Taking the long view on alternative protein financing

The state of alternative protein funding

In some ways, it feels like yesterday that capital was pouring into the alternative protein sector. Deal flow was robust, valuations were sky-high, and funding challenges were not the first thing on founders’ minds.

Today, however, the fundraising landscape has changed dramatically. It can be tempting to overstate the implications of a down market, just as it was tempting to overstate the significance of a strong market. The real story lies somewhere between exuberance and fear. For context, let’s take a look at what’s really happening in the alternative protein industry.

Seeing the forest for the trees

As a think tank constantly parsing the most up-to-date alternative protein industry data, GFI prioritizes having a realistic and accurate view of the current market environment. Assessing the long-term opportunity, however, is also critical to developing a comprehensive understanding of the sector.

While alternative proteins, like most sectors, have experienced a recent decline in funding, we can bring it into perspective by acknowledging that variation in funding is normal. In fact, it is to be expected in a nascent industry like alternative proteins, particularly in a period of global economic contraction.

Funding declines will lead to natural and healthy industry consolidation. Some of the talent displaced by liquidity events or layoffs will move to more stable startups, which may also acquire tech from less-resourced ventures. Some companies will shutter, but others with a stronger foundation will continue to build toward a world in which alternative proteins are no longer alternative. 

There are, however, challenges the industry will face that are specific to alternative proteins. Alternative proteins are both a CapEx-intensive industry and, like CPG food and beverage more broadly, a relatively low-margin industry. As such, financing scale-up and commercialization can be complex.

As the alternative protein sector has evolved, funding pathways have shifted. In its infancy, much of the sector focused on plant-based CPG products, many of which could be sufficiently funded with venture capital. Timelines to bring those products to market were a reasonably good fit with VC expectations. The risk was often moderate, early consumer adoption was promising, and there was demonstrated interest from retail and foodservice. Early precision fermentation and cultivated meat startups secured investment, especially from VCs, based on technological breakthroughs and proof of concept.

Jumping to this year

The initial funding exuberance around plant-based foods has shifted to a more measured approach. VCs who once flooded the sector are more closely assessing the strength of founding teams, product-market fit, unit economics, and consumer appeal (taste and price). Valuations have decreased, as has investors’ fear of missing out. Much of the same is happening in precision fermentation and cultivated meat, categories in which funders require rigorous de-risking of investment. Startups may need to conduct techno-economic analyses (TEAs) and/or life cycle assessments (LCAs) to prove the potential for profitability and/or impact.

Additionally, as alternative protein food and ingredient startups mature, it is now clear that traditional pools of capital will become insufficient for timely commercialization. VC timelines and expectations are often not well-aligned with those of advanced precision fermentation and cultivated meat companies, as those startups can take longer to deliver returns than less technologically complex ventures (i.e., plant-based CPG startups). Private equity favors established companies with track records of steady cash flows. And commercial banks are typically too risk-averse to provide loans for cutting-edge alternative protein innovation.

The sector needs forward-thinking investors and strategic partners focused on the immense long-term opportunity. While equity still has an important place in alternative protein financing, alternate funding vehicles must now enter the arena.

The need for diversified funding

Recognizing the emerging criticality of funding diversification for alternative protein advancement, we are conducting deep-dive research on non-traditional funding for the sector. That research will be available this year as an open-access guide to non-dilutive funding in the U.S. It’s already clear that there is no low-hanging fruit. It is key that the alternative protein industry collaborates to identify sources of capital and take advantage of creative financing structures.

Very early non-dilutive funding may take the form of research grants (like the ones offered through GFI). Emerging startups can often leverage this kind of funding to get off the ground. Applying for grants is typically an arduous process, so founding teams should be prepared to dedicate considerable time to completing the application. Once an alternative protein company leaves the bench, research grant funding is inadequate to fuel continued growth.

A report by the Rockefeller Foundation and Boston Consulting Group (BCG) estimates that alternative proteins have an annual unmet global funding need of $40 billion. That kind of investment will require significant government funding for both R&D and commercialization. 

Other industries have taken advantage of government investment to commercialize and boost profitability. Using the electric vehicle sector as an example, government funding can benefit a specific company or an industry as a whole – and benefiting one company can often have ripple effects across the whole sector.

Governments should prioritize alternative proteins for the same reasons they prioritized electric vehicles in the U.S. and elsewhere—their broad social and environmental benefits. A global shift toward alternative proteins offers significant mitigation and sequestration opportunities. Just as essential as changing how energy is produced is the need to transform how meat is made. Plant-based meat causes up to 98 percent less emissions than conventional meat. Cultivated meat could cut the climate impact of meat by up to 92 percent. These industries offer additional environmental benefits by conserving land and water and minimizing pollution, compared to conventional production methods.

A shifting landscape

Despite the urgent need for alternative proteins, the sector has historically not captured meaningful attention from the U.S. government. That, however, seems to be shifting.

• The Department of Energy (DOE) Loan Program Office is open to supporting alternative protein companies that can demonstrate a reduction of GHGs in their manufacturing processes. (Notably, the language in the application is tailored to different industries and can be difficult for alternative protein companies to navigate.  Additionally, the application cost can be prohibitive, coming in at millions of dollars.)
• In January, the DOE Industrial Efficiency & Decarbonization Office (IEDO) issued an official Funding Opportunity Announcement (FOA)  relevant to alternative protein companies. IEDO recently released the official FOA, which can be found here.
• A week later, the Department of Defense announced a new funding opportunity for food tech companies, including alternative protein companies, to apply for biomanufacturing grants. The new Distributed Bioindustrial Manufacturing Investment Program (DBMIP) will provide  Defense Production Act funding to strengthen domestic supply chains
• Outside of the U.S., there have been promising public investments in alt proteins, including in Denmark, Canada, U.K., and Germany. 

By no means is government funding the only avenue for raising non-dilutive funding. Our upcoming non-dilutive funding guide will expound on this topic. Yet access to this kind of capital, regardless of what form it takes, often requires offtake agreements. This is a particularly nuanced challenge for many alternative protein companies. Guaranteed offtake agreements, where buyers commit to purchase a certain volume of product, are often necessary to obtain loans for infrastructure projects.

Similar mechanisms like advanced market commitments have been used in the pharma sector to support the development of socially beneficial products with high upfront development costs, such as vaccines for developing countries. Unlocking the most efficient pathways for securing offtake agreements is a primary focus for the alt protein industry as it evolves. In positive news for the alternative protein industry, Cargill recently invested in Enough and signed offtake agreements related to ENOUGH’s mycoprotein, ABUNDA.

Unlike the pharma sector, the food and beverage industry has notoriously thin margins and depends largely on volume to be profitable. And, ultimately, the major goal of an alternative protein company is to bring food, ingredients, or food-related solutions to market.

Perhaps one of the lessons learned as the alternative protein sector advances is that while the scientific and technical progress has been staggering, founders must consistently and realistically assess the long-term business case of their ventures while still in the lab. R&D efforts should focus on products that can scale, have a validated market, appeal to consumers or manufacturers, and be profitable. Likewise, founding teams should feature significant business expertise along with technical expertise – bonus points for including traditional food and beverage experience, which can help to de-risk investment.

Remaining rationally optimistic

The current dearth of funding has likely changed the alt protein sector for the better. In the wake of turbulence, the most promising startups will be better prepared to raise and enter the market. They will rigorously assess assumptions, products, and talent. They will work tirelessly to de-risk investment. And they will right-size valuations.

Meanwhile, investors will be drawn back to the space by the potential to add exciting companies to their portfolios at more palatable prices. The industry will have a better understanding of non-dilutive funding vehicles, the value of strategic partnerships, and the criticality of long-term planning.

Like many industries that came before it, we know funding volatility is positioning alternative proteins to go the distance. Those of us confidently building a world where alternative proteins are no longer alternative continue to be inspired by the innovations at our doorstep and those yet to come.