The food and ag sectors are tied to nearly a quarter of all global greenhouse gas emissions. However, those sectors receive disproportionately less climate tech venture funding. Beatriz Franco and Maya Benami of Vita Vera Ventures explain how investors are overlooking opportunities for both impact and returns.
Overlooked and Underfunded
Climate tech investing has significantly increased in the last few years, based on both the urgency for solutions as well as the clear business opportunities it offers. However, we continue to see that investors are not appropriately targeting technologies with the highest potential for reduction of greenhouse gas (GHG) emissions, and in the process, they have been overlooking opportunities for both impact and returns.
Highlighting this disconnect, PWC's State of Climate Tech report notes that the food and agriculture sectors are tied to nearly a quarter of all global GHG emissions (some say up to 1/3 of emissions) but received only 12% of global climate tech venture funding. Meanwhile, the mobility sector received almost 50% of global climate tech venture funding in 2022, yet is responsible for only 15% of global GHG emissions.
Current food production is not only a driver of climate change, but it is also a victim of climate change.
This means that, unfortunately, we cannot expect our food supply to continue at current levels. Combined with the added pressure of population growth, it is clear we will need to integrate emerging food technologies into our food supply system in order to support the demands of humanity, as well as the sustainability and resiliency of our food system.
While there has been much media discourse specifically focused on the plant-based meat subcategory of food technologies, this fast-growing sector is much broader and deserves a more nuanced conversation. In this article, we will focus on one such food technology that shows a lot of promise but is still largely misunderstood: precision fermentation.
What is Precision Fermentation?
Fermentation itself is not new. Humans have been consuming fermented foods, such as cheese and alcohol, for centuries. They are made through traditional fermentation methods, where microorganisms, such as yeasts, transform sugars into an ingredient, new food, or beverage in order to remove toxins, increase shelf life, and/or improve taste and digestibility.
Precision fermentation is a more advanced form of fermentation. It uses microorganisms, like yeast and bacteria, as "factories" to produce specific end products such as proteins, enzymes, fats, vitamins, flavors, or pigments. Those microorganisms are fed carbon-based compounds, such as sugars, and are engineered and optimized to produce replicas of an organic molecule, such as protein. Precision fermentation is already used in pharma for the production of compounds such as vaccines and insulin, and it is now being applied to food production as well.
In the past, insulin was harvested from millions of cattle and pig organs. Such systems were inefficient at best, as they required tons of pig parts for just a few ounces of purified insulin, not to mention that this non-human insulin also caused allergic reactions in many patients. Today, insulin is produced through precision fermentation by inserting the human insulin gene into a microbe which is then prompted to produce human insulin.
As far as new food applications go, examples of exciting products in development or in production through precision fermentation include whey protein, casein to make cheese, palm oil alternatives, animal fat, collagen, and even breast milk proteins for infant formulas.
Seizing the Opportunity, Why the Disconnect?
With so many opportunities for impact and returns, why aren't we seeing more generalist investors looking into food tech?
We believe one big challenge comes from the fact that it is becoming more complex to assess the opportunity given the evolution of new processing tech and biotech methods. Also, given its nascency, many companies are still in R&D and lab-scale phases, thus too early in their journey to offer revenue and customer metrics to analyze traction during investor diligence.
Can Investors Leverage the Biomedical Sector as a Proxy during Diligence?
Unfortunately, it's not that simple. While some scientific aspects of pharmaceutical and biomedical diligence can offer comparative insight, other aspects can be quite different, especially when considering that the goal of food production is to make much larger quantities at much lower price points. Accordingly, business strategy as well as processing and equipment requirements can diverge significantly.
Drugs created via precision fermentation for the pharmaceutical industry are grown in expensive, highly controlled bioreactors that are suitable for the production of high-value, low-volume products.
The food industry, on the other hand, needs to create more affordable, high-volume food compounds from fermentation produced in food-grade conditions. This need is the reason why we are seeing so many new start-ups focused on building the infrastructure and enabling technologies around alternative foods, including built-for-purpose fermenters and bioreactors.
One other difference to highlight between the two industries is on the regulatory side. The regulatory process for novel foods can be perceived as easier and faster when the primary goal is to demonstrate that the new food is substantially equivalent to an existing food. Biopharma, on the other hand, needs to go through the rigorous testing required for new medicines that are often administered to immune-compromised patients.
Also, it is interesting to note that there are differences in the way scientists in these two industries approach their products. A cell biologist who works in the pharmaceutical industry will not be concerned (or necessarily understand) the nuances of what is needed to make a successful food product, which includes specific consideration of each sensory property, such as flavor, texture, and color, and using only food-grade reagents.
Starting from the Ground Up?
You might be saying, "Ok, so is this all new and a black box?" Well, yes and no. Precision fermentation relies on living organisms and cells as part of its process. While biology is the oldest "technology" in the world, it is indeed still a black box in a number of ways. For example, the mechanisms of cell communication and the complexities of cell organization are still not well understood.
However, humans have been successfully using biology for advancement long before understanding the science behind it, by growing crops and breeding livestock, and effectively developing agriculture approximately 12,000 years ago.
These days, genetic screening, cell manipulation technologies, artificial intelligence, and machine learning greatly enhance our understanding of cell processes by pinpointing genetic sequences that are responsible, for example, for protein production pathways in a cell. So now scientists can use what we do know and build upon it to harness natural processes.
Using precision fermentation, we can leverage microorganisms to create, in a sustainable way, a vast array of known and novel foods and ingredients, from meat, dairy, seafood, and honey to specific flavors like new sweeteners, taste enhancers, and much more.
Investors' Journey: Important Aspects to Unpack During Diligence
So what should an investor look for during diligence? While there are many angles to be evaluated, similar to any other start-up due diligence process, such as market opportunity, team, competitive landscape, IP, and moat, among others, commercial traction is most likely not going to be available for investors' analysis.
Based on this and on the intricacies of this nascent industry and its requirements, we will unpack below a few important points that we believe investors should take into consideration when going through diligence of a precision fermentation company.
Yes, it is true that most likely there will not be early revenues and customer traction to review. However, in that case, we can move to the next best thing, which is customer validation. Investors can and should talk to potential customers and validate that this product is actually solving a real need.
Some companies will have LOIs, initial partnerships or customer trials, or surveys that can also give an indication of how a potential customer is thinking, but a phone call with a potential customer in your network is still advisable not only to understand how important that solution really is but also to get any information you can on willingness to pay for such solution.
Proof of Concept and Scalability Mindset
As mentioned before, many companies are currently at lab-scale or R&D phase. At lab-scale, in the early stages, they will be creating prototypes and proofs-of-concept and producing a few grams to a few kilograms per batch and using fermenters under 20 liters and likely between one liter and five liters.
As they progress and move to pilot, demo, and commercial scale, quantities produced and size of fermenters increase accordingly but one important thing that some investors forget is that not all products are created equal. If a precision fermentation company is targeting products that represent a small percentage of the final food formulation, that company will be able to go to market with a higher price point than one whose product makes up the bulk of the final food formulation, and therefore their path to a viable commercial scale is shorter. Investors should be aware that a viable commercial scale can vary in size significantly depending on the target product.
In all cases, investors should always look for founders with a "scalability mindset." In other words, no matter how early a company is in its journey, founders should be thinking about scalability from the start. This is shown through each of their decisions during technology and process development. For example: Are they frontloading their cost analysis while building their process? Did decisions around inputs take into consideration availability and supply chain resiliency? Are they already planning for their equipment needs and establishing partnerships?
Scaling is one of the trickiest parts of the success of this industry. In addition to having to focus on scaling up the technology itself and accurately forecasting budgeting needs, companies have been facing an additional challenge: the bottleneck of little-to-no fermenter availability (both from a co-manufacturing standpoint or direct purchase) as many fermenters available today are currently prioritized to produce high-value, lower-volume pharmaceutical grade vaccines and drug compounds. Alternatively, companies purchase biomedical infrastructure or fermenters from biofuel facilities or other industries and attempt to repurpose them, which is not ideal.
However, we expect and hope to see a positive change in this space in the near future given not only the surge of new companies tackling this problem but also the increasing interest shown by governments around the world through regulation and potential investments targeting the development of the industry.
Process Feasibility, Efficiency, and Optimization
This is a key part of diligence. Investors need to dig in and understand where the company's process is at and how efficient both the upstream and downstream processes are. A critical aspect here is to understand how much final product you get at the end of the process and how long that takes from start to finish. This involves understanding how much product the microorganism secretes, how fast, and how much product is recovered after purification.
Investors should not only understand where the company is at that moment but also where the company must get to in the future in order to be profitable. Therefore, investors should review the company's optimization plans and efficiency targets. Much like an investor would review financial projections, all assumptions embedded in these plans should be checked to make sure they are realistic and reasonable.
It's Time to Seize the Opportunity
Not a day goes by without us seeing headlines reminding us of the consequences of climate change. Now is the time to focus on technologies that can change that and, as discussed here, investors should give special attention to those that can reduce the most GHG.
Precision fermentation, together with other food emerging technologies, will, without a doubt, be a much-needed part of the answer to climate change and to a more resilient food system.
And here is the "cherry on top": there is real money to be made by investors. Climate tech is not only the biggest hope in the fight against climate change, but it is also good business. If we focus on just the food sector as an example, the global food market is a significant percentage of the global economy (estimates say it is about 10% of the global GDP) and demand is only growing.
Start-ups that can offer good substitute products at the right price and with a lower carbon footprint will find success, and those who are able to offer better quality and cheaper products on top will knock it out of the park.
Vita Vera Ventures is an early-stage venture fund focused on climate tech and supply chain tech advancing the resiliency, sustainability, and efficiency of our food system. Vita Vera Ventures would love to hear from early-stage entrepreneurs building with this in mind.