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How startups can bypass the ‘capex Catch 22’ of scaling up

Article-How startups can bypass the ‘capex Catch 22’ of scaling up

It is easy for food-tech startups to fall foul of the paradox of scaling up, whereby the founders need investment to generate volume and sales – but potential investors require evidence of demand before they will commit finance. Experts at Fi Europe explored this ‘Catch 22’ situation.

At the Fi Europe Innovation Hub, expert speakers on both the entrepreneurial and investment sides of the fence discussed this dilemma in a panel discussion, Scaling food-tech: Engaging key players to realise its full potential. Moderator Thomas van den Boezem, a principal at food-tech venture capital (VC) firm Peakbridge, first touched on the “elephant in the room” of capital expenditure (capex) and what he termed the “Catch 22” of balancing capacity with demand.

Marie Asano, a partner at fellow VC provider the European Circular Bioeconomy Fund (ECBF), picked up on the theme. “Say a company wants to raise money for capex, and they’re saying their product is unique, disruptive, so it’s difficult to work with contract manufacturers, because you’d have to retrofit the technology,” she said. “They’re trying to raise €10 million or €15M, and that’s a lot of money. You look at the traction and ask, ‘Is there a product-market fit?’” Without demonstrating such a fit, the proposition can be too risky for investors, she added.

Our standard phrase is, ‘Come back when you have more traction.’ But the companies reply, ‘How can I have traction if I don’t have money to build my facility, so I can make my product and actually sell it in a quantity that makes sense?’

Representing the startups was Corjan van den Berg, cofounder of Revyve, which makes functional ingredients from microbial biomass. He highlighted a different side to the challenges facing any new food-tech business. “You see that a lot of end users won’t even consider working with you as a small start-up that might go belly-up in half a year,” he said. “They say,Why would I waste so much of my applications team’s time to work with this new ingredient? Come back when you have a factory.’”

Is scale-up possible without capex commitments?

Van den Boezem asked whether the panel thought there were ways of scaling without any need for capex commitments.

Asano believed this might be the case with certain classes of product. “If your innovation is a clever formulation or mixture, maybe you can outsource it with contract manufacturers. It may cost a lot, but you can get the product-market fit without the capex problem. This is especially true if you have a high-value ingredient which you can sell for a high margin.”

Van den Boezem asked what potential investors from among the larger ingredient and food-and-beverage groups could do to be more proactive.

The ECBF’s Asano returned to the idea of ‘traction’. “For a strategic investor to invest, they want to see a certain level of traction,” she said. “But a little more risk-taking on their part would be nice, because they’re not so dependent on financial returns.”

On the other hand, investors such as VC groups, she argued, “bluntly put” need to “make money”.

VCs look for de-risked startups

Until a startup has been de-risked, said Asano, it may not be “return-savvy” for a VC-type fund to invest. But looking around the audience, she added: “For strategic investors, what about investing if there’s a good strategic fit and going in extremely high-risk, especially for that capex part of the equation?”

In fact, van den Berg’s startup Revyve found common ground with a major industry investor early on. The company, which was founded in 2019, can use biomass which would otherwise be a waste product to create – for example – egg-white replacers. “We worked with one of the world’s biggest brewers AB InBev, and they supported us in our initial scale-up,” he said. Later, Revyve received further support from another food company, as well as from a regional development fund.

The fourth company represented on the panel, Vanilla Vida, is vertically integrated. It saw funding from at least five strategic investors at different stages in its process, explained vice president of business development and marketing Gali Fried.