2020 has been good for the food startup scene – Crain’s Chicago Business
With signature vending machines stocked with pre-made meals peppered throughout the city, Farmer’s Fridge was a bastion of Loop lunches until the pandemic sent everyone home.Instead of delivering food to the fridges, Farmer’s Fridge started delivering to customers’ homes. The plan worked, and the startup brought in slightly more revenue than last year, says founder and CEO Luke Saunders.
“Things are not going to go back to the way that they were,” he says. “There’s going to be things that are fundamentally different, and in a lot of ways, we feel like we fit into that new world better than we did before.”
The pandemic has accelerated innovation in Chicago’s food and beverage industry. Some food startups are benefiting from a surge in online grocery shopping and at-home cooking, and like Farmer’s Fridge, many are honing their business models. New companies are springing up to solve problems COVID created. And investors are betting on them.
The number of food and beverage companies headquartered in Illinois increased this year to 373 from 84, according to data from PitchBook. The number of funding deals also quadrupled, to 390 from 96.
More than $16.2 billion in capital has been invested into those companies this year, up from about $6.3 billion.
Though the number of deals and companies skyrocketed nationally as well, the amount of capital invested in the industry declined to about $55.9 billion from $82.6 billion last year, according to PitchBook. But Chicago companies were involved in the industry’s three biggest deals this year: The $7.3 billion acquisition of Grubhub, the $3.2 billion sale of part of Kraft Heinz’s cheese business and the $3.2 billion Morton Salt sale.
Venture funding, which is invested in startups, is also on the rise. More than $216.2 million was invested in Chicago-area food and beverage startups this year, according to data from venture funding tracker Crunchbase. That’s up from almost $75.3 million last year.
The Chicago area still trails the San Francisco, Los Angeles and Philadelphia areas in food tech venture funding, but has passed others, including the Washington, D.C., and Denver areas, according to Crunchbase.
Startups are using those dollars for growth.
Tovala closed a $20 million funding round in late spring. The startup’s smart ovens and meal subscriptions hit well with consumers stuck at home. Revenue and subscribers have tripled since March, and hiring at the Chicago-based company is up 30 percent, founder and CEO David Rabie says.
“People are cooking more and also looking for more convenient solutions,” he says. There are “more ways to use the product than you might have done pre-pandemic.”
Simple Mills, which makes gluten-free baking mixes and other snacks, hired 28 of its almost 70 employees this year, says founder and CEO Katlin Smith. The company is benefiting from a pandemic baking surge and a shift to online grocery shopping.
The vast pool of industry talent in Chicago has been critical for helping Simple Mills maintain growth, Smith says.
“Everyone is firmly parked in Chicago,” she says. “These are people who grew up in these large (consumer packaged goods companies) . . . then they come over and they bring that expertise and really help us grow.”
That recycling of talent from large companies like Kraft Heinz and Conagra Brands is one of the reasons the food startup scene has long been a bright spot for the city, says Brad Henderson, CEO of P33, a nonprofit aimed at improving Chicago’s standing as a tech hub.
Additionally, Illinois universities have robust agricultural programs, and the area is home to big-name, food-focused investors, such as Walmart heir Lukas Walton and former McDonald’s CEO Don Thompson, whose investment firm is raising a $500 million venture capital fund.
“We have some of the best food investors in the world in Chicago,” Henderson says. “They’ve pushed really hard during the course of the crisis.”
Chicago has been a hot spot for startup shopping recently, too. HelloFresh announced last month it would pay up to $277 million for Batavia-based meal delivery service Factor 75. In recent years, Kroger paid up to $700 million for meal kit company Home Chef, and RXBar sold to Kellogg for $600 million.
Chicago’s food tech scene still has a ways to go, Henderson says, but all the factions are working together more coherently.
At food incubator the Hatchery, which opened its space in East Garfield Park in 2019, more people than ever before are looking to start food companies, says CEO Natalie Shmulik.
Enrollment is up in the incubator’s monthly class on how to start a food business (now virtual). Typically, half the ideas people bring are for brick-and-mortar businesses, and half are packaged goods. Now, they’re skewing toward delivery and ghost kitchens.
To be sure, startups based at the Hatchery have shut down amid the pandemic, and the nonprofit’s revenue streams have taken a hit, Shmulik says. It has been a crucible of a year. But issues that have long plagued food businesses behind the scenes, like low profit margins or delivery hiccups, have come to light.
“What this has allowed us to see is, OK, there are clearly challenges throughout the entire supply chain,” Shmulik says. “Now we can really focus on how to improve them.”
Companies built during economic downturns tend to be well constructed and strong, as there isn’t room for error, says Paul Earle, adjunct lecturer of innovation and entrepreneurship at Northwestern University’s Kellogg School of Management.
“The problems they’re solving have to be real and proven,” he says. “If you can get something airborne during this time, it’s a really good plane.”
Evergreen’s healthy frozen waffles hit the freezer section of 28 Illinois Whole Foods stores the second week of March. Founder Emily Groden lost the chance to offer free samples to customers—a key aspect of packaged food launches—but was able to capitalize on the pre-lockdown freezer stocking.
Groden suspects many people grabbed her products who normally wouldn’t have tried a new brand. Initial sales were so strong that Whole Foods expanded Evergreen to 46 Midwest stores.
It is going well, Groden says. She quit her day job as general counsel for Alinea Group to work full time on Evergreen, and growth has been steady, she says. Still, she says it’s impossible to know whether Evergreen has ended up ahead or behind because of the pandemic.
But one thing is certain: “I’m excited to see what it’s like to own a brand in a non-pandemic world,” she says.
Published at Fri, 04 Dec 2020 21:05:44 +0000