The rise of alternative materials: A summary
- Lowering yields are pushing up prices for raw materials
- Alternative materials are gaining more investor attention
- Investors are asking for stronger commercial fundamentals than they once did
- Stealth inclusion and rebranding are two methods to offset consumer backlash to alternatives
- Sustainability itself, however, is less of a concern than it once was among investors
Gone are the days when raw ingredients for food and beverage were easily accessible. Ingredients such as cocoa and coffee now come with a hefty price tag.
Now, yields are being reduced by climatic pressures, crop pests and unpredictable weather patterns.
Added to this, regulations such as the European Deforestation Regulation (EUDR) are adding compliance costs to companies’ expenses.
Meanwhile, investor interest in the market for alternative versions of such ingredients is growing. At the same time, sustainability itself – at least, a focus on sustainable practices – is declining as a priority.
A decline in sustainability
Sustainability is no longer a key priority among food tech investors, explains Mridul Pareek, an investor at bioeconomy-focused venture capital fund ECBF.
“A couple of years ago, we were talking a lot about sustainability and planet friendly food. Now the narrative has changed.“
Previously, the focus for investment had been on trends such as meat alternatives and sustainability-focused food tech.
Health is now a key focus, with clean label and functional ingredients at the forefront of many consumers’ minds.
Another is resilience to the myriad supply chain shocks that face food and beverage, ranging from inflation to geopolitics to climate. This trend extends from start-ups to large-scale CPG companies.
It’s this latter aspect that drives interest in alternative materials, as they help companies de-risk vulnerable commodities like cocoa and palm oil.
While “there is a sustainability element” to food tech investment, explains Pareek, it is less likely to be the most prominent part of a new company’s narrative.
Alternative materials strengthens . . .
The need for alternative materials is stronger than ever.
Climatic pressures from previous years remain, but added to this is the pressure from US tariffs. This has meant growing interest in the market.
Alternatives for cocoa, coffee, and even eggs are being developed, often as B2B ingredients rather than consumer-focused brands.
Such alternatives are even reaching the larger companies. For example, Barry Callebaut, the world’s biggest cocoa supplier, is moving to de-risk by using cultivated cocoa.
Partnerships between larger companies and start-ups can not only help the former de-risk alternative materials, but the latter to scale up.
The companies which are scaling up the most efficiently “are the ones who are focusing on what they do the best, which is their core”. Everything else can come together through collaboration.
. . . but with higher expectations
Despite the success of alternative materials, however, investors are more cautious than they once were, requiring more assurance before deploying their capital.
The bar for these start-ups to acquire funding “has raised quite a lot”, Pareek stresses.
Not long ago, a start-up could raise a Series A funding round with just tech and R&D. Now, investors are asking for significantly more than that, especially around the commercial side.
There are positives to this, in Pareek’s view. Higher standards for investment is helping start-ups to solve their fundamentals before scaling up, he says.
“We are shifting a bit more towards realism in the food tech industry. The VCs are demanding sharper fundamentals, the companies are working on it.”
Appealing to consumers with alternative materials
With consumers preoccupied with health and clean-label “real” food, there is always the potential for consumer backlash if products start including alternative versions of ingredients they’re familiar with.
There are two strategies to respond to this, explains Pareek. Firstly, the rebrand, where companies using alternatives define themselves in contrast to the original materials, painting them as the newer, better version.
However, Pareek points out, this approach did not work well for plant-based alternatives, which received a lot of backlash from traditional producers who felt threatened.
The second strategy is stealth inclusion, where companies add alternatives into products without being explicit about it.
A lot of new B2B companies are looking at this approach, Pareek explains.
The future of alternatives
The sector may have a bright future ahead, suggests Pareek, although there are a few contingent factors.
Investors are not sure whether the current levels of interest in these companies is due to price increases or not.
The question still remains whether the currently high prices of commodities come down, those using alternatives will stick with them, or go back to using originals.
“Once the market goes back to normal, they might have a tough time to defend their case. They might still be relevant, but the hype or the attention that they get might not be as much as they get right now.”
Mridul Pareek, investor at ECBF, will be hosting a panel on alternative materials at Future Food-Tech London (24-25 September).
- Date: 24 September
- Time: 13:30-14:15
- Location: Main stage
