Venture capital's taste for investment in alternative proteins

The venture capital (VC) community is showing an increasingly strong appetite for investment into the alternative proteins sector. The Good Food Institute (GFI), a non-profit think tank and international network of organisations working to accelerate alternative protein innovation, estimated that more than $14.6bn has been invested into the sector over the past decade. What are the "need to knows" of venture capital and how could it benefit future foods businesses?

What is venture capital?

Venture capital is financing provided by third party investors to innovative and/or disruptive businesses, in high-growth sectors, in early stages of development or those seeking to expand, in return for the right to be issued equity (shares) in the company.

The menu of VC investors is long, both domestic and internationally. The most common are business angels (individuals), corporate venturing (established companies from similar or overlapping sectors) and venture capital funds. In the case of future foods businesses, in particular, given their novel genesis – being a hybrid of the technology, consumer, food and life sciences sectors – investors across this uniquely broad range of sectors are actively seeking their next investment opportunity.

What are the benefits of venture capital?

For the company, venture capital provides more than just financing. The right investor(s) can offer founders invaluable sector and commercial expertise, together with introductions to their network of experienced and influential contacts.

Nevertheless, business need will change and evolve as the company develops. Founders may find that, as new challenges arise over time, additional funding and knowhow will be required. At this stage, founders (with the consultation of key existing stakeholders) may consider it beneficial to target new strategic partnerships with sector-specialist investors that compliment the existing investment and management team.

For investors, they are primarily looking for a financial return on their investment. This is not usually expected to come from short-term trading profits (to the extent there are any). Rather, venture capital investors favour the long-term growth, expansion and eventual sale (or acquisition) or IPO of the business. However, many investors in this sector are also driven to make positive impacts across the food system through their investments.

Key VC investment documents

The main documentation for a venture capital investment comprises the term sheet, investment agreement and articles of association.

The term sheet outlines the fundamental terms of the investment, on a legally non-binding basis, paving the way for the long form, definitive investment documents. See our Insight for more detail on term sheets and why they are important.

The investment agreement forms the principal, legally binding, agreement governing what the investor(s) will receive for their investment (that is, shares), as well as the ongoing relationship between the shareholders and founders. Terms will include contractual warranties about the business (especially intellectual property), founder restrictive covenants (non-solicitation and non-competes), board appointments and/or observer rights, positive undertakings and the provision of information (financial statements, business plan).

The articles of association form the constitution of the company. They detail the preferential share rights required by the investor(s), including provisions relating to dividends and return of capital (the "waterfall"), voting, founder leaver provisions, anti-dilution protections, share transfers and "drag" and "tag" along rights.

Top tips for preparing for a VC fundraising process

1. Due diligence – Collate and organise the business's key documents that demonstrate ownership of the shares and assets. For the future foods sector, investors will be keen to review the company's IP and IT processes, commercial contracts, technical expertise and business plan. More generally, investors will expect to review the constitutional documents (including statutory registers), accounts and cash flow forecasts.
2. Key assets – The intrinsic value of a future foods business is attributable to its intellectual property and people. Failure to protect either of these assets properly may delay, and can even reduce or prevent, investment. In addition, certain investors in the future foods market are showing a strong preference towards the company demonstrating an active commitment to positive social and environmental impact, transparency, and accountability (for example, becoming a Certified B Corporation).
3. Term sheets – Before signing the term sheet, businesses should make sure they understand (and seek advice on) the terms. Even though term sheets are not usually binding (save for confidentiality and exclusivity provisions), once something has been agreed in a term sheet, it can be difficult to renegotiate.
4. Managing existing stakeholders – Businesses should confirm in advance which consents (if any) are required to approve and implement the investment, and how this will be delivered. For instance, the company may need to obtain the prior approval of its existing shareholders (and/or specific investors).
5. Advisors – Businesses should start talking to advisors – in particular, accountants and lawyers – as soon as possible. They will help navigate the investment process.

See our Insight for our top 10 tips for companies on how best to prepare for VC investment.

Osborne Clarke comment

Recent industry reports from institutions such as the GFI, Social Market Foundation (SMF) and UK Research and Innovation (UKRI) share the general consensus that, while the public's appetite for alternative proteins grows, the success of the future foods industry hinges heavily on supply-side scalability – making products cheaper and tastier.

With predictions that the plant-based-alternatives sector alone could reach £6.8 billion in the EU and UK by 2025, and that cultivated meat could add a further £2.1 billion to the UK economy by 2030, strategic venture capital partnership(s) could help future foods businesses meet the challenges and opportunities that await. However, partnering with, and being prepared for, the right investment for the business is crucial to securing sustainable growth.

Please reach out to our team to find out how we can help you navigate the investment landscape.