Tl;dr: This is the Alternative Protein Fund investment thesis.
AgFunder is an online Venture Capital Platform based in Silicon Valley. AgFunder invests in exceptional and bold entrepreneurs who are aiming to build the next generation of great agriculture and food technology companies. As a Platform-VC, they have leveraged technology, media and research to build a global ecosystem of over 50,000 members and subscribers, including over 5,000 investors. They build technology to help source, evaluate, and support their portfolio companies and invest at scale. Through special co-investment funds and Special Purpose Vehicles, AgFunder gives investors the opportunity to coinvest with them and other leading VCs.
Why technology could make animals obsolete
Cars replaced horses, petroleum replaced whales, tractors replaced oxen, telecommunications replaced carrier pigeons, fermentation replaced cows and pigs for insulin production. And despite its many shortcomings, plastic continues to take market share from leather. Wherever we look, humans have consistently built technologies that surpass their animal predecessors. Food may be next.
All over the world, entrepreneurs are reinventing how we make products we’ve traditionally derived from animals. Applying the latest technologies from biotech, tissue engineering, artificial intelligence, and food science, entrepreneurs are trying to create new animal-free products that are cheaper, healthier, tastier, and more sustainable. Even if they’re moderately successful, they’ll have an opportunity to capture a meaningful portion of the $1.5 trillion dollar animal protein market . Opportunities don’t come much bigger than that. As venture capitalists, this is hard to ignore.
The world is about to change very quickly. As venture capitalists, our job is to identify technologies that will be embraced by the future and then bet on that future.
Today we’re announcing AgFunder’s upcoming alternative protein fund to invest in animal protein alternatives, including plant-based alternatives, cellular agriculture, and the picks and shovels technologies required to enable this emerging industry.
The key insight driving our investment thesis is that for thousands of years animals have been employed as a technology to provide valuable products and services including transportation, communications, energy, labor, clothing, medicine, and of course food. But history has shown animals are not necessarily the best means for these end products and services. The market demands them, but it shows little allegiance to their mode of production. And so when new technologies come along that are better and cheaper, markets tend to switch. And switch fast. Just as chicken replaced beef as a staple protein because it was cheaper and perceived as a healthier alternative, large swaths of the commodity meat industry are similarly at risk of substitution. The history of technology teaches us that this outcome is rarely escapable.
We anticipate that many consumers will shift to animal-free food products if those products begin to meet or exceed their animal-based alternatives on key areas like cost, taste, functionality, convenience, and health. Factor in a more conscious consumer concerned about the impact of animal agriculture on our environment and sustainability and that switch may happen even faster.
Plant-based products have been around for a long time, so why is this happening now? We believe it traces back to four key trends.
First is the emergence of social media, which led to the formation of new food tribes and trends including organic, gluten-free, vegan, keto, flexitarian and reducetarian. These new digital distribution channels are permissionless and they allow indie brands to take their message directly to customers long underserved by large food companies focused on the mass market. These customers embrace brands that reflect their own values.
Second is the emergence of a more conscious consumer concerned about health, climate change, the environment, and animal welfare. Particularly among millennials, Gen Z, and parents.
We anticipate that many consumers will shift to animal-free food products if those products begin to meet or exceed their animal-based alternatives on key areas like cost, taste, functionality, convenience, and health.
Third is the emergence of new technologies such as gene editing, recombinant proteins, and artificial intelligence as well as major advances in tissue engineering, DNA sequencing, and mass spectrometry. Not only can food companies now create new products like never before, but these new technologies can be protected with intellectual property, which ultimately makes these opportunities venture-backable.
Fourth is the recent emergence of a small group of passionate and mission-driven entrepreneurs who want to effect change in our food system. They recognize that to achieve their goals, they need to create products that taste as good as products derived from animals; products that even a carnivore would love.
Importantly, many of these early pioneers didn’t choose to become mere protein ingredient companies. Rather, they chose to be consumer-facing companies that could control their narrative and they took their message directly to the market. With savvy PR and the help of social media, a single article in the Wall Street Journal could launch dozens of blog posts and make the internet buzz. This early success has subsequently attracted a whole new generation of entrepreneurs and venture capitalists who can more rapidly execute on these successful playbooks. This is the beginning of the second wave.
Disruption can happen fast
In 2008, Blockbuster’s CEO declared that ‘Netflix wasn’t even on the radar’ in terms of competition. Eighteen months later they declared bankruptcy. The paradox of disruption is the proverbial frog in boiling water; not much happens from one moment to the next. You acclimate to the new environment without realizing you’re sealing your fate by not reacting.
Once alternative protein companies get the taste, texture and cost right, how fast do they need to scale to see a complete flip in the market? Let’s unpack this by using plant-based meat company Impossible Foods as an example and start with the assumption that they’re able to migrate to alternative pork, poultry, and fish products.
Technologies are emerging that are poised to capture large portions of the traditional animal ag market, not because they are being forced on the market but because consumers are making the switch.
To supply the world population with alternative meat at current animal-meat consumption levels (94 pounds/person), Impossible Foods would need to achieve a global annual production of 700 billion pounds. Today, they reportedly have an annual production capacity of just 24 million pounds from a single facility in Oakland; just 0.003% of their total addressable market. They’re not even making a dent. But what if they could double their production capacity every year? In just 15 years and with 30,000 production plants, they could match the global demand for meat.
Assuming a capital cost of $50m/plant, this would bring total CAPEX to $1.5 trillion. While we know of facilities producing eight million pounds monthly with similar CAPEX, this should serve as a high watermark. As a sanity check, Samsung spent $41 billion on CAPEX in 2017 and 2018  so while CAPEX and scaleup challenges make it unlikely that anyone company could corner the market, the sheer size of the opportunity suggests that there could be dozens of multi-billion dollar companies globally.
But what about the inputs? Given that one pound of soybeans has roughly 35% more protein than beef, we will make the conservative assumption that each pound of soy–or another equivalent protein-rich plant–could produce one pound of plant-based meat with equivalent protein content. At current average production of 50 bushels/acre, this would require 235 million acres of farmland to produce 700 billion pounds of protein-rich plants. On a land-equivalent basis, this could already be met with acreage from today’s global soy production alone.
However, if these products become better and cheaper, we’ll need to account for the ensuing rapid increase in global per capita consumption. Revising our calculation above, we can ask what would it take to supply the world at US consumption levels of 222lbs/year? As it turns out, we’d only need two years of doubling annual production to meet that additional demand and 550 million acres of soybean-equivalent acres. To put this in context, that would require about a third of the world’s arable land, which is the amount currently used to grow feed for livestock .
Here there be Dragons
Whether or not you support animal agriculture, there are major scale-up challenges in meeting the protein demands of another 2.5 billion consumers by 2050. This will require new ideas, not higher density animal confinement, deforestation, and further strip-mining of our oceans. Our thesis is that new technologies are emerging that are poised to capture large portions of the traditional animal agriculture market and advance pieces of the protein puzzle. Not because these technologies are forced on the market, but because consumers are making the switch.
Still, there are many questions that need to be answered around scalability, health, nutrition, price, regulations, and, of course, public acceptance. And so despite the size of the opportunity, investment in this sector comes with significant risks and challenges.
Health: Many consumers are growing increasingly wary of processed foods, and just because something is plant-based doesn’t necessarily mean it’s healthier. Margarine was invented in 1869 in France as a butter substitute made from rendered beef fat for the armed forces and lower class. Shortages in beef fat combined with advances in hydrogenation of plant materials eventually led to the production of pure plant-based margarine by the end of World War II . At its peak, margarine captured nearly 75% of the butter market, but with growing health concerns around trans fats, margarine ceded its market dominance and today holds about 40% market share . As highly processed foods, plant-based products are going to have to place a major focus on health as well as taste and cost to displace meat or compete against cellular agriculture. Furthermore, cellular agriculture and animal-based products may have other factors that contribute to nutrition that plant-based products need to contend with.
Environmental: Plant-based products are also going to have trouble escaping problems and criticism faced by conventional agriculture, which include monocropping, chemical and fertilizer use, and top-soil depletion. And if these products require ingredients like palm oil, critics will readily point out the hypocrisy given that industry’s record on human rights and sustainability. If startups choose to take a moral high ground, they’re also going to be held to a higher standard.
Cost: Fermentation-based startups like Perfect Day, Clara Foods, and New Culture, which brew genetically-modified microbes that express animal proteins, will also have their challenges. These techniques have been used successfully in the biopharma industry, but these tend to be extremely high-value proteins and it remains to be seen whether these companies can produce their proteins economically and at-scale to compete with commodity ingredients.
Scale: Cellular agriculture, which may be the holy grail, also has many challenges. Well known names in the space in different categories include Memphis Meats (Beef), Finless Foods (Fish), SuperMeat (Chicken), and Shiok Meats (Shrimp). A few years ago, critics pointed out that cellular agriculture relied on the blood of fetal calves (Fetal Bovine Serum), but that’s generally a thing of the past and several biotech companies are now offering plant-based, serum-free media. However, cell culture media still costs about $500/L and today you need between 10L – 40L of growth media to produce just 1kg of meat. These costs will need to come down significantly to compete with both conventional meat products and even plant-based alternatives. But costs are coming down quickly, and we’ve seen companies claiming media costs as low as $40/L on top of using dialysis technologies to recycle their media. In fact, what amazes us most about the cell-ag industry is just how fast it is moving.
Plant-based products will have trouble escaping problems and criticism faced by conventional agriculture, which include monocropping, chemical and fertilizer use, and top-soil depletion.
Capex: At scale, the cell-ag industry will also have to come up with bioreactor technologies that are more robust than food-grade fermentation equipment, but which are far less costly than pharmaceutical-grade bioreactors. Lessons from cleantech remind us that CAPEX can kill businesses producing commodity products. However, the first versions of these products will likely not be complex meat products. Instead, they will likely be high-value ingredients that improve the taste and texture of plant-based products, even at low quantities.
Consumer acceptance: But the ultimate test for cell-ag will be customer acceptance. To get taste and texture just right, startups may need to incorporate additional constituents like fats, myoglobin, and vasculature, making the process more complex. Even then, the thought of eating cultured meat may be off-putting to many consumers and it’ll be a challenge to create a product that can compete with a whole muscle bone-in ribeye steak. Still, there seem to be many opportunities in food ingredients and processed products like dumplings, meatballs, hotdogs and hybrid plant/cell ag burgers. This may not be the meat our fathers will eat, but with no antibiotics, chemicals, or ethical objections, it may be the meat our children will eat.
Social: And let’s not forget the farmers in this equation. Many farming families have been proudly operating for six or more generations. Row crop farmers may see a welcome boom from plant and cell-ag based protein, especially if this demands higher grade–less commoditized crops–but farmers whose livelihood depends on animal farming will naturally feel threatened. Look no further than Missouri, which recently became the first State to prohibit the use of the word “meat” to refer to anything other than animal flesh . However, since protein alternatives will likely compete with commodity meat, there should still be a long-lasting market for producers focused on high-quality, more sustainable meat production.
Competition: On the business front, startups will face fierce competition from the incumbents. On the plant-based meat front, Tyson recently announced their Raised & Rooted plant-based meat brand, Nestlé announced their Incredible Burger, Kellogg’s announced Incogmeato, Kroger’s announced Simple Foods. As they say, if you can’t beat them, join them. And you can bet companies like this are willing to spend billions of dollars on R&D to defend billions of dollars of market share. Plant-based protein companies will need to find defensible strategies beyond brand to remain durable but they are disadvantaged because Big Food is unable to take the same risks of the younger and more agile startups with much less to lose.
AgFunder’s New Carnivore Fund
The world is about to change very quickly. As venture capitalists, our job is to identify technologies that will be embraced by the future and then bet on that future. These bets are informed by consumer demands that drive markets and technology triggers that suddenly make the impossible possible.
All over the world, entrepreneurs are working to create new technologies to replace the need for animal farming. These are PhDs and food scientists from leading research labs around the world who are bringing the latest science and engineering to bear on this problem. With two biology PhDs from Yale and Stanford on our investment team, this is a language we also know how to speak. The passion and talent we see in this industry is second to none and it makes innovation in this space move so much faster. These are mission-driven founders who are out to make a big dent in the universe, and we’ve been inspired to join them on their journey.
The passion and talent we see in this industry is second to none and it makes innovation in this space move so much faster.
We believe this is an important mission, and that this is one of those rare moments in history where a technology comes along that could genuinely make the world a better place. In the short-term, we recognize that new technologies often lead to new problems. The invention of the car came with urban sprawl, pollution, and over 1.25 million fatalities each year. But cars are also getting cleaner, safer, and more efficient and few of us are willing to go back to the horse carriage. Disruption doesn’t occur because a technology is pushed on unwelcoming consumers. Instead, disruption occurs when it suddenly fills a vacuum in consumer demand. The arrow of technological progress always points toward a better future and we trust in the wisdom of the markets to get us there.
The fund will will have a target size of $20m and will invest globally. We will seek to invest in the best of breed companies from pre-seed to pre-IPO in addition to some secondary transactions.
The fund will be open to both individual accredited investors and institutional investors. Investors investing less than $1 million will have an opportunity to participate in the first close period ending on December 15.
For others who are interested in getting involved, we’re also doing a call for mentors. We’re particularly looking for individuals who have highly distinguished careers or unique talents that will be relevant to the founders of these companies.
References Dr. Carsten Gerhardt, Gerrit Suhlmann, Fabio Ziemßen, Dave Donnan, Dr. Mirko Warschun, and Dr. Hans-Jochen Kühnle, How Will Cultured Meat and Meat Alternatives Disrupt the Agricultural and Food Industry? AT Kearney (URL)  David Manners, Samsung Spends $46.8 Billion On Capex In 2017 and 2018, ElectronicsWeekly.com, 2018 (URL)  FAO (URL)  Margarine, Wikipedia (URL)  David McCowan, I can believe it’s not butter: The rise and fall of margarine, The Takeout, 2018 (URL)  Zlati Meyer, Missouri becomes first state to regulate use of the word ‘meat’, USA Today, 2018 (URL)
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