Friday, December 21, 2018

Why is Europe Behind in Food Tech Investment?

A deep dive from AgFunder, December 12:
European food tech startups are on course to have raised between €750 million to €1 billion in 2018, according to different estimates. That will be around a 40% decline on 2017 funding levels.
When you take out 2017’s largest deals — including Europe’s leading food tech startups in the food delivery segment such as Deliveroo, and HelloFresh — there will be some moderate growth in funding. But European food tech startups will still lag the global food tech ecosystem raising just 16% of global food tech funding between 2014 and the first half of 2018, according to a report from DigitalFoodLab, a corporate consultancy in France. The report points out that Europe is home to 25% of the global agribusiness market.

Sixty percent of the €4.2 billion raised during that period was concentrated in the coffers of three companies: restaurant marketplaces Delivery Hero and Deliveroo, and meal kit startup HelloFresh.
Add in Just Eat and, and this set of food ecommerce businesses have raised a combined €3 billion and are now worth a combined value of €21 billion, which is a 7x return in five years, according to a separate report by local VC Five Seasons Ventures.

These are great exit multiples and a signal of a successful ecosystem, according to some investors, but DigitalFoodLab is not as impressed with the success of these startups.

“Each of these three European giants is among the world leaders in Delivery & Retail. Though, none of these startups has “invented” its own business model. Delivery Hero and HelloFresh were born from the German startup studio Rocket Internet, specialized in copycatting successful (US) startups. While Delivery Hero has grown rapidly by taking over brands such as Foodora and FoodPanda, HelloFresh has become the world leader thanks to the US market,” reads the DigitalFoodLab report.
“If we consider that FoodTech startups are both externalized R&D and the future of current agri-businesses (either through M&A or by replacing them), we can only be worried about Europe’s future as a food powerhouse,” reads the report.

But wait; European Food Tech Innovation is Thriving?
Speak to others in European food tech and they’ll tell you the industry is thriving, albeit with challenges.

Maarten Goossens from Dutch agrifood tech fund Anterra Capital points out that while last year’s dollar funding levels represented just 15% of global levels, Europe was more active in terms of the number of deals closed at 31% of the global landscape.

“When we started Anterra in 2013, there was already a healthy number of food tech startups in the US, and that was led by the fact that the US, in general, has a more entrepreneurial ecosystem, that’s engrained in the culture; European investors have in general been more risk-averse. But if I look back at the last few years in Europe, I’d say it’s catching up to the US, just three years behind, with a healthy funnel of earlier stage companies being developed of which circa 1,000 got funding over 2015 to 2017,” he tells AgFunderNews.

The European food tech ecosystem is even starting to mature, Goossens added, with a few notable companies reaching beyond Series B stage raising significant amounts of capital across the food supply chain such as Dutch insect farming group Protix ($50m), French indoor farming group Agricool ($42m), Germany’s Infarm ($33m) and Dutch grocery delivery startup Picnic ($100M).

Later-Stage Funding Challenges
There could be a challenge for these startups as they reach later stages, however. “Europe does have a problem when it comes to later stage capital, specifically for Series B to D funding rounds when larger amounts of capital are required while the risk of failure is still significant; there’s a gap in those investment stages across all tech industries,” Goossens cautions.

Goossens says the distribution between early stage and later stage capital in Europe is out of balance, there is 14 times more capital available for later stage startups in the US than in Europe. “If you compare Europe and the US relative share of global VC funding — 15% vs 45% — you’d expect that to be a factor of three. The lack of later stage capital will remain an issue until bigger pools of capital turn their eyes to Europe.”

This appears to be a challenge across European venture capital, according to PitchBook’s Q3 European report. “From our perspective, the major difference (with the US) is a current lack of widespread VC support or ability to do €100 million+ deals. This has become a staple of the US VC playbook but is still relatively rare in Europe,” reads the report.

While Europe’s startups raised record levels of funding in 2017, much of that came from foreign investors, according to PitchBook, highlighting a 23% year-over-year drop in fundraising dollars and a 15% drop in the number of funds closed in 2017. PitchBook MD Trafalet indicated to the Financial Times that Brexit was a key consideration in the lacking ability of European VCs to raise capital. The data company predicts that the number of funds closed will have continued to fall in 2018, but that VC firms are raising larger funds, keeping total fundraising at a similar size (~€8.2bn).

Distinct Startup Investment Ecosystems
Alessio Dantino, CEO of London-based Forward Fooding, believes that the challenge for Europe’s food tech industry — and perhaps venture capital overall — is not a lack of capital, but more how that capital is organized.

“The European food tech industry is behind but starting to thrive. In my opinion, the real challenge funding wise is not the lack of capital but fragmentation and investing culture. 

In general, the level of sophistication of investors is lower than in US; there are less professional investors and different regulations of what defines a professional investor for each country doesn’t help either. How investors approach startup investing is also different,” Dantino told AgFunderNews.
Europe might be a single market — for now — but each country has clearly different ecosystems for startups. And the journey for a startup in any European market is not as clear-cut as in the US where startups typically follow the similar route of attracting seed stage funds from specific types of investors, perhaps joining an accelerator and then moving onto a wealth of larger, growth stage VCs to mature to the next level.

“There are ‘small’ funds/super angels for each country and very few EU-based cross-country funds that look at investing big checks in fast-growing international businesses; most bigger deals are primarily done by a mix of PE, CVCs, family offices and funds of funds,” says Dantino....