Fancy Snacks Are Having a Moment. Venture Capital Wants In

Just 10 years ago, a trip down the snack aisle probably meant a cart full of all things puffed, fried, and detonated in hydrogenated oils and surfaced in red and orange food dye. Not now. These days, shoppers can expect hand-baked chips made in Brooklyn from organic dried chickpeas and beets, dusted in sea salt harvested under a full moon in Croatia. And high-protein jerky bars — 100 percent grass-fed bison glazed with ancho chile, yuzu, and honey from a sustainable bee farm in Vermont. And, naturally, gluten-free biscuits, studded with hand-foraged local chanterelles baked in non-GMO cricket flour.

This is only a slight exaggeration, but the point is, these are the “mindful” snacks of today, products that supposedly howl with authenticity and practically scream “this was made with real ingredients by a real person who has a story to tell” — brands like KIND Snacks, Sir Kensington’s, Justin’s, Crunchsters, Mamma Chia, and WTRMLN WTR. It’s a far cry from the crap of snack aisles past, a market segment that’s growing faster than you can say non-GMO. And investors want a bite.

According to a 2017 research note by Goldman Sachs and Conde Nast, smaller “mindful snack” brands are showing strong momentum, gaining share in 62 percent of the top 50 packaged food categories. A Boston Consulting Group report found that food and beverage (F&B) Consumer Packaged Goods (CPG) companies with less than $5 billion in sales gained 2.7 points of market share since 2011 — representing $18.1 billion in aggregate sales growth. Kind of a big deal.

Nick Giannuzzi, a lawyer and the founding partner of law firm the Giannuzzi Group, has been in the business of representing early-stage food and beverage makers since the dawn of the word “artisanal.” Known as “the Food Deal Guy,” Giannuzzi is legal counsel to nearly 700 of the most sought-after food and beverage brands. Recent financings (in which he represented the snack clients) include $7.5 million invested in Koia, the plant-based protein drink, by KarpReilly LLC; $4 million into tea-and-cocktail-mixer company Owl’s Brew by ZX Ventures; $10 million to Spindrift seltzers by VMG Partners; and $19 million for Bulletproof Coffee from Cavu Ventures.

But when Giannuzzi started out nearly 20 years ago, the snack world and the investor landscape were quite different. He recalls one of his first clients, a little-known bottled water company called Glacéau, makers of Smartwater and Vitaminwater, which he started working with in 1999. “It went from $0 to $650 million in sales, and was sold for $4 billion eight years later in 2007,” he says. “That kind of growth turned on a switch for me.”

What Giannuzzi started to see was a shift to snack makers who were in the “incrementally healthy” model: “Look at Vitaminwater,” he says. “It was full of sugar and it wasn’t all natural or organic or any other buzzwords, but it had vitamins and made a step in the right direction.”

Then, around 2011, Giannuzzi saw snack innovation ramp up, driven by a fundamental shift in consumer demand. “You have more people realizing that chia isn’t just for people practicing yoga, it’s for regular people,” he jokes. Entrepreneurship was also buoyed as barriers to entry started vanishing, thanks in part to the growth of co-packers — companies who handle packaging the manufactured product for brands that don’t have the necessary packing capacity, machinery, or knowledge to package their product themselves.

What’s more, the advent of social media killed the need for an advertising and marketing budget, says Christopher Bradley, managing director and partner at Mistral Equity Partners, a private equity fund and frequent investor in food and beverage brands. The last piece, distribution, was also made easier thanks to the rise of Amazon and e-commerce.

With innovation at an all-time high, and demand to match it, Wall Street slowly began waking up to the profitable world of mindful snacks. Previously, venture capital and private equity funds shied away from investing in risky early-stage companies — those without proven revenues and profitability. Private equity firms, which make and manage investments on behalf of their investor clients, generally bankroll companies that are already profitable, have established market demand, and are either in need of expansion capital or have cash flows that allow the private equity investor to borrow money for the purchase and make a higher rate of return (like a homeowner taking out a mortgage), explains Bradley.

Venture capital funds generally invest earlier. They tend to be attracted to companies that are just an idea, have very little revenue, a very limited history of operations, and are generally years away from profitability. But even before the early 2011s boom, VCs were not interested in funding quirky snacks.

“Back in the day, if you wanted to start your own granola company, you’d go to your aunt, uncle, and neighbor, or maybe an angel investor, and cobble together a round of financing,” Giannuzzi says. “You could not get venture capital or private equity to write you a check, because it was too risky.”

That was the lay of the land from about 2008 to 2011, when venture capital and private equity investors began parting the waters to get in on the deals. “The tech investors are starting to look over their shoulders to see what is happening with CPGs,” says Giannuzzi. “You start to see a huge influx of capital at every level.”

The money truly starts to rain down when companies experience impressive “exits” — being acquired, in huge sums, by big food, so-called “strategics” like General Mills, Unilever, Hershey’s, Pepsi, and Coke, which are itching to acquire nascent brands. The reason? Apparently not as many folks want to dig into a bag of sodium-soaked Chex Mix, a General Mills classic, when they can snack on newly innovated Crunchsters — a savory toasted sprouted-mung-bean snack dusted in sea salt or vegan bacon that’s high in protein, fiber, and minerals.

Strategics are not keen to sit back and watch their market share eroded by young entrepreneurs making kombucha in their garage. So they buy them. “Strategics are highly acquisitive,” Bradley says. “When marketers can’t make their numbers [and] they see small upstarts taking market share, they advocate for purchasing that company.”

Why not innovate internally? Because it takes too long. “Strategics can only have so many initiatives going in R&D at the same time,” Giannuzzi says. “There is a lot of red tape, and it can take years to get a new product to market. They see all these entrepreneurs setting up shop in their basement who can bring it to market faster.” Which explains why General Mills acquired Annie’s Homegrown (for $820 million) and Epic Provisions (for $100 million, nearly five times the revenue of the company). Hershey’s snatched up Krave all-natural beef jerky (the price was undisclosed but reported to be between $200 and $300 million), and Unilever just purchased Sir Kensington’s for an undisclosed price.

The rise in investment has also lead to the creation of a new crop of food-focused funds, companies that didn’t exist before the mindful snack boom. “You now have dozens of funds — BIGR, Boulder Food Group, Emil Capital Partners, AccelFoods, Mistral Equity Partners, the Collaborative Fund, Cavu Venture Partners, Anzu Capital, and more — writing checks for $250,000, $500,000, or $1 million — to really really early stage food and beverage CPGs,” Giannuzzi says.

AccelFoods, one of the market’s most exciting food and beverage investment funds, was founded in 2014 by Jordan Gaspar and Lauren Jupiter. It now works with about three dozen companies, mostly in the allergen-friendly, super-food, children’s nutrition, and portable-protein markets. It aims for companies that are launch-ready up to $10 million in sales, investing in brands like Kidfresh frozen meals, Good Day Chocolate, and the newest sensation, Four Sigmatic, makers of mushroom coffees and teas meant to reduce stress, increase energy, support memory, and enhance immunity.

Accel offers its brands something more than mere cash; its investments come with a kind of brain trust. AccelFoods’ team works long-term with company founders on everything from sales strategy and operations to hiring, branding, supply chain optimization, legal and capitalization structure, trademark strategy, and distribution, through close relationships with major retailers such as Wegmans. AccelFoods is also partners with Amazon Launchpad, where it is part of a group of funds and platforms that are bringing new, cutting-edge brands to consumers; many of their portfolio companies have gained access to Amazon through this platform. “It’s a full suite of services, building infrastructure to support early-stage brands,” Gaspar says.

Strategics, naturally, are also starting their own investment funds. Campbell Soup and Kellogg’s both launched VC arms in 2016 — Acre Venture Partners and Eighteen94 Capital, respectively — while General Mills’ venture arm, 301 Inc., which launched in 2015, escalated its activity with five CPG investments this year.

For the start-up, an investment from a strategic leads to help with supply chains, distributing, and marketing. The upshot for the strategic is serious profit. “While strategics don’t require the companies to exit to them, oftentimes they do,” Bradly says. “Or they are in at a lower purchase price and can be part of an exit down the line.”

Looking ahead, don’t expect innovation or investment to slow down. The non-GMO snack future is bright, says Giannuzzi, who expects to conduct 150 financings this year. “We are in a place of massive growth right now, with huge amounts of money in the space.”

AccelFoods’ Gaspar says she does not see this as some sort of organic-heirloom-artisanal bubble. “There are dips and surge points in any industry, but here you are looking at consumers who are universally committed to what they put in the their bodies and in the bodies of their children.” And the demand for these mindful snacks is not just driven by millennials, Gaspar says. “What we are also seeing is baby boomers who are looking to elongate their lives reaching for natural solutions. Those two groups combined makes for a very powerful demographic fueling this growth in innovative F&B.”

Bradley, too, sees a long stretch of road ahead, pointing to the recent $700 million acquisition by industry icon Campbell Soup of Pacific Foods, a three-decade-old natural-foods purveyor that specializes in organic broths as well as plant-based drinks and meals. “So long as you have deals like Campbell’s, there’s really no limit.”

Because companies like these tend to operate with a social consciousness traditionally absent from Big Food, new money fueling these brands might mean a better food future. These small brands care about what they put into their products, how they package them, and how their businesses affect the world — from people to the environment — at large.

Backing by Big Food and Wall Street funds means that those values will hopefully trickle down across the food landscape as a whole — a return to the crap of snack aisles past won’t really fly with today’s more discerning consumers — making our food ecosystem better today and tomorrow.

Andrea Strong, founder of the pioneering food blog the Strong Buzz, has been writing about restaurants and food for the past 18 years; her work has appeared in the New York Times, Saveur, Serious Eats, and Food Republic. Andrea Kalfas is an illustrator, graphic designer, and letterer currently soaking up the charm of Baltimore, MD.
Editor: Erin DeJesus