The Business of Food Incubators

In simpler times, it wasn’t uncommon for start-up food companies to launch from a restaurant kitchen or even a garage — literally — with distribution from a borrowed truck or a van.

Today’s business environment is more complex and the barriers to entry are higher. There’s no lack of entrepreneurial spirit — new entrants to the marketplace have reached unprecedented levels in recent years—but the odds of success may be getting longer.

Fortunately, an ecosystem of new and repurposed food incubators can nurse early-stage enterprises through initial growth pains and position them to thrive – or at least compete – in the market. At the same time, financiers are ponying up the lifeblood of any organization. While the rush of venture capital that occurred in 2015 has slackened, there’s no shortage of alternative financing, from private equity to quasi-governmental funds.

When Campbell Soup Co. announced its venture capital fund last year, CEO Denise Morrison said 400 food start-ups received more than $6 billion in the prior five years. That doesn’t include more recent seed sources like the $30 million Michigan Good Food Fund, backed by Michigan State University, W.K. Kellogg Foundation and others, or the Purdue Ag-Celerator Fund, which shepherds university intellectual property to commercialization.

Another example of the expanding support infrastructure is the Chobani Food Incubator. More than 400 start-ups vied for the half-dozen seats in Chobani’s first class of entrepreneurs, who benefited from four weeks of intense tutorials from corporate mentors representing a wide spectrum of disciplines essential for operating a successful food enterprise. Incubator director Jackie Miller is in the midst of an outreach effort to recruit candidates for the next class, partnering with groups in New York, San Francisco and Boulder, Colo., that advocate healthier eating.

Spurred by evolving eating habits and criticism of industrial-scale food production, entrepreneurs are launching a wave of new firms with a better-for-you message. Many of these are headed by people with no prior food experience or understanding of the challenges in delivering affordable food to hundreds of millions of geographically dispersed urbanites. Rather than compromise on the ideal of minimally processed food, some of their offerings come at, to be blunt, elite price points.

Case in point: Zupa Noma is one-upping cold-pressed juices with HPP-processed soups made from so-called superfoods. Costing as much as $7 for a 12 oz. bottle, it’s enough to make a middle-income American blanche. On the other hand, it’s backed by Sonoma Brands, an equity-plus-management-expertise incubator created last year by Jon Sebastiani, who hit a home run with upscale beef jerky (Krave Pure Foods, sold to Hershey).

Can Americans have affordably priced processed foods that deliver uncompromised quality? Can the organizations that make that promise move into the mainstream?

We’re about to find out.

Affordable indulgence

At the tender age of 21, Luke Sellers has received the kind of assistance food entrepreneurs of the past could only dream of. He attended the Yale Entrepreneurial Institute’s summer 2016 bootcamp, a 10-week program that gives budding entrepreneurs start-up education, pitching experience and $15,000 in seed money to give them a leg up on creating a scalable business venture. Soon after, Sellers’ Chops Snacks venture was plucked from more than 400 applicants to join Chobani’s first food incubators class.

The Chobani program comes with a $25,000 no-strings grant, a welcome gift for any start-up but not the biggest benefit, according to Sellers, who graduated in May with a degree in medieval European history (his partner, Aaron Jones, majored in neuroscience). Corporate specialists in marketing, manufacturing, supply chain management, product development and other disciplines essential for long-term success taught and mentored the class. Sellers key takeaway from participating in food incubators like the Chobani program, “was learning how to manage the team and the corporate culture.”

“We’ve applied everything,” adds Sellers. “Our growth and transformation since the April 2016 soft launch on the web has been radical. A lot of it is due to the Chobani program.”

Copackers produce the premium beef jerky sold under the Chops Snacks brand, starting with beef brisket and natural spices and a promise of no MSG, nitrites or gluten. The formulation was created by Dusty Jaquins, Sellers’ father-in-law and Chops’ third principal. Jaquins is an alumnus of Coca-Cola; Sellers’ grandfather was an engineer with Kraft in Atlanta. “They’re Big Food, and we’re not,” Sellers pointedly notes.

Premium ingredients and manufacturing costs aren’t reflected in price points, which he describes as competitive with “quality jerkies.” A retail price that put the product in the luxury category would have precluded Chops’ acceptance into the Chobani incubator.

“Great food shouldn’t be for just the elite few,” Chobani’s Miller insists. “We’re looking for companies that share Chobani’s DNNA—delicious, nutritious, natural and accessible food—and can help us accomplish our mission of better food for more people.”

Small-scale ambitions

Chops may be the next Epic Provisions, a maker of meat-based snacks that grew to $20 million sales in less than 24 months before being acquired by General Mills last year. Other start-ups have more modest aspirations, but a support ecosystem is accommodating them, too.

“Locally sourced” has cachet in today’s market, both with retailers who devote shelf space to those products and consumers who associate the term with fresh and natural foods.

“With people asking, ‘where is it coming from’ and ‘who made this,’ there has been a tremendous beneficial impact on start-ups,” notes Rebecca Singer, president and CEO of the Center for Innovative Food Technology in Toledo, Ohio. Not all of them want to change America’s eating habits. Many are content to remain Little Food and simply make a living, but they still need assistance.

CIFT is part of Ohio’s Manufacturing Extension Partnership, a network that supports small businesses and manufacturers, including an estimated 1,100 food companies in the state. Big Food is well represented — Campbell Soup’s Napoleon, Ohio, plant is its biggest — and CIFT’s mission includes helping those organizations, too.

But start-ups and early-stage companies need broader support, particularly business assistance. Brand positioning, how to work with brokers and retailers and focus group feedback on packaging, labeling, pricing and the product itself are becoming a bigger part of CIFT’s services, complementing longstanding support in the form of test kitchens and pilot plants.

That breadth of assistance is in overdrive at the Food Business Incubation Network (FoodBIN for short), the brainchild of Lou Cooperhouse, who also serves as director of Rutgers University’s Food Innovation Center. He is stitching together an international network of food incubators that can groom entrepreneurs to deal with both the business and the manufacturing sides of food. InBIA, a conference designed to bolster food incubators and their programs globally, is set for Sept. 12-14 in New Brunswick, N.J., with support from USDA’s Rural Development agency.

Taking on outside help often comes with a price. A case in point is Skeeter Snacks LLC. Two investors whose families include children with nut allergies launched the nut-free snack firm in 2013. A vendor relationship with Revolution Foods, a school lunch commissary operator focused on healthy pre-made meals, kick-started growth the following year. Pitches to venture capital groups paid off recently with $10 million in funding from a group headed by Acre Venture Partners, Campbell’s venture capital group.

It wasn’t the firm’s first infusion of outside capital. Skeeter Snacks was barely a year old when $4 million in added equity arrived at the same time as a new management team composed of senior executives from Winn-Dixie, M&M/Mars and Safeway. Those executives were replaced before the latest funding round by a team headed by Will Holsworth, a Gatorade veteran who guided Cytosport Holdings, maker of Muscle Milk, until its 2014 acquisition by Hormel for $450 million.

Holsworth will continue the organization’s focus on school lunch programs and other direct sales to reach people with food allergies, a population he pegs at 17 million and is projected to double in 10 years. Almost everything else is changing, though: The Skeeter name is being dropped, replaced with Abby’s Cookies and Remy’s Grahams; retail sales no longer will be pursued; and the company is being rechristened the Safe+Fair Food Co., now headquartered in Chicago.

“Single-product companies are very binary,” CEO Holsworth observes. “Thousands of them fail.” Backed by a $100 million war chest, he aims to change the former Skeeter’s fortunes by acquiring slow-growth companies that own brands with upside potential. The first was Mama Jess Organics, a sauce maker founded by a dietitian five years ago.

“I’m seeking synergistic acquisitions, companies with $3-50 million revenue and 3-5 percent growth,” says Holsworth. New products and a broad portfolio are critical in moving early-stage firms to the next level, but many food start-ups don’t understand that. “People think they have the magic widget and everybody will recognize that,” he reflects. “They get starry eyed, thinking they’ll cash in big. That’s a singular bet, and it doesn’t happen often.”

Allergen-free, on the other hand, covers everything in the cupboard. It’s an underserved segment, Holsworth maintains, and it extends to everyone in the allergic person’s family. Product choice and social marketing is Safe+Fair’s organizing principle: The company is designating the Sean N. Parker Center for Allergy and Asthma Research at Stanford University as its primary charity, with 3 percent of proceeds supporting the center’s work.

“We’re going to do our part,” he says. “Corporations have to say they support a cause. This is what we are.”

How one chef earned some green

Founder and CEO Michael Joseph already had two direct-delivery meal enterprises under his belt when he launched Green Chef, the first meal-kit company to be certified under the USDA organic program. “We still make chicken salad,” he laughs, but there’s little other resemblance in terms of scope and scale between Joseph’s 2004 venture and today’s Green Chef.

From a standing start in October 2014, Green Chef generated sales of more than $100 million in 2016. Full-time employees are approaching 1,000. “It would have been impossible to grow so quickly by this point without equity financing,” he says. Venture capital funds have helped the firm raise $67 million, allowing Green Chef to mine new customers.

“It’s been an incredibly fast journey,” Joseph understates, fueled by capital access. The downside is “a constant focus on profitability,” an operating pressure Safe+Fair’s Holsworth appreciates. Investors expect a healthy return, and if it doesn’t arrive on schedule, another C-suite change is certain.

Veterans from foodservice and food manufacturing are helping Green Chef manage growth. The majority of the internet marketing team is applying skills they learned selling video games online. For the most part, though, trial and error and in-house development have guided growth. “We purchased some software, but we built most of it,” he says.

Organic Valley, the La Farge, Wis.-based cooperative, is among Green Chef’s suppliers, though most suppliers are invisible to customers. Chefs create the sauces in meal kits assembled from commissaries in Aurora, Colo., and Swedesboro, N.J., and suppliers’ original packaging is stripped away before shipping.

Maintaining refrigerated temperatures in transit is a challenge. “How to pack is a moving target,” allows Joseph, and he frets the trust-building work of Green Chef might be undermined by other companies. In a recent Rutgers-Tennessee State University study, 47 percent of 684 home-delivered meals arrived with surface temperatures above 40° F.

Better product handling by companies in the category is a pressing need. “Be careful what you wish for,” he prefaces, “but in terms of the safety of our community, unified federal laws for direct delivery would be helpful.”

Babies and bath water

Chobani’s no-strings approach is the outlier to the typical scenario. Usually, a fast-growth start-up grows to a certain point, then is acquired by a major food company (think Annie’s and General Mills). Venture funds created recently by Kellogg, Tyson, General Mills and Campbell are attempts by Big Food to get an earlier toehold with emerging companies before their buyout prices spike. The venture capital component is new, but the strategy isn’t.

Back to Nature Foods exemplifies early-stage involvement. Sales were less than $10 million when Kraft acquired Back to Nature in 2004. Within six months, the five cookie, cracker and mac ’n cheese products in Back to Nature’s portfolio had grown to $38 million and Kraft had a toehold in the fast-growing natural and organic segment. When it sold Back to Nature to a private equity firm specializing in overlooked corporate brands eight years later, sales were under $75 million, insufficient to justify enough resources to continue to grow.

The Back to Nature relationship had all the ingredients for success. Scaling up successful new products is a struggle for early-stage companies and also what major companies do best. Patience is needed, though, and that often is in short supply.

“Most leadership people get to where they are because they have opinions and provide direction,” points out David Behringer, the CEO of Pilot Lite Ventures USA, who was directly involved in the Back to Nature project during his two decades at Kraft (his last post was Kraft Fellow for discovery, incubation and adoption of enterprise-side disruptive innovation). Package changes were the first marching orders, but the original design was tied to the brand promise. When the new look was presented to focus groups, “people hated it,” Behringer recalls.

The story needn’t have turned out that way. He cites White Wave and Cascadian Farms as upstart brands that transitioned to blockbusters under Big Food’s auspices. Large organizations can source ingredients at a cost that turns a hot new entrant’s price point from elite to popular. An order from a national retailer might sink an entrepreneur who has to scramble to service that customer and meet supply chain, customer service and product quality challenges, whereas a big company can take those issues in stride.

“It takes a few years, but you have to let that new brand grow in this new ecosystem,” he says.

In his new position, Behringer will be working with Big Food to help companies identify orphaned new ventures and intellectual property and guide some to success and cast off others. Pilot Lite claims a 50 percent success record on greenlighted projects, compared to a 15 percent success rate for venture capitalists’ projects and 5 percent for corporate ventures.

A “historical shift” in corporate R&D is under way, with food companies focusing on operational efficiency and abandoning innovation and the personnel that drive it. Many of those product development experts are involved in the right-for-the-times foods from start-ups and early-stage companies. But the next disruptive change in the supply chain is always just around the corner, and Behringer believes only large corporations have the wherewithal to weather it.

Anomalies like Chobani will always happen, and the seismic shifts that some industry leaders have noted might mean they’ll occur with greater frequency. But the food industry is complex and challenging, and major corporations don’t get to where they are without highly skilled professionals with a breadth of expertise. The issue going forward is nurturing fledgling organizations until they take flight, either alone or as part of the flock.

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More About FoodBIN

FoodBIN is a global network of food incubators, accelerators and shared-use kitchens with the mission to serve as the world’s leading voice for advancing best practices in food business innovation and incubation; and identifying programs, services, funding sources and partnerships that can maximize impacts to food and agribusinesses within regional economies worldwide.

The FoodBIN Conference will be a highly-engaging platform focused on building thriving food entrepreneurial ecosystems in your community. The unique programming will celebrate the tremendous diversity that exists within the food incubation programs around the world, and we hope you will participate in the dialogue! All FoodBIN attendees will also receive a complimentary 12-month membership to the FoodBIN Network, a global network of food incubators, accelerators and other food entrepreneurial support organizations, which will officially launch and be announced at the conference.