some of the indirect benefit Barnhorn can see. Companies will rise and fall, but a bigger market means more choices. “More choice is always better than less choice for a consumer,” Barnhorn says. Silicon Valley money, however it plays out, creates choice. “I don’t think there are any negatives to consumers.”

Another payoff from the delivery models could be consumer intelligence. What customers keep or check off their lists is information CPGs would jump at and delivery companies could sell it. “They are looking at other ways to monetize beyond a classic food business,” says Barnhorn. A company like NatureBox delivering a box of natural food products every month is not so different from having sample stations in every natural grocer in the country. “You are looking at ways that you can get information that can be used for food companies to mitigate risk without ever touching a retail shelf,” Barnhorn says.Page_207_20image.JPG

Who needs a product?

That doesn’t mean that information creates opportunity, or innovation. For all the talk of Silicon Valley moving into food, few edible and drinkable products fall in the target zone. Hampton Creek, Beyond Meat and Nu-Tek Salt are notable names in every “Tech VC Making Big Bets on Food” magazine article, but that list of standouts is short.

Most food and beverage entrepreneurs face the financing challenges they always have. Adam Louras has seen it from both sides. He worked at Transom Capital Group and Bain & Company and is now raising capital for his Koa Organic Beverages, a drink he calls the first “zero-calorie juice.” Louras calls the “Silicon Valley shakes up food” headlines “a hype train.” “I wish it was real,” he says. “We are looking for money right now, and it was just as difficult as it was when I had the idea on a napkin.”

The problem, Louras explains, is that the Silicon Valley VC model simply doesn’t play well in food and beverage. VC accustomed to tech has built what he calls a “small box” out of growth-curve expectations that include billion-dollar exits. “The problem is a lot of food and beverage stuff does not fit that box,” Louras says. “You can’t really take that and apply it to food and say everything should line up the same way because it just doesn’t.” The delivery services are getting the funding because it’s within the tech VC comfort zone, he says. Apps and online ordering systems are familiar, but they are not food. “Products will be the very end of this whole thing, unless there is somebody who can create a business model where the products and delivery are intertwined.”

Austin Kiessig sees the same phenomenon occurring. Kiessig, a San Francisco blogger at ediblestartups.com who has written pieces like “What ‘Big Ideas’ In Food Get Funded in Silicon Valley?” is currently hunting capital for Good Gut Daily, a prebiotic drink with offices in Palo Alto, the heart of Silicon Valley. It’s not easy, if early conversations with VC firms are any indication. “We are almost too small with too little prospect of a hockey stick growth curve for them to even pay attention to us,” Kiessig says. “That is true of 99.8% of food or supplements, or any physical product businesses. For food product entrepreneurs, what Silicon Valley is investing in right now changes almost nothing.”

The benefits for food may come through the new distribution channels, the Instacarts and Good Eggs, he says, describing something not so different from Louras’s “intertwined” prediction. “You could see some artisanal cheese finding customers through Good Eggs,” Kiessig says. “But it’s indirect.”


Those distribution channels, however, almost assuredly do not have the business potential to match the huge investments, both Louras and Kiessig maintain. Most Americans don’t live in the dense urban environments that might support delivery, and most Americans are happy to go to the market. They are not sitting at their desks coding 16 hours a day in a San Jose cube farm, and they don’t need somebody to shop for them, or make a drink like Soylent they can slurp to get all their nutrition. “There are a lot of companies in Silicon valley built on the problems of Silicon Valley,” Kiessig says.

The problem for food, he says, might come when the delivery companies discover their target markets are too crowded and they crash out à la Webvan. That could “discredit food.” “I think that’s very unfortunate, because there are a lot of food investments that should be financed and may not yield a billion-dollar payout in five years but will be a money-making business that will sell product to customers.”

As Kiessig sees it, the reason the few companies like Hampton Creek and Beyond Meat get big attention is because they are tackling big problems—that offer big payouts. Replacing meat and eggs is huge. The current meat production infrastructure is “built on an unstable backbone,” he says. It is destined to fail and there is opportunity in failure. “Instead of that being a bet on prices coming down because of technology, it’s a bet on price going up on the alternative.”


Big problems

Big problems with big solutions, however, are not abundant. Scott Smith is not convinced better-for-you-and-the planet is a simple sale. Predicting the future isn’t easy, but it’s his job as a futurist at Changeist.com. Eating is a mix of ritual, culture and taste that doesn’t always sit well with plans and market models, something he wrote about in a piece for Quartz titled “There’s nothing new about Silicon Valley’s food hacking.” Consumers may not want their food “disrupted,” and meal choices are not quantifiable in the Netflix/Amazon mold. “Analyzing our food as a chemical program and reformulating it to sort of give us more nutrition and sustainable food sources is again kind of taking this algorithm filter on the world and applying it to something that’s a lot more complex than choosing a book or a movie,” he says.  Consumers who aren’t changing their eating habits to save themselves may not be ready to change those habits to save the earth. “The same thing could be said about self-driving cars,” Smith says. “Yes you could build them. You could solve some problems. But there is a whole lot of culture around mobility and transportation that is not being addressed.” Consumer tastes and acceptance changes slowly, he points out. “Something like soy milk took decades to get into the mainstream.”

Meat substitutes exist at a whole new level. “It’s going to be quite difficult to move the population away from traditional proteins and I don’t see anything major generationally that’s going to change that in the near term,” Smith says. Even something as simple as grocery delivery runs into deeply ingrained culture around food. “These are millennia-old behaviors,” he says, “I have done a lot of primary research on grocery shopping. Yes there are inconveniences. Yes there are cost inefficiencies. At the same time, there are other secondary issues that are solved by those behaviors.” Going to the market is a kind of ritual—“There is more in it than negotiating the price of a tomato”—just as people who could get their meals delivered see eating at the same restaurant as an outing, an event. The growing locavore movement is a testament to culture over commerce. Hyper efficient supply chains and lab-grown meat have little place in a farmers’ market.

Some would even question the better-for-the-world ethic behind the food tech innovations. Writing from New Zealand, environment-focused wealth manager Rufo Quintavalle worries that efficiency, food tech innovation and the startup model might not benefit farmers, and farms are where sustainability has to start. “One of the things that seems to distinguish a ‘startup’ from previous generations of new companies is that start-ups tend to employ fewer people ... Job destruction in the rural economy seems particularly damaging to me since it reduces the resilience of small communities and increases urban migration which brings with it a myriad of social and environmental problems. And farming and food processing are big rural employers.”

The money may not go where it’s most needed either, Quintavalle writes. “There are parts of the food value chain that could do with a big injection of cash in order to make them more sustainable - irrigation, cold storage, regional processing plants.  But these are long term infrastructure type investments which offer slow and steady returns and are hence unattractive to the VC firms.”

Will it work?

Beyond that, the alleged disruption in food may not be the revolution many expect it to be. “A tech approach which focuses on new forms of processed food and selling farmers new kinds of inputs is essentially just tweaking the status quo,” Quintavalle writes. The status quo, however, may look different from Silicon Valley. The tunnel vision and self-obsession of the Bay Area is famous. What works in San Francisco may not work everywhere. Phil Sanderson works in San Francisco, a managing director at IDG Ventures. He subscribes to two CSAs. He owns a “cowshare” to get raw milk, and he knows he lives in the “microcosm of Northern California.” IDG is watching food but he’s not investing in it, yet. “I think there could be a misstep in believing that the mentality you find in Northern California is everywhere,” he says. “Because it’s not.” Sanderson’s family ran a regional dairy operation, Honey Brook Farms, in Upstate New York. Silicon Valley investors may also discover that the efficiencies are harder to tease out than they thought, he says.

If the alleged revolution fizzles, would Silicon Valley’s flickering attention span remain focused on food? As Kiessig says, a few major nose dives in the crowded delivery sector could put a chill across food.

Louras worries that high profile bets that end in high profile failure bring a new raft of headlines about Silicon Valley money moving out of food, and the stage is set for just such an event. “It is worrisome because there are very few at bat,” Louras says. “They could either make it or break it in one shot. If they are looked upon as the poster child for food investment and they bomb, everybody is going to look elsewhere until you get a couple of big wins.”

Kiessig sees a struggle in the Bay Area between “techno optimists” and the “cynical realities” of existing challenges that are resistant to innovation. “There are a lot of these cynical realties in food,” Kiessig says. “Can you drop a techno-optimist concept on every single one of them and solve the problem? Absolutely not.”

In the end, he says VC and food may never have the relationship predicted in the national press. The Good Gut Daily project has been “self-financed and boot-strapped.” Kiessig can show clinical results for digestive support but he can’t always get investors to look at those results. It’s food. It’s not a gadget. It’s not an app. “It’s not in their bailiwick,” he says.

Still, food has big challenges and the ideas that may save the food ecosystem could very well come from outside the entrenched institutions and established supply chains. Partovi isn’t looking at disrupting food as much as saving it. The interest in Silicon Valley is no fad, he says. The goals are both long term and urgent.

“I would say that the conventional agricultural system is short term, in that it’s not sustainable. People are making money with practices that are someday going to hit the wall, and we are investing in alternatives that have a more long-term future.” Silicon Valley has the money to build the new models and take the big risks. “Trying them,” he says, “is really the only way to find out.”

About the Author(s)

Rick Polito

Editor-in-chief, Nutrition Business Journal

As Nutrition Business Journal's editor-in-chief, Rick Polito writes about the trends, deals and developments in the natural nutrition industry, looking for the little companies coming up and the big money coming in. An award-winning journalist, Polito knows that facts and figures never give the complete context and that the story of this industry has always been about people.

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