Category Archives: Venture Capital

Feeding 100 Trillion Friends: Produce or Pills?

Originally published on Edible Startups:  http://wp.me/p1F0iE-9A

Photo 1_microbiomeIf you’ve participated in foodie dinner table conversation in the past year, you’ve likely heard the term “microbiome” more than once.  Due in part to exceptional expository pieces such as Michael Pollan’s “Some of My Best Friends Are Germs,” the popular lexicon now includes some incredible statistics about the body’s ecosystem of 100 trillion bacteria. For instance: a count of the cells within the human form will yield a tally of nine non-human microbes for every human cell. Moreover, 99% of the total genetic information in our corpus is microbial. We’re taught to think of life as a turf war between “us” humans and “them” germs; yet, it turns out that “us” is mostly “them.”

And many of the bugs inside us – the denizens of our microbiome – are doing us quite a bit of good. In babies, Bifidobacterium Longum helps stave off pernicious bacterial infections, while Lactobacillus Johnsonii aids in the digestion of mother’s milk. In adults, Bacteroides Thetaiotamicron and Escherichia Coli (different from unsavory strains of E. Coli) are critical to digesting plants and extracting vital vitamins from our food. Moreover, our internal bacteria can even determine our susceptibility to arthritis, our predilection for metabolic disorder, whether we are fat or thin, whether we develop the type of arterial plaque that causes heart disease, and even how we think. Whoa.

Knowing this, we have begun to own up to the need for a paradigm shift concerning microorganisms. As one author puts it: “We are moving from a multi-decade focus on killing ALL bacteria via soaps, detergents, antibiotics and hand sanitizer, to a new understanding of the complex bacterial system in our bodies and in the world around us.” Famous fermenter Sandor Katz further elucidates this point in Michael Pollan’s Cooked: “’To declare war on ninety-nine percent of bacteria when less than one percent of them threaten our health makes no sense. Many of the bacteria we’re killing are our protectors.’”

So how do we best cultivate our individual microbiomes to effect benevolent health outcomes? One way to preserve your gut ecology is to avoid the haphazard consumption of antibiotics. Antibiotics are the “nuclear option” in regulating our foreign fauna: they wipe the slate clean, eliminating good bacteria along with bad. Similarly, it’s good to lay off the Purell and antibacterial soaps. But what about promoting the growth of undersized friendly germ colonies, or sowing new communities that aren’t currently present in our bodies?

Is this the domain of food, or medicine? How might we optimally shepherd the hardy, cunning, and inexhaustible soldiers of our internal infantry? If control is the most valuable currency we can amass in our daily grapple with the swirl of feral nature, then this is a major question indeed.

Food

Photo 2_microbiomeWhat we eat for our own nourishment also happens to be the fuel for our microbiome. And the bacteria that enter our body along with our food often become a part of the microbiome. Indeed, the evolution of our internal microbe colony has historically depended heavily on the consumption of a variety of “living” foods.

Today, food safety regulations all but ensure that the living elements of our food are annihilated in the course of preparation, packaging and delivery. Much as we use the blunt instrument of antibiotics to destroy bacteria in our bodies, we use heat (Pasteurization) or high-pressure processing (HPP) “kill steps”, engender abundant acidity, thoroughly dehydrate, and seal our food in protective packaging to ensure that microorganisms are obliterated. We codified these safety procedures to ensure that we eliminate a short list of pernicious pathogens (such as e. colisalmonella, and listeria) that sometimes exist within the large community of microorganisms that are present on raw food.

By requiring that our packaged food be heated, acidified, and desiccated, we are rendering it “dead” in every sense. Valuable enzymes, vitamins, minerals, and antioxidants are forever lost. And so are the myriad harmless and benevolent microorganisms that we have benignly ingested for centuries. Accordingly, processed food fails to stir up microbiome magic.

“Living Food”

Lately, there has been a resurgence of food as medicine for the microbiome. Michael Pollan’s latest book, Cooked, offers a robust look at a productive class of artisan fermenters that create living foods as varied as cheese, yogurt, kimchi, sauerkraut, miso, prosciutto, pickles, etc. (Cooked also delves eloquently into the science of fermentation, a mind-blowing process wherein humans cultivate microorganisms that transform foods for us.) Fermented foods contain beneficial live cultures known as probiotics, while other foods contain prebiotics, the nourishing molecules that sustain probiotic organisms.

(Important side note: many mass-produced “fermented” foods are not actually fermented by living organisms. They use chemical processes to mimic the effect of microbial action. For instance, supermarket pickles are pickled by vinegar, not microbes. These non-living foods are cheaper to make and more uniform in taste. But they lack probiotic function.)

Contemporary artisan fermenters have benefited from a revolution in financing and distribution options. For instance: after reading Cooked, I wanted to eat more “living” food, so I ordered some delicious Real Family Foods sauerkraut through Good Eggs, a grocery delivery service that brings a diverse array of goods to my doorstep. A few weeks later, I received an email from peer-to-peer lending platform Kiva Zip with a request to help finance a loan to Real Family Foods. I contributed $25, and within a few days the $2,500 loan was fully funded by 41 of Real Family Foods’ customers. The loan is being used to obtain USDA Organic certification. This case study highlights how easily the modern consumer can vote with their dollars for shifts in the food landscape – without ever leaving home. I supported one of our oldest food production techniques by using some of our newest technology, all in the interest of making my buggy friends happy.

Yet, the exact relationship between which foods we eat and how those foods impact our microbiome is still somewhat murky. We know that fresh organic produce (some exemplars are onions, garlic, and leeks; and, broadly, vegetable fiber is excellent) and fermented foods work wonders. Highly processed foods are bad, as is sugar (for instance, you don’t have to refrigerate honey because bacteria cannot live in a pure sugar solution), and antibiotic-laden meats will shock your gut ecology. Beyond that, it’s hard to say. And there is real risk in consuming raw foods that may be tainted by deadly pathogens. (Note: one of the many remarkable aspects of fermentation is that the fermenting microbes create an acidic environment that is inhospitable to pathogens. Only the good guys can survive.)

Medicine

Photo 3_microbiomeThe traditional role of Western medicine is to react to developed or emerging sickness. The medical establishment has been slow to develop preventative measures or guide patients on how to maintain health, particularly when it comes to food. Layer on to this that our understanding of the microbiome is rudimentary at best, and you can see why most physicians probably don’t have polished advice for their patients when asked: “So, how do I jump-start my internal ecosystem?”

Precision Therapeutics

However, many are looking to the biotech community to develop targeted therapeutics that will help the microbiome flourish. Second Genome is the early leader in this category, and has taken some $19 million in venture financing. But the leaders of Second Genome know that creating therapies for any single person will be difficult given the unique nature of each microbiome. Second Genome CEO Peter DiLaura acknowledges the need for precise therapies: “’We are really focused on the interaction between the microbiome and the host…when we think about therapeutics, it’s about impacting the interaction that is beneficial for disease.’” The company is using DNA sequencing technology to customize solutions, but the cost of doing so is onerous. Peer company Vendata Biosciences is pursuing similar solutions.

At this point, not only are such interventions too costly for mass adoption, but they generate the same slew of privacy concerns that other DNA sequencing technologies have raised. (NPR has an entertaining and illuminative story on this topic, and the accompanying cartoon video on the microbiome is definitely worth a watch.) Nonetheless, endeavors such as the American Gut Project and uBiome are nobly pressing forward to map our collective microbiome, much as the precedent Human Genome Project did in spite of concerns voiced by its detractors.

Right now, the best microbiome solution offered by medicine is inelegant, highly effective, and not for the squeamish. Fecal microbiota transplants (or fecal bacteriotherapy) are exactly what they sound like: taking stool from a person with desirable microbiomic traits and – ahem – sharing it with a person with health issues. The results of the procedure have been inarguably positive, and accordingly the FDA has green-lighted the therapy.

Food or medicine?

The “answer” lies somewhere betwixt the two domains: both food and medicine play a role. With food, cultivation of your microbiome is just the latest in an endless list of reasons to eat more fresh produce and trustworthy raw food. And integrating fermented products into your diet makes good sense: humans have been eating ferments for as long as we’ve been around. Our co-evolution with fermenting microorganisms is a clear synergistic success story.

As far as medicine goes, truly targeted microbiome treatments are not cost-competitive enough to supplant the crude fecal transplants being used today. But those transplants are saving lives in acute disease states. Their applications should be increasingly tested in preventative care.

There are also over-the-counter supplements on the market that purport to service your microbiome. Walk through your local store and you can find a multitude of probiotic pills or “probiotic-enhanced” foods. But any consumer should be seriously skeptical of supplements, and I suggest opting for real probiotic foods instead. Probiotic supplements might be appropriate after a course of antibiotics to catalyze a rebuild of your microbiome, but I suggest doing research on products before buying them.

In the meantime, stay tuned to scientific advances addressing the microbiome, and pay attention to credible literature on what probiotic and prebiotic foods are best suited to positive health outcomes. The next chapter in our long history with our tiny friends is sure to be an interesting one.

What “Big Ideas” In Food Get Funded In Silicon Valley?

Originally posted at: http://ediblestartups.com/2013/10/14/what-big-ideas-in-food-get-funded-in-silicon-valley/

Much has been written about the ascent of Silicon Valley (SV) as the go-to global incubator for transformational change.  SV has become the Jerusalem of the techno-optimist religion. In venture capital doctrine, the absolution of humanity’s sins begins with seed financing for the next spate of Big Ideas. And in an America where the federal government no longer functions (quite literally), Silicon Valley has taken on new gravity. It is ground zero for ingenuity as cathartic salvation.

The unsustainability of the modern food system is one of humanity’s biggest problems. So, it’s worth taking a look at which Big Ideas in food the leading SV venture capital firms (VCs) are voting for. Where are VCs placing their bets for the salvation of food? (Note: this piece will focus on venture capital financing, but not crowd-funding, angel financing, or later-stage private equity financing, all of which also play an important role in advancing Big Ideas in food.) SV’s rising focus on food has already received attention from the mainstream press.

Before diving in, it’s important to bear in mind a few truths about the VC business model. To have a chance of being funded by a VC, a company must “walk and talk” like a high-growth technology firm. VCs look for: a) billion-dollar marketplaces; b) game-changing innovations; c) short innovation cycles that can quickly lead to high-margin revenue; and d) a promising path to “liquidity” (meaning the sale of the VC firm’s equity shares in the company). One problem cited by food entrepreneurs is that food businesses often don’t fit this profile. So as you peruse the ideas below, it’s also important to consider what’s not being financed. But, more on that later.

Agriculture Inputs: Information, Resource Management, Seeds

VC graphic 1VCs love agriculture input innovations. Why? Inputs undergird all of food production, and thus represent massive marketplaces. Plus, VCs understand the imminent scarcity of inputs such as water and petroleum-derived fertilizer. If technology can reduce or supplant the need for threatened resources, it can probably be monetized. (However, because such technologies often hinge on bets about unforeseeable commodity price trends and/or government distortion of markets, they bear resemblance to some of the “cleantech” investments that burned VC firms in recent years.)

A good place to start is with the recent sale of The Climate Corporation (CC) to Monsanto for over $1 billion. Having liquidated for about ten times the $109 million in venture funding the company has received since 2007, CC is rightly hailed as a successful venture investment, and was backed by big-name firms such as Founders FundKhosla Ventures, Google VenturesNEAIndex Ventures and Atomico. CC is a “Big Data” company that processes historical and real-time weather data with predictive algorithms, and then intelligently prices crop insurance and weather informatics for farmers. CC produces something that tech-oriented VCs can understand, and they’ve cracked into the multi-billion dollar insurance and business intelligence marketplaces. While we may not think about risk management and production intelligence as agriculture inputs, farmers certainly do! CC is an important case study because it shows VCs that they can make money playing in agriculture.

Another interesting information-seller is Solum, which produces soil sensors and an accompanying analytical platform aimed at reducing fertilizer inputs. The company provides farmers with detailed knowledge on the health of their soil to enable precise decisions on how much additional application is needed to maximize crop yields.

VCs have also focused on companies trying to reduce water use. The Roda Group financed mOasis, a company developing a polymer gel that retains soil moisture and reduces watering intensity in arid climates. Both Banyan Water and PureSense offer technology platforms to economize water application on irrigated landscapes. And Khosla Ventures backed NanoH2O, a membrane technology company that lowers the cost of desalination (and brings farmers one step closer to using abundant salty water for their fields).

Seeds are an additional big focus of VC firms. Kleiner Perkins has two non-GMO seed companies in its portfolio: Kaiima and VoloAgri. Both are trying to coax better productivity out of crop lines without directly altering genetics, a la Monsanto.

Note that what all these companies are really selling are data-derived intelligence or intellectual property that could shift entire marketplaces. They are high-risk, but potentially high-return, with global applicability.

Ag Production & Food Processing: More Efficient Protein, Process Automation

VC graphic 2Another concept that VCs love is substitutes for conventionally produced animal protein. If you know anything about how resource-intensive it is to raise a cow, you realize it’s probably possible to produce protein far more efficiently. Furthermore, the market for proteins is large and growing as more middle-class consumers come online worldwide.

The animal protein alternatives market is currently dominated by next-generation plant-protein synthetics that closely mimic real meat. The most “buzzy” among them is Beyond Meat, which leads a class of startups investing heavily in food science and processing technique to bring the flavor, texture, and visceral eating experience of their substitutes as near as possible to “the real thing.” The promise for VCs is that these companies will make delicious products with a much lower production cost, thereby carving out a large fraction of the global market by virtue of a favorable price point. Also in this vein is Hampton Creek, an egg substitute with exceptionally promising early market traction, and Lyrical Foods, which is going after cheese.

Further down the pike are companies attempting to grow real animal cell cultures (and ultimately complex animal tissue compounds) in a lab. Rather than originating from a cow in a field, your hamburger would come from “in vitro cultivation” in an industrial incubator. Again, the investment promise of companies such as Modern Meadow is that they will someday streamline production and drop costs – although today, a single “cultured” burger costs $325,000.

(Keep an eye on one more animal protein substitute: farmed insects. While I am not aware of any insect companies currently being financed by institutional VCs, they are thriving on crowd-funding sites such as Kickstarter.com.)

Another well-attended class of ventures is those that are automating processes in the semi-structured environment of food production. For example, Blue River Technology is using computer vision technology to automate in-field weeding and plant selection processes, which have historically relied on manual labor or excessive application of chemicals. Primary backer Khosla Ventures envisions a future where autonomous robotic vehicles diligently roam every agriculture plot around the world. A similar company is Rowbot, which is focused on fertilizer application.

And not far off will be a series of investments in flying drone vehicles used in food production. I don’t know what these will look like, but some have ventured a guess.

Storage, Distribution, and Consumption: Supply Chain Traceability, Numerous Consumer Applications

VC graphic 3Information is of paramount importance in distribution. Since supply chain traceability is of interest for food safety, cost control, and consumer education purposes, VCs have bolstered technology company HarvestMark, which can help track fresh food items down to the package level.

Further along the supply chain is the intersection of food and consumer purchases. Because “consumer Internet” (the intersection of internet technology and the traditional consumption of goods and services, the latter of which composes over 70% of U.S. GDP) has been such a massive area of investment for VCs, the ecosystem of ventures that allow people to seek out, buy, and consume food is extremely robust. Instead of trying to catalogue notable investments in this space, I will refer readers to Brita Rosenheim’s exhaustive map of “Food Tech and Media” companies. For ongoing coverage, Food and Tech Connect monitors this space very well.

What’s Being Left Out?

Anything that is regionally oriented, serves a small market, or fails to provide an “exit opportunity” for VC investors is unlikely to be funded. The reason such investments are left out is because the business of venture capital is to make money, and do so relatively quickly. VCs raise investment funds from limited partners (smaller investors), and promise to “close” a pool of funds and deliver returns within five to seven years. What that means is that even a company that receives investment early in the five-to-seven year life of a fund doesn’t have a tremendously long time to grow and go public, be bought by a competitor, sell to a private equity firm, or otherwise recapitalize to “liquidate” equity shares. If the “exit opportunity” never manifests, the VCs can’t make money, and they won’t make the investment in the first place.

Contrast the five-to-seven year exit timeline with the life cycle of most agriculture and food businesses. Pistachio trees take seven years to mature after planting. Converting land from conventional to certified organic takes at least two years (and probably closer to four in practice). Building sales and distribution in a physical sales network takes much longer than in an e-commerce network. VCs simply aren’t willing to wait for many food businesses to generate a competitive return on their investments.

And, even if VCs waited, a competitive return may never appear. Most parts of the food value chain generate modest profit margins. Contrast the 15% operating margin of Kraft Foods (a mature and profitable food company) to the 34% operating margin of Microsoft (a mature and profitable software company). For a VC chasing “superior” returns, the profit profile of a business matters a lot.

So what “progressive food” business models are unlikely to be courted by VCs? Big Ideas that are a bit ahead of their time (such as vertical farming); “low-tech” agriculture production technologies; local foodshed farming operations; regional food processors or distributors; artisanal “mom and pop” food manufacturers; most restaurant chains; retailers targeting “food deserts”; niche cooking or nutrition education platforms; and most publications or blogs. VC is not interested in Slow Food or Slow Money. And it’s important to recognize that many of the changes needed in the food system simply don’t fit in the “techno-optimist” paradigm. For those changes, alternative investment channels are springing up, but may never develop at all. Future posts will address complementary avenues of investment in other parts of the food system.

In the meantime, cutting-edge food start-up incubators such as Local Food Lab and Accel Foods, and investment enablers such as CircleUp, are trying to close the broad gap between new food businesses and institutional VC financing. As more Big Ideas (and laudable Small and Medium Ideas) in food continue to emerge, stay tuned to the evolving infrastructure of support for food companies.