Good-for-You Products Are Healthy Investments for VC Funds

Johnny Ream understands how personal passions to fix health problems drive many people to become entrepreneurs who address their circumstances by inventing a product or a food platform and then build a business around it.

He’s sort of like that. “There was a time in my life where my father—who by most measurements you’d say was healthy—passed away from cancer,” recalls Ream, a partner at Stray Dog Capital, an early-stage venture capital (VC) fund based in Leawood, Kan., that focuses on food and agriculture investments. “I also have two kids, two little bodies I’m responsible for when it comes to what goes into them. So I’ve got a personal and professional intersection where I can have an impact from the investment side.”

Ream and his fellow partners at Stray Dog, which started in 2016, take such motivations into consideration as they evaluate opportunities in food and beverage startups that are in stages up through sales of about $10 million a year.

They see how entrepreneurs’ drive to provide better diets for themselves and loved ones translates into helping everyone. “We use this idea of food as medicine and health as wealth—not just something that we do for pleasure, but using food to eliminate some of the effects of the current American diet in terms of chronic disease and things plaguing the health-care system,” Ream says. “There are opportunities for change.”

Stray Dog’s more than 40 stakes are held in companies ranging from cultivated meat pioneers such as Aleph Farms and AQUA Cultured Foods to Miyoko’s Creamery, which produces dairy analogues; MyFOREST Foods, which makes a mushroom-based bacon substitute; Sirabella’s, a maker of dairy-free cheesecakes; and Uncaged Innovations, which uses biomaterials to imitate leather.

More highly recognized companies in Stray Dog’s portfolio include Beyond Meat, the faux-meat brand; UPSIDE Foods, a leader in cultivated meats; and BlueNalu, which is bringing forth a cell-cultured substitute for bluefin tuna.

In this interview, Ream shares some of the thinking behind Stray Dog Capital’s commitment to investments focused on personal and planetary health.

Fitting with your view of how to use the food system to improve life for everyone, what are the major investment themes and trends that drive Stray Dog’s portfolio?

They touch a few boxes. We’ve done a lot of investments in biotech for food and alternative proteins and biotech for meat, seeing the potential health impacts. We look at clean label alt-proteins for health benefits but also for planetary benefits in climate change and the negative externalities that exist around our current food system, particularly in industrial animal agriculture.

There’s also the element of people caring about the way products are made today, such as in the treatment of animals. That’s a big theme for a lot of consumers. And we’re not looking for incremental innovation. We are really looking for disrupting the current food system in massive ways to make big, big gains.

That sounds a lot like what the big plant-based burger makers promised. What has happened there with sales that have fallen off? What does it mean? And where does that sector go from here?

What you’re seeing is the impact of a lot of competition and a lot of new products coming to market that I would say don’t really meet the levels of customer expectation that they need to in order to be around a long time and be a brand that will stand the test of time. Beyond Meat and Impossible Foods took the veggie burger and did some really innovative things and took the space forward, but we see that there is still a long way to go.

They had a great win, and they’re great products, but we can get them even better by leveraging new, innovative technologies and new approaches and production methods. It’ll take some time. [Meanwhile,] too many companies have been coming into the space with products not as good as they need to be on taste and texture and priced on a premium level because of a low scale of production.

Will the next wave of alt-proteins, cultivated meat, make the same mistakes?

Cultivated meat has seen that there’s a high bar you need to hit, that you need to get the product to a level where consumers are going to come back for it. On the economics side, alt-proteins have a bit of leeway [to raise prices] that you have for [other] premium products.

So they need to take a strategic approach about where to go first and how to build out and scale and what levers they can pull with funding so that they can pass along the product as cheaply as possible to the consumer.

Do you have a rule of thumb about what proportion of your portfolio companies you expect to survive and succeed?

The general industry number is that around 35% of companies in a VC portfolio will ultimately fail; that’s just part of the model. Typically one-third fail, and you get another third that return one to three times [the investment], or something like that. The last third of the portfolio averages 10X-plus returns [10 times the invested amount or more], so it’s pretty common that a large portion of portfolio returns in a VC will come from a small subset of companies.

We’ve seen some attrition in our own portfolios, but actually it’s been pretty good, less than 35% to date, and in a pretty challenging environment.

You operate in a challenging environment that’s also moving very fast. What will surprise us as consumers in the next three to five years?

It’s not new, but we’re looking at it in a new light: fermentation. Consumers want not only plant-based products but also products that are clean label in nature with a short list of feel-good ingredients. One thing that’s special about fermentation is you’re able to build fantastic proteins and products that are very clean and very nutritious and can be used in a wide array of products, such as seafood.

We also just closed a deal on a company called California Cultured, which is using fermentation to make real cocoa and real coffee. It’s pretty amazing; think about the impact elements here. Cocoa and coffee production are based in regions that are particularly exposed to climate change and have all sorts of challenges with their supply chains. So to be able to utilize fermentation and bring forth real products is very exciting. Lots of chocolate companies are paying attention.

Climate change obviously has become a huge driver for food companies and for many consumers. Has mitigating climate change become a bigger consideration for your investments?

For one thing, we benchmark that theme against traditional product counterparts. For instance, Daring Foods makes alt-chicken, so we compare that against the impact of traditional chicken. We want to make sure that the companies we’re investing in are going to address the problem of climate change and not contribute to it, but at the same time we want to make sure that just because they might be good from an emission perspective, they’re not doing something bad in some other category.

You’re from Kansas City. Alt-foods have come to be dominated by Silicon Valley. Are you ever concerned that Stray Dog is helping obsolete the traditional geography of America’s agriculture and food industries?

The food system will transform, and there will be lots of opportunities to build that, which provides lots of great jobs for any displacement that might come in future decades. Plus, without, for example, having to fly tuna in from Japan on a daily basis to the rest of the world, you can build so much more of a localized infrastructure for food production and distribution.

So it’s pretty exciting. We’re not operating from a place of fear about what may happen but are really excited about what this new food system could look like.ft