Does corporate venture capital bring credibility and customers or conflicts and constraints? And what role does it play in an investment landscape that looks markedly different than it did a few years ago, when every leading food company was jumping into the venturing game in fear of missing out on the next big thing?
Every corporate venture fund is different, notes Rich Products Ventures managing director Dinsh Guzdar. But there are certain advantages to working with a fund attached to a family-owned bakery and frozen food giant with annual revenues of $6 billion that’s been around for 80 years.
Launched in 2017, when every other person walking through the halls of a food trade show was an investor, Rich Products Ventures was designed less as a pipeline to acquisition than a way to stay connected to fast-moving trends shaping the industry, says Guzdar. But the team—which looks at around 35 deals a month and will invest in four to six a year—has a disciplined eye on returns.
“We absolutely have to get results,” says Guzdar, who has over 30 years of experience in the food industry as both an operator and investor. “But we don’t have to answer to Wall Street, which allows us to take a longer-term look so the business is not shifting priorities, CEOs, or management every six months. We have a patient approach to capital.”
AgFunderNews (AFN) caught up with Guzdar (DG) to discuss how Rich’s structures deals, where he thinks AI can add value, how the investment focus has evolved, and how to create win-win partnerships with portfolio companies.
AFN: Tell us about the genesis of Rich Products Ventures
DG: I actually pitched a venture fund when I first started at Rich’s [in Buffalo] in 2003 and the leadership liked the idea, but it wasn’t the right time. But when I moved back to the Bay area [to run Rich Products subsidiary f’real foods in 2013], they said let’s start thinking about it.
After running f’real for a while I talked to our CEO and our COO and pitched the shareholders to stand up a venture fund, really, from the standpoint that in 2017 there was so much happening in food with innovation, new companies, new business models, that we didn’t want to miss out.
It wasn’t to invest to get a path to acquisition, but more to make sure that we’re building an ecosystem that is connected to what’s happening in the venture world with respect to food. But we absolutely have to get a return on invested capital because it makes us disciplined investors and also good stewards of our shareholders’ capital.
AFN: Aren’t there other ways to stay current through open innovation without venture funds?
DG: We had a group that I started when I was in Buffalo… we changed the name a bunch of times, but let’s call it external innovation, a small group that looks out for partnerships with large and small companies to solve innovation challenges.
Today there’s a close relationship between the two groups. We look at something like 35 deals a month, and we’ll invest in four to six a year. But a lot of those deals where we don’t invest we can pass on to [the] external innovation [team] if we feel there’s a connectivity to Rich’s that makes sense.
Likewise, when we invest in a company, if it has an interesting ingredient or business that is relevant to Rich’s, we will connect them with [the] external [innovation team] as large companies such as Rich’s can be hard to navigate if you’re a startup. We can help figure out the right business unit, the right models, and the right way to connect and drive to a commercial arrangement.
AFN: How do corporate venture capital (CVC) funds fit into the food investment landscape?
DG: They’re both [CVC funds and standalone VC funds] required in this ecosystem to drive innovation, to solve the challenges facing the global food system. For example, we work very closely with S2G Investments, and we’ve co-invested with them on a number of deals. They will write a bigger check than us, but we provide strategic value in addition to investment capital.
Corporate venture funds, if they are run right, can provide strategic value around access to leadership, go to market strategies, or how to manage a new channel. For example, we have a strong presence in foodservice, which can be complicated, so we can help companies navigate that.
We also have access to global markets, so we have a very strong business in China, India, Vietnam, Malaysia, Brazil, Mexico, and can potentially help open up those markets [for portfolio companies]. We also have manufacturing and R&D expertise, so we bring that to bear.
AFN: How do you manage expectations on both sides at the start of deal talks?
DG: When we make an investment, what we like to do with the management team of the company is ask what do they want from us. And we put that into a document to say these are the four or five things that Rich’s can provide. Sometimes we do that in a much more structured way where it’s a commercial partnership and we are doing something that’s so valuable that we’ll earn equity in the form of warrants for that.
Sometimes it’s more informal, and it’ll be here are the things we’re going to do, but we want to document it and make sure that we can do it. For example, if they are looking at buying new equipment, we can help them with what’s the right equipment to buy. What’s the right way to design your plant? You’re looking at entering the foodservice channel. Can we potentially open any doors?
AFN: Should startups think twice before working with CVC funds?
DG: There’s a reputation that corporates move very slowly, that they’re going to want right of first refusal on a type of deal, or there could be signaling effects [if a corporate pulls back support, it may deter other investors, for example].
So all those are real concerns. How we handle that is we have a very small team. Our check size is generally in the $1 million–3 million range. We can go higher if we need to, but within that range, we can move very fast.
We also have a very lean investment committee that includes our CEO. We meet once a month and use outside counsel here in the Bay Area to review the deals.
From an investment perspective, we do not ask for right of first refusal. We wouldn’t want to put that onto a deal if it [reduces] the value of that investment, because our job is to get a return on invested capital.
If we’re really leaning into a deal, we’re going to be providing lots of support and there’s a lot of value creation, then we’ll have a different discussion about structure, but we haven’t done that yet.
We treat ourselves as a venture fund, not as a strategic with the company. We are wholly owned by Rich’s, but we’re a separate entity with separate NDAs. We cannot provide [sensitive information from startups] back to Rich’s. No way.
If we are investing in a deal and Rich’s were interested in acquiring the startup, if I were on the board as an observer, I would step out and remove myself to make sure there’s no conflict.
AFN: Can Rich Products Ventures take a longer-term view than venture funds at public companies?
DG: I don’t want to say one’s better than another as we’re all different, but I would say Rich’s is an 80-year-old family-owned business, our CEO is very active with our CVC, he’s on the investment committee and he’s not going anywhere. That continuity is something that I think [has real value].
We absolutely have to get results and returns, but we don’t have to answer to Wall Street and that allows us to take a longer-term look, so that the business is not shifting priorities, CEOs, or management every six months. Which does happen with other companies. There’s turnover. There’s a poor quarter and things get looked at very differently. We have a patient approach to capital.
We’re also very active with our portfolio companies and we want to make sure that we bring our operating experience to our companies.
AFN: How much money do you have to work with?
DG: We don’t talk about that. We do this off the balance sheet. But we’re active. We’re continuing to do deals.
AFN: How has your investment focus evolved since you started in 2017?
DG: We spent a lot of time in the past around sustainable production, cultivated seafood, cultivated meat, precision fermentation, really looking at the food system and figuring out how we produce ingredients and proteins in a novel way.
Over the last couple of years, we’ve started to lean more into branded consumer packaged goods, so we just made an investment in a [UK-based frozen novelty] company called Doughlicious, which is all about frozen permissible indulgence, an area we already play in, so there are a lot of synergies. We’re looking at fast-growing emerging brands with clean label, better for you ingredients.
We’re also looking at the intersection of food and medicine. And then we’re looking at how GLP-1 drugs impact consumer behavior, so we have invested in brands such as thistle, which makes plant-forward, meals, salads, smoothies, which are doing very well and meet the standards of what somebody on GLP-1 drugs is looking for: high protein, high fiber, nutrient dense foods. It’s similar with [another portfolio co] Tovala, which is a smart oven with prepared meals.
We’ve also looked at molecules that exist in nature [that trigger GLP-1 receptors for example]. We have not made an investment there but we’re going to continue to look at it.
AFN: What’s your investment thesis around AI and food?
DG: We’re trying to figure out that intersection of AI within the food system where we can find real value. As one example, automation is a big area with AI and back of the house for restaurants where they have issues with labor constraints, so we’re leaning into that.
We’re also looking at technologies on the retail side that can help streamline order processing.
On manufacturing, we’re looking at everything from inventory management to predictive maintenance.
In the supply chain there is potential [for AI to help] connect the restaurant or retailer to the distributor to the manufacturer, predict demand better, market better, and manage inventory better.
One of our latest investments, a company called Marqii, works with multi-unit restaurants that want to make sure menus and opening hours are accurate across platforms such as Uber, DoorDash, and Yelp. We’ve all had that experience when you look online and see the restaurant opens at four o’clock, and you go there and it’s closed, or the price on the online menu is not what you’re charged at the restaurant.
These guys [at Marqii] are integrating with systems so that with a push of a button, you can seamlessly update your digital menu, store location, hours, etc across multiple platforms. They can then use AI to automate responses on review platforms and craft the right response quickly. They can also use AI to see what’s happening by location in terms of reviews, and gain insights.
Whether it’s restaurants or retailers, [internal] systems can be very slow and hard to pull data out of. With these AI tools, you can get information faster and make decisions faster.
AFN: You’ve invested in a couple of precision fermentation players… what’s the rationale?
DG: Like every large food company, we’re trying to move away from artificial dyes. What we like about Phytolon [which makes vivid reds and other shades via precision fermentation] is the performance is excellent and once they get [regulatory] approvals, they’ll be able to really move fast, so we are excited to be part of that both as a customer and an investor.
We buy a lot of eggs for our cakes and other bakery products and as The EVERY Co [which makes egg proteins via precision fermentation] gets to scale, we think they can be a model for consistent pricing and quality in the new world where egg prices are so volatile with avian flu. And with the move to cage free, prices are getting even higher.
AFN: What other ingredients are under threat?
DG: Coffee demand is increasing but supply is constrained, and that’s going to drive prices up. Same with cocoa. But there are also going to be other ingredients that come under pressure, which will lead to price increases or price volatility. And so a synthetic biology alternative that meets [industry requirements for] quality and performance but doesn’t depend on growing in a part of the world that may no longer be sustainable makes a lot of sense.
It always comes down to can you get the right cost structure. But what helps some of these startups is that when you see volatility, like we’ve had with eggs, companies are willing to pay a bit of a premium to have some consistency.
Sometimes it’s just about timing. Some of these things are maybe a little early, but then a pandemic or avian flu can accelerate those trends and all of a sudden, the need is right there.
AFN: What about sugar alternatives?
DG: We’ve been looking at that space. We have an investment in MycoTechnology, which is developing new honey truffle sweeteners [and flavor modulators from an ultra sweet protein found in rare honey truffles that MycoTech produces more cost effectively via precision fermentation] we think are really interesting. And we are always looking at other companies in that space.
AFN: How would you characterize the investment climate right now?
DG: Five years ago, we had zero interest rates, money was moving into the market, and valuations were very high, which was probably not healthy, as when a company raises too much money, it can create bad habits. It can lose discipline. And this is food; this is not technology.
So you’ve got to build a real business that’s profitable, which takes time, and raising hundreds of millions of dollars at half a billion or a billion-dollar valuation doesn’t solve that problem. If anything, it maybe makes it harder, because now you’ve got a valuation that you have to earn up to, and you’re not going to accelerate that just because you have that billion-dollar valuation. You’ve got to get the revenue.
So now money is absolutely harder to raise, but that constraint pushes founders to build businesses in a much more disciplined, structured way. I think the companies that are going to come out of this are going to be really strong.