November 29, 2022
“Humanity is on a highway to climate hell with our foot still on the accelerator,” said United Nations Secretary-General Antonio Guterres, kicking off the UN’s COP27 climate summit earlier this month.
That’s an incredibly grim, but unfortunately very truthful, statement. But here’s a silver (or maybe more of an industrial-smoke gray) lining to the world’s come-to-Jesus climate moment: funders are investing in solutions.
“The wagons are circling around climate,” says Mike Dovbish, executive director of Nutrition Capital Network. “Sometimes that looks like food tech, sometimes it’s plant-based, sometimes it’s a brand. Regardless of the form it takes, there is broad-based interest in deals with a climate focus.”
NCN’s Mid-Year Report on Financing, M&A and Dealflow examines the trend and provides an overview of the current and near-future funding landscape for the health and wellness industry. Here are three takeaways.
1. Funding is down—so is the outlook
Despite inflation and other macroeconomic headwinds that make each grocery run feel like a barefoot stumble across hot coals, our industry is still growing. For the first half of 2022, financing grew by 9%.
That growth, however, is a shadow of 2021’s 24% rate. Mergers in the first half of 2022 slipped to –11% versus +14% in 2021. The NCN Transaction Database has recorded 670 deals so far this year compared to 641 in 2021.
“Inflation is the biggest concern we have right now,” William Hood, managing director at William Hood and Co., told Nutrition Business Journal. “It hurts business, it hurts consumers and you have to get it under control.”
Branded food and beverage equity financing fell 72%, or $227 million, in the first two quarters of 2022, compared to the $824 million in first two quarters of 2021, according to NCN’s report. And while the average size of financing across all segments of the health and wellness industry has more than doubled since 2016, the average deal decreased 25.3% during the first half of this year, from $52.1 million down to $38.9 million.
How long will the financial cloud last? “Experts consulted for our mid-year NCN report are predicting 12 to 24 months of downturn, with Q1 of 2023 a pivotal quarter for assessing just how deep this cycle of pain might run,” says Will Grubb, NCN business development manager.
2. Emerging focus on climate investing
“Climate is an emerging driver for investors,” Grubb says. “There’s a real hunger for those technology segments adjacent to food and nutrition to make a big impact on the evergreen issues around climate.”
Climate and environmental impact are fueling the advance of tech into food and nutrition, and investor appetite is growing. While the top 10 branded food and beverage financings in Q1 and Q2 2022 were worth $228 million, funding for the two hottest categories—biotech and agtech—reached $781 million. For example, food tech brand Mori raised $50 million to expand a technology that uses salt, water, heat and natural silk proteins to extend product shelf life, thereby reducing waste and creating more sustainable food supply chains.
3. Benchmarking and validation needed to vet climate claims
The report, featuring input from NCN membership, makes two points clear: One, there is a very real appetite for tech-based solutions to existential problems such as climate change and environmental collapse. Two, the yardsticks to get there are unclear.
Investors are now seeing more callouts of climate-positive initiatives, as climate concerns direct decision-making across multiple facets of business—everything from mission and purpose to packaging and sourcing. What’s lacking is the necessary benchmarking and validation to vet climate claims properly.
“ESG can be a frustrating concept for investors in the private markets,” Grubb says. “Positive outcomes are claimed by many brands, but there’s a lack of standardization in evaluating, measuring and tracking real ESG impacts.”
For both brands and investors, implementing ways to track those impacts is worth the investment. Consulting firm McKinsey & Co. reports that Certified B Corporations and ESG-minded brands focused on climate command a premium of at least 10% from investors. CircleUp’s Helio platform has tracked a 3X sales bump that comes from measuring and validating a company’s social impact.
What about social impact and funding for diverse-owned companies? Climate has definitely superseded social in terms of funding focus. “We haven’t seen a huge momentum shift” as far as DEI, Dovbish says. However, women-owned businesses have seemingly garnered more attention, he adds.
“There is more awareness of diverse-owned companies and it seems like a bit more investment in them, but [not] a huge upsurge,” Dovbish says. “I think there is a positive trend in this direction, but it’s slow. It helps if there are more diverse investors, but that has been slow too.”
In the meantime, economic headwinds may push investors toward veteran founders, who typically are not diverse founders.
For more information about Nutrition Capital Network or the Mid-Year Report on Financing, M&A and Dealflow, please contact Will Grubb, business development manager, via email at [email protected].
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