Food tech venture capital deal sizes decline for the first time in seven years

Dive Brief:

• The median VC deal size in the food tech category declined for the first time in seven years to $3 million in the second quarter of 2023, a 12.4% decline from 2022, according to a PitchBook report.

• The decline in the average deal size contrasted with an increase in the number of investments. There were 268 deals in the second quarter, up 13.1% quarter over quarter, the report said. 

• The increase in deal count for the quarter may indicate a return of investment activity after a pause due to the Silicon Valley Bank closure in March, the report said. However, the increase may “reflect a new, more careful paradigm at play,” particularly within the emerging fermented protein category.

Dive Insight:

An increasing number of startups gained attention from early-stage investors in recent months, the report said, mostly in the fermented protein space.

The discovery and review segment logged the largest quarterly increase in deal count, climbing 40%, the report said.

Early-stage startups in the fermented protein space saw the largest increase in value, climbing 65.5% quarter over quarter from the second quarter of 2022. The category is quickly coming up with innovative methods to scale, making the space desirable for venture capitalists, accordingt to Pitchbook.

In August, Scotland-based mycoprotein maker Enough raised $43.6 million in order to double the production of Abunda, a replacement for meat made from fungi. 

The company has also seen the benefits of collaboration. Unilever, for example, is one of its customers and plans to test Enough’s Abunda product in its European Vegetarian Butcher products. 

The cultivated meat category, on the other hand, is in need of further VC funding and collaboration if it wants to become profitable, the report said. 

Among the biggest developments in the food tech space recently occurred in June when the USDA issued grants of inspection to Eat Just and Upside Foods. This allowed these companies to commercialize cultivated meat in the U.S. market.

Despite this advancement, the industry must overcome the challenges of its early stages — mostly scalability, consumer acceptance and cost — if it wants to thrive, according to the report. The development of larger production vessels and lowering the cost of cell-growing feed also needs to happen for the space to become profitable, but these processes have a hefty price tag.

These challenges could potentially make businesses in this sector more dependent on raising cash to fund their operations.

Collaboration with traditional meat companies, such as JBS, Tyson Foods and Cargill “could hold the key to a profitable and sustainable future for cultivated meat,” the report said, but consumer acceptance must be addressed in order for more of these deals to happen.

The environment is hardly favorable for companies looking to raise cash.

With interest rates at their highest level in years, it’s more costly than ever to borrow money. Some banks are being more cautious to whom they lend money. The collapse of Silicon Valley Bank earlier this year removed a player that was known to work with young companies.At the same time, venture capitalists are being more selective in what they invest in.