Why Isn't the Heartland Home to More Food Startups?

The Midwest is America’s traditional food pantry. But much as there’s been a generational change in dietary preferences going on among consumers, there’s also been a significant shift underway in the locus of growth and innovation in the food and beverage business.

Now the ascending centers are on the coasts. The startups redefining the food and beverage industry seem to be arising disproportionately in California, New York, and other seaboard enclaves rather than in flyover country. Think Plum Organics, Annie’s Homegrown, Happy Family, Chobani, IQ Bar, and many more.

At the same time, these new era companies mainly have been stealing sales from big outfits headquartered in the heartland. Consider the recent woes of Kraft Heinz and Kellogg, for instance, and challenges to Conagra, Mondelēz, and General Mills.

Nobody has quantified this trend, but it’s clear. “The Midwest is the historic home of the food business, but it’s mainly the startups from everywhere else that are determining the future of the industry right now,” says Ken Harris, managing director of Cadent Consulting Group.

Equally discernible are the reasons. One of the foremost is that the healthy-diet emphasis of sunny California, and residents’ entrepreneurial experimentation based on it, have inspired hundreds of startups. Eventually these regimens wash eastward, but usually not until after Golden State entrepreneurs already have capitalized on them.

Also, nearly all entrepreneurship these days is based on some harnessing of digital technology, and Silicon Valley dominates there. Thus, many food and beverage startups now begin with online platforms, such as personalized nutrition company Habit. (It’s mainly because of its digital capabilities that Austin, Texas, at least gives Middle America one good horse in the food-startup derby.) Other coastal successes are based on lab-developed products from California such as plant-based Beyond Meat.

There’s a third factor: The money centers remain on the coasts. It’s axiomatic that about three-quarters of America’s venture capital comes from three states: California, New York, and Massachusetts. “I’ve heard many entrepreneurs say that they can’t get funded in Chicago—that they have to go to the coasts to get that figured out,” says Alan Reed, executive director of the Chicagoland Food & Beverage Network for startups.

One such Midwest innovator is Farmer’s Fridge, a Chicago-based startup that sells salads from vending machines. “I personally am very skeptical that a business like ours would have been possible outside of where we started,” says founder Luke Saunders in 2017. But in late 2018, Farmer’s Fridge welcomed an infusion of $30 million led by the venture capital firm founded by former Google CEO Eric Schmidt. Local investors such as Cleveland Avenue, a VC firm run by former McDonald’s CEO Don Thompson, participated.

But the heartland food industry retains underappreciated strengths. It’s the home of commodity agriculture. And it’s where many startups even from the coasts still must go to scale production. Krishna Kaliannan, for instance, started his keto-friendly grain-snack company, Catalina Crunch, in New York City but after initial success is building a plant in Kentucky. “We’re not going to do it in downtown Manhattan,” he says.

Metro Chicago alone, according to Reed, has about 4,500 food and beverage companies employing about 130,000 food scientists, manufacturing experts, packaging whizzes, distribution planners, production workers, and many others. “The Midwest has a legacy of every-person foods,” says Jordan Buckner, cofounder of Chicago-based TeaSquares, which produces caffeinated snack bites. “So while traditional companies are being disrupted, this is also creating a stock of people who are really passionate about food and looking to reinvent the food system.”

Another favorable factor for flyover country is that digital capabilities and expertise continue to disperse across the United States because of the nature of the technology—and the fact that the cost of living in hotbeds on the coasts is creating more “rubber-banders” who take their training back to their roots in the heartland.

Also, many big CPGs have become rescuers as well as laggards. Tyson, Kraft Heinz, Mondelēz, Land O’Lakes, and others have launched incubators and accelerators that are helping to home-grow more successful startups in flyover land.

Eventually, all of this might even get attention by the coast-dominated national media. “There’s a tremendous amount of innovation in the Midwest,” says Joel Warady, a former top executive of Enjoy Life, the Chicago-based “free-from” food pioneer that now is owned by Mondelēz. “But it doesn’t get the same attention as on the coasts.”