What are VCs looking for in the food, beverage arena?

Food and beverage startups are so integral to the CPG category that bigger companies are increasingly making investments in smaller firms. Within the past few months, Tyson Foods’ venture capital arm invested in alternative protein firm Future Meat Technologies and Kellogg’s venture unit, Eighteen94 Capital, invested in functional ingredient company MycoTechnology.

As consumers continue to seek healthy food and beverage options with transparent ingredients, entrepreneurs are answering the call by swiftly releasing new products. In fact, many analysts are saying that food-focused startups are on track to get more momentum this year.

Taste is king

Small food and beverage businesses that are seeking investments from venture capital firms often wonder what investors look for when they evaluate brands for potential funding. One thing that’s essential in a product is that the flavor is appealing, said Carole Buyers, co-founder and managing partner BIGR Ventures, a growth equity fund that provides capital and partnership to early-stage natural and organic products.

“Great taste is an absolute must,” Buyers said. “If a product does not taste great, no amount of capital or operational excellence will overcome that obstacle.” In addition, BIGR looks for companies with strong brand values.

“Typically, in the early stage companies in which we invest, the brand values are a direct reflection of the founders' values, and working with great people is a high priority for us,” Buyers said. “When those strong values manifest in the brand, there is an emotional connection to the consumer that goes far beyond a simple transaction.”

Small businesses don’t necessarily need to have a cult following to attract VC attention, Buyers said. “We understand that a cult following takes time to develop and we try to help our portfolio companies create a business that deserves a cult following.”

This is the no. 1 differentiator between failure, success

Although there isn’t a one-size-fits-all flavor profile that will always make one food or beverage brand take off over another, there are other features of a growing business that signal success to investors, said Duane Primozich, managing partner and cofounder at BIGR Ventures, which has invested in such firms as High Brew Coffee, REBBL and Bobo’s Oat Bars, among others.

“In our experience, the number one differentiator between companies that succeed and those that fail is people,” he said. “The right team of people can take an ordinary business and make it exceptional. Sometimes founders can bear most of this burden, but that is the exception. More often, the most successful founders are those that have surrounded themselves with terrific talent.”

Grain-free trend gains steam

Much like gluten-free was the hot food trend a decade ago, grain-free is now trending, Primozich said. “We think you are going to see grain-free options emerge in virtually every grain-full category in the store,” he said. “I'd point to the Siete brand and the success the Garza family has created as a perfect example of what is possible in grain-free.”

On the beverage side, Primozich believes that real, whole-food ingredients and plant-based nutrition will be on-trend. “We like products without ingredients like gums, stabilizers and natural flavors and those that make use of trending ingredients like adaptogenic herbs,” he said.

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