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BFD Expert Voices - Climate Deals

BFD Expert Voices

While technological innovations in the supply chain have improved access to fresh food and cut waste, solving the food waste challenge at scale remains an uphill battle, Kimberly and Megan write. 

Why it matters: The issue presents a trillion-dollar opportunity for myriad startups focused on food waste — if they're able to navigate complex silos and shifting regulations. 

Context: Food waste companies raised $1.85 billion in private funding as of September, per Crunchbase. (See more on major players below.)

Around 84% of grocery retailers have plans to invest in food waste technologies over the next two years, according to a Coresight Research survey.

The big picture: The cost of incorporating food waste technology into the supply chain is high — and the current alternative (i.e., the landfill) is much cheaper, says Callie Babbitt, a Rochester Institute of Technology professor.

The food supply chain is siloed, making incentivizing the mass scaling of new technology challenging, says Babbitt, who leads a group that works on circular economy solutions.

Zoom in: When economic incentives fail to take hold, state and local policies aligned with waste reduction may spur innovation in the supply chain. 

California passed a statewide law requiring food waste separation and management from businesses and residences alike. 

New York has passed a similar bill that calls for businesses to donate excess food and recycle scrap that can’t be donated.

Zoom out: On a national level, the Food and Drug Administration’s Food Traceability rule went into effect this week, requiring companies that manufacture, process, pack or store foods to maintain records and provide that information to the FDA within 24 hours or a reasonable time frame.

"This is one of those infrastructure requirements that continues to be handled on paper and pen, even in large enterprise customer settings, and so this will drive tech adoption," says Noramay Cadena, a managing partner at Supply Change Capital, a venture firm that focuses on food technologies.

Brandon Hill, CEO of Vori, a grocery digital management platform, likens accommodative policy to legislation around electric vehicles. 

"If we want to see any mass scale adoption… we might want to see a similar type of program to incentivize technology adoption at scale," he says.

Meanwhile, corporate America is working to better mitigate its carbon footprint, especially the ever elusive Scope 3 emissions.

Scope 3, which encompasses the carbon footprint of a product's entire lifecycle from seed to landfill and often accounts for a large portion of a company's total footprint, is often hard to measure given the siloed nature of the supply chain. 

The latest: That’s why software startups that help companies measure carbon through the supply chain have skyrocketed in popularity among investors. 

What they're saying: "When you connect the nodes from the silo to the shelf, then everybody becomes more efficient, a lot less food gets wasted, and it saves everybody money," Vori's Hill says. "That's the importance of a connected supply chain."

The bottom line: Ironically, the most effective way to scale food waste technology is to de-scale the supply chain, says Ruben Smit, CEO of grocery e-commerce startup Sunrise Daily Goods.

The more localized the supply chain becomes, the easier it becomes to mitigate waste, Smit says. "All of these outcomes are possible if you keep the supply chain short." 

1 big thing: Food supply chain's waste problem

Illustration of food waste piled on a kitchen scale.

Data: PitchBook Data; Chart: Axios Visuals

After a banner year of M&A activity, consolidation in the food waste sector is expected to plateau, Megan writes.

Why it matters: A healthy exit market goes a long way in winning over investors in new industries, and a slowdown in M&A activity can dampen investor enthusiasm.

Context: Managing food waste in a sustainable way is a complex problem unlikely to be solved by one company. 

The logistics of decreasing food waste during production, for example, look a lot different from turning waste into other materials like natural gas for fuel. 

"It's not one problem, so it's not one solution or one solution provider that can impact it across the board," ReFED executive director Dana Gunders tells Axios.

By the numbers: Last year saw one of the largest increases in M&A activity in the food waste sector, with nine deals totaling more than $173 million in publicly disclosed value.

In 2022, the sector has seen just three M&A deals so far.

Yes, but: Investors and founders expect consolidation within niches of food waste as each area matures and growth levels off.

The food industry dynamic is "really prone for network effects because it's all so connected," Dan Khachab, CEO of restaurant food waste management startup Choco, tells Axios.

Khachab notes there aren't many players large enough to roll-up smaller competitors, as was the case in grocery delivery when Misfits Market acquired Imperfect Foods for an undisclosed amount this fall.

Zoom out: Food waste accounts for about 10% of global greenhouse gas emissions.

About 50 million people in the U.S. will face food insecurity this year, according to ReFED.

Meanwhile, as retailers face inventory glut and social pressure to meet sustainability goals, demand for food waste tech will grow — as will investment, Susan Flake, global director of food and logistics at packaging giant Avery Dennison, told Axios in July.

The bottom line: "We are very much in this trial and error period with an explosion of innovation, but some of it will work and some of it will not," Gunders says.  

2. The BFD: Food waste's M&A plateau

By the time Imperfect Foods sold to Misfits Market, it had lost that "food waste wunderkind" glow. As the company's cap table grew — and as stakeholders got smarter on sustainability — Imperfect's "no waste" business model faced increased scrutiny, Megan writes.

Why it matters: Imperfect Foods' story reflects the tension between effective sustainability and the venture capital world's growth-at-all-costs philosophy.

Flashback: Imperfect Foods (FKA Imperfect Produce) launched out of San Francisco in 2015, with around $38,000 raised via crowdfunding site Indiegogo. 

Its pitch: Send customers blemished fruits and vegetables that didn't meet retail's aesthetic standards — but were still perfectly edible — for a discounted price. 

The initial marketing featured a series of photos of imperfect offerings — a heart-shaped potato, a carrot with "legs" — sporting google-y eyes.

In 2016, Imperfect Foods raised a $3 million Series A and continued to rake in funds in subsequent years from investors like Insight Partners, Norwest Venture Partners, FirstMark Capital, Thirty Five Ventures, Justin Caldbeck, Flybridge Capital Partners, Maveron, Shasta Ventures and Kevin Durant.

It topped out at its $110 million Series D in 2021, valuing the startup at $450 million pre-money, per PitchBook. A Bloomberg article pegged the startup's valuation at $700 million in 2021. 

Meanwhile, the startup scrambled to grow on pace with its aggressive fundraising strategy. 

It added new markets — including a broad East Coast expansion — in June 2019 and broadened its grocery offerings.

Along with "imperfect" fruits and vegetables, offerings included packaged snacks, beverages, facial products and baby food following a company rebrand in October the same year.

The company also saw a COVID-related bump in business as consumers eschewed grocery shopping for grocery delivery — but like other e-commerce players, that tail of growth was short-lived. 

Reality check: As Imperfect Foods grew, critics questioned accounts of how much wasted food it was actually sparing.

"Those apples they were selling now, they were going to juicing before. It's not a question of, would they go to the grocery store or not," ReFED’s Gunders tells Axios. 

"So the question becomes, 'If they were going to juicing, but now are being sold in a box as fresh apples — does that count as reducing food waste?'" 

ReFED analyzes startups in the food waste space — and issued a report on Imperfect Foods — to evaluate their claims of waste reduction, among its other business functions.

Yes, but: Gunders cedes that any reduction in food waste by rerouting minimally blemished foods is a net positive for the food production ecosystem, since it frees up space for even more undesirable foods to move up in the production queue.

What they did: When growth flatlined in 2021, Imperfect Foods' board of directors ousted CEO Philip Behn and replaced him with interim CEO Steve Nave, per Insider.

Dan Park, the former CEO of Canada-based BuildDirect Technologies, took over permanently in January 2022. 

Imperfect Foods closed its warehouse in San Francisco and laid off about 50 employees in August. Soon after, it announced its sale to peer Misfits Market, another food waste e-commerce company. 

Misfits CEO Abhi Ramesh told Axios in September that Imperfect Foods was initially looking at raising additional funding — but ended up selling in an all-stock deal.

What they're saying: "Misfits Market has successfully completed the acquisition of Imperfect Foods, uniting both brands to deliver a better, more affordable, and sustainable grocery experience," Ramesh told Axios in an emailed statement responding to a request for comment for this story. 

"As a combined company, we will continue to focus on reinventing the food supply chain to bring more accessibility, affordability, and sustainability to online grocery," Ramesh said.

3. Imperfect Foods' canary in the landfill

Pandemic bottlenecks brought the supply chain into focus, and investors have flocked to companies aiming to put a dent in food waste, Kimberly writes.

Why it matters: As the nascent space of food waste technology grows, there's ample opportunity to roll up these solutions to create formidable players that target all siloes of the food supply chain.

The big picture: The food supply chain is a vast system that connects livestock and crops, manufacturing and packaging, transportation and distribution and retailers. 

Building resilience in the food system often yields redundancies to ensure everyone gets food, says Brita Rosenheim, managing partner of early-stage food tech VC firm Vita Ventures.

“All of these redundancies that are built into the food system also create food waste,” she says.

Zoom in: That's why connecting those points in the supply chain through infrastructure and data remains pivotal, she says.

“When you have that visibility and data connectivity in terms of the journey of the food, and you're able to track and trace that, then that helps augment their ability to reduce food waste,” Rosenheim says.

State of play: Myriad food waste tech players have secured investments in the last year, all targeting various buckets of the supply chain.

Andes Ag, an Emeryville, California-based startup that makes biologically engineered microbes to treat crops for increased resiliency, secured just under $13 million of its $15 million target in equity funding.

Soli Organic, an indoor farming company that makes nitrogen-based fertilizer using organic waste from its facilities, raised $125 million in Series D funding.

Afresh, a San Francisco-based fresh food software platform, raised $115 million in a Series B round for tech to help grocers better understand and predict inventory.

Vori, a Palo Alto, California-based grocery digital inventory management platform, bagged $10 million for expansion. Vori's order digitization gives companies real-time inventory visibility.  

Choco, a German software startup that helps food producers and restaurants better manage food inventory, netted $111 million in Series B2 funding at a $1.21 billion valuation.

Smarter Sorting, a circular commerce data company, received an additional $7 million in funding from Leonardo DiCaprio-backed Regeneration.VC, an extension to its $25 million Series A raise.

Smarter Sorting helps companies determine if a product should be donated, recycled or thrown away in a landfill.

4. The companies playing with food (waste)

Illustration of a dollar sign on a grocery store checkout conveyor belt.

Today's newsletter is a collaborative Pro Deals dive into the world of food waste tech by Kimberly Chin of Axios Pro Retail and Megan Hernbroth of Axios Pro Climate, edited by Claire Rychlewski.

November 19, 2022

1 big thing: Food supply chain's waste problem