ImpactAlpha, December 16 – 2022 has been a hard year for champions of the plant-based diet. The economic downturn, VC slowdown and rising prices of food have curbed the once-frothy market for startups developing animal-free alternatives to meat, dairy and other food staples. Companies making plant-based products—rather than lab-grown foods—have been hit particularly hard.
Plateauing demand signals that plant-based alternatives have saturated the market of vegetarians and flexitarians, says Sophie Bakalar of Collaborative Fund. The New York-based firm was an early investor in Beyond Meat, the poster child for the plant-based movement’s meteoric rise then drop.
One company this week bucked the trend: Chile’s NotCo, which raised a $70 million Series D extension round for its AI-powered product discovery platform that it has used to develop its animal-free “Not” range: Not Milk, Not Mayo, Not Burgers, etc.
The company, which has a $1.5 billion valuation, sells its products through grocers and other retailers, but is now leaning more into a business-to-business strategy, helping established companies like Kraft Heinz, Starbucks and Shake Shack develop their own vegan products. The strategy may be buffering the company from a challenge other plant-based food companies are facing: inability to set their products apart from the competition.
But despite its growth, NotCo founder Matias Muchnick acknowledged that the market for fundraising is tough. “VC money is really scarce,” he told Bloomberg. The latest raise sets up NotCo for an IPO in 2025.
Climate impact
If the world eliminated animal agriculture and switched to an entirely plant-based diet, we would “effectively halt the increase of atmospheric greenhouse gasses for 30 years and give humanity more time to end its reliance on fossil fuels,” a recent study from Stanford University found.
That’s not going to happen anytime soon, if ever: meat consumption worldwide is increasing, even though there are slight but promising downward trends in historically big meat-consuming markets like the U.S., Canada, Europe and Australia. The climate significance of reducing meat consumption is, however, proven.
Plant-based products may well have been the low-hanging fruit of a bigger, and necessary, consumer diet shift. Companies like Impossible Foods and Beyond Meat have greatly improved upon the taste of past generations of plant-based products, like the garden burger.
“But are they able to create long-term differentiation?” asks Seth Bannon of Fifty Years VC, an investor in the alt-protein sector. “If they’re not able, through better technology, to create sustainable advantages by having the tastiest, cheapest or most convenient product, then their margins will be pushed down over time.”
The big unanswered question, he says, of the plant-based market is whether these “food tech” companies can actually prove a lasting technological advantage.
A bigger issue is that consumer appetite “may be more limited than many thought,” according to a survey by Deloitte. Plant-based product companies may not be converting as many meat eaters and flexitarians as they had hoped. Those inclined to substitute meat for plant-based products have price limits: in the current inflationary environment, many are switching back to cheaper real-meat products.
Consumers are also questioning the health benefit claims of plant-based meat alternatives.
Trillion-dollar tech
The only way to move the needle on “all the harm from meat and dairy production is to reach the meat eater,” says Bakalar, an active investor in protein alternatives. “And the only way you do that is by creating such a high-fidelity product that it is indistinguishable from animal based meat.”
Enter lab-grown meat.
A growing crop of tech startups are racing to hit the market with so-called “cultivated meat” products, which are produced in a lab using a small number of animal cells. Such products can be, with the right formulations of fat and muscle, indistinguishable from traditional burgers, steaks, chicken breasts and fish filets because they are, unlike plant-based products, made of real meat.
Collaborative Fund led a $22 million funding round in October for Hoxton Farms, a London startup cultivating cell-based animal fat, rather than muscle where most development has been focused.
“There’s an opportunity to build a trillion dollar company in the cultivated meat space,” says Bannon. “VCs often say that in order for a market to be big enough, it has to be $1 billion a year. Meat markets are mind-bendingly large markets.”
“Chunk meat,” or stew meat that comes from the shoulder of a cow, is a $6 billion market in the U.S. alone, he explains.
Many lab-grown meat producers have been working on their technologies and formulations for a decade or more. Recent breakthroughs have accelerated the race to get products as close as possible to cost-parity with standard meat products and to navigate the murky regulatory environment.
Netherlands-based Mosa Meat made headlines nine years ago for its lab-grown burger, which then cost $280,000 to produce. Mosa, U.S.-based Upside Foods and others have finally gotten their unit production costs close to premium meats.
Eat Just was the first company to feed cell-cultured chicken to consumers after getting clearance from Singapore’s regulators. Last month, Upside Foods, a Fifty Years’ investee, became the first cultivated meat company to get a green light on consumer safety from the U.S. Food and Drug Administration.
“I pinch myself,” says Bannon of the progress Upside has made since Fifty Years’ invested in 2015. “But if they want to be in McDonald’s, they’ve got a lot of work to do.”
Why, though, would cultivated meat companies fare better than plant-based companies, given a similarly expanding and competitive field of players, and a similar market race on costs and taste?
“There’s so much hard, cutting-edge, many-PhDs-required technology. There’s a lot of intellectual property, which is super important in cultivated meat. There will certainly be a technology moat,” says Bannon, whereas “there’s not a lot of IP that is super important for plant-based companies.”
Further, as the cultivated meat market matures, there will be opportunities to disaggregate the value chain. Some companies may specialize in bioreactor tech, others in cell lines, others in consumer product development.
“Right now you have to build everything yourself and put it all together yourself,” Bannon explains. “But over time, you’ll be able to create huge businesses by horizontally serving the industry. And I think we’re getting to the point where cultivated meat and cellular agriculture is big enough for that.”
