Tasty investments

Shenzhen-listed MYS Group was formerly a packaging company. But since its announcement that it was venturing into hemp-based artificial meat production last month, its shares surged to a four-month high in a matter of days. This enthusiasm mirrored the earlier strong rally in the stock price of its better-known American counterpart Beyond Meat.

China’s ongoing swine flu crisis has raised local awareness about the issue of food sustainability. The performance of MYS Group’s share price also reflects how the investment community is turning its gaze to companies with technology that might offer solutions. Among the country’s earliest venture capitalists to target the booming sector was Shanghai-based Bits x Bites, which since 2016 has backed 14 start-ups from around the world. Below, its managing partner Joseph Zhou discusses the opportunities and challenges arising from China’s pursuit of a more innovative food economy.

What prompted you to start Bits x Bites and focus on food-tech start-ups?

Bits x Bites was created to fill an investment gap that’s vital to China’s future food supply chain.

From food security, food safety, to nutrition and food packaging waste, many countries are confronting similar food system challenges. Around the world, the food- tech space has attracted many biochemists, data scientists and robotic engineers who are now adapting technology from more mature industries such as biopharma and technology, media and telecommunications to address the opportunities in food and agriculture. And this has aided the explosion of agrifood-tech in the last few years. The food-tech movement saw its first milestone with the Climate Corp acquisition by Monsanto in 2013, and most recently the Beyond Meat IPO is responsible for drawing many newcomers.

Since China is the largest producer and consumer in a variety of food categories, the food system challenges are magnified here, from soil pollution on the farm to food safety concerns to exploding foodborne diseases like diabetes. Yet, food-tech in China is only in its infancy, and there has not been an ecosystem to invest in agrifood-tech entrepreneurs and help them scale up.

This is where Bits x Bites comes in as China’s first food-tech VC.

How do you define “food technology”?

Our technology interests spread across the food supply chain, and there are many interesting applications of technology ranging from biosciences, data sciences, IoT (internet of things), patented food processing to patented consumer packaged goods.

Starting with upstream: on the farm, how might precision agriculture reduce excessive agricultural chemicals to alleviate harmful run-offs? How might robotics and AI address labour shortages and improve farming efficiency? How might gene editing help create high-performing crops that are resilient to diseases and rain variations due to climate change?

In midstream: how might ingredient extraction and processing create tastier, healthier new protein sources to reduce reliance on animals? How might the IoT and data analytics update cold chain logistics to improve food safety?

Downstream: how might nutritional data and analytics improve diet habits for consumers of all ages?

Which area or segments under the umbrella of food-tech is most relevant to China?

There are so many opportunities across the whole supply chain. That said, protein is one of the most important issues in our investment thesis.

On the supply side, with China’s growing demand for protein coupled with the recent African swine flu and trade war with the US, there is an increasing urgency to enable a more sustainable and safe protein supply that will help China become more self-sufficient.

On the demand side, the growing middle class in China is leading to a growing protein intake. Meat consumption soared 300% between 1990 and 2013.

Technologies that can add value to the protein supply chain can be categorised into four main groups.

‘Breeding technology’ companies are advancing genomics for production efficiency, using genes and markers to identify animals with the best breeding values such as growth and disease resistance.

Feed start-ups are developing novel methods of producing essential nutrients for farmed animals with the aim to reduce reliance on animal-based sources. One example is Californian company Calysta, which is fermenting natural gas and bacteria to produce alternative feed ingredients.

Animal farming optimisation solution companies are applying automation, data sciences and artificial intelligence to improve farm management. They also help address the shrinking of a labour force worsened by aging and urbanisation.

Novel protein ingredient and production companies (whether plant-based, cell-based or insect-based) are completely changing how animal protein is produced. We’re seeing promising technology from the US and Europe.

We have already made four investments in this space including Israeli InnovoPro, which produces chickpea protein concentrate to meet growing plant-based demand; US-based Wild Earth, which produces clean protein pet food; and Chinese silkworm snack brand Chanbala. And when we backed the Israeli company Future Meat Technologies, we became China’s first venture capital fund to invest in cellular agriculture, the technology that enables meat production from cells rather than from entire animals. We remain active in seeking new investment opportunities.

What is the size of China’s food-tech market? What is driving its development?

According to UBS, the food innovation opportunity in 2018 was $135 billion. And according to the 2018 AgFunder Report, China contributed roughly 20% of total agrifood start-up investing.

There are both top-down and bottom-up drivers.

From the top down, the Chinese government is acutely aware of the need to improve food security and this includes self-sufficiency, resilience and affordability. The recent trade war and epidemics have only made these priorities more urgent.

From the bottom up, growing consumption power in the expanding middle-class is demanding food options that fit their needs for taste, convenience, nutrition and value.

In parallel, on the talent side, we see more scientists from biotech, pharmaceuticals, data science and other areas bringing their expertise to pursue overlooked opportunities in food and agri-tech.

On the funding side, the recent Beyond Meat IPO has drawn the attention of new investors. Bits x Bites has seen more inbound inquiries as well, including many family offices looking to expand beyond health tech and fintech investments. This is a healthy development for the ecosystem.

How would you describe the competition in China’s food-tech market?

The food-tech ecosystem in China is still in its early stages. Compared to other food tech markets, home-grown start-ups and investors are much more active in downstream innovations. With China’s growing middle class pursuing improved quality and convenience, start-ups and investors have rushed to meet their new food preferences. In the 2018 China Agrifood Investing Report we co-authored with AgFunder, we reported that more than 80% of the investments were in downstream areas, such as food deliveries and in-store retail tech. Midstream and upstream only represented a small fraction but it is growing, in fact by more than eight times between 2017 and 2018.

We have no doubt upstream activities and competition will grow in coming years. The rapid boom of China’s eGrocery and food delivery services have put a spotlight on the urgent need for improving supply chain performance and giving farmers access to markets not previously available.

Bits x Bites invests in companies from around the world. Does it take much to localise foreign technology for the China market?

We invest in disruptive technologies with collaborative business models. Technology is just the enabler, and can be adopted by both foreign and Chinese companies. In fact, we find Chinese food companies are open-minded about working with external partners who can provide technologies or solutions that suit their needs.

For example, our portfolio company Analytical Flavor Systems, which is an AI platform that helps food and beverage brands predict consumer preferences, is already working with Chinese food brands on projects. That’s why we’re comfortable about finding the most qualified food-tech companies in a given specialised sector, and we then engage our network resources to accelerate their China market entry.

How involved are the BAT (Baidu, Alibaba, and Tencent) in China’s food-tech start-up scene? What is driving their engagement?

Indeed, BAT were all active players in 2017. In 2018, Alibaba and Tencent were the more dominant forces. With their growing footprint in the food supply chain, they were able to add to their traffic, data and logistics capabilities.

Alibaba and Tencent investments are a positive driver for the ecosystem. They have not only provided exits for fast-growing downstream companies such as Ele.me in a $9.5 billion acquisition, but as they are increasingly investing in midstream and upstream companies like Cainiao in logistics, they provide valuable strategic and financial resources for companies that are improving the supply chain, particularly those in the later stages.

Do you see much support from the Chinese government for the food tech industry? Can you give us more colour on your collaboration with COFCO?

Yes. The central government’s Five-Year Plan has outlined goals to modernise the agriculture sector, and address sustainable agriculture developments.

Through the COFCO partnership, Bits x Bites portfolio companies will have access to 50,000 square meters of COFCO NHRI lab space and scientific equipment across 12 R&D centres in China. They can also earn potential pilot opportunities across COFCO’s extensive supply chain covering 140 countries.

In any ecosystem, you need start-ups, corporates and investors working together. Where corporates are stronger in streamlining operations through standardisation and scale, start-ups are excellent at innovation through rapid learning and adaptation. As China’s first food-tech VC, we have taken on ecosystem-building so as to bridge these key partners and work together to accelerate the food-tech ecosystem. The collaboration with COFCO is an important step in that same direction.

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