Deep Dive: Clear attraction

From precision fermentation to microbial and biomass applications, the fermentation sector is attracting significant funding. Nick Bradley investigates why investors are betting big on the technology as an enabler of the future of food

Fermentation’s credentials in terms of providing sustainable, nutritious, and innovative food products makes it an intriguing option when it comes to feeding the future. The most significant advantage for Sharyn Murray, CFA, Senior Manager of Investor Engagement & Financing at The Good Food Institute (GFI), is its flexibility. “It allows producers to create a wide range of products, including proteins, fats, vitamins, flavor molecules, and even non-food biomolecules,” she begins. “Additionally, it can utilize various feedstocks, including side streams and waste streams, and can be scaled up or down quickly to meet demand.”

Murray was one of five panelists taking part in our July 2024 webinar, Raising for Research: Financing options for funding fermentation R&D in today’s investing climate, with her colleague, Erin Rees Clayton, Ph.D., Senior Scientific Research Advisor at GFI, sitting alongside her. Agreeing with Murray, Clayton says the confluence of the above advantages has kept fermentation a steady draw for investors.

“Private sector investment in alternative proteins surged between 2020-2022, driven by factors such as the pandemic and a search for yield,” Clayton reports. “In this period, alternative proteins raised US$11.3 billion, accounting for 70% of their total funding over the past decade. Fermentation companies also benefited from this trend, raising US$2.8 billion during the same period. Although overall investments have slowed recently, fermentation has remained a popular choice for investors. In the past year, fermentation companies raised almost US$450 million, surpassing plant-based and cultivated meat companies in terms of VC funding. This trend is reflected in investor surveys and conversations, indicating a growing interest in fermentation technology.”

That enthusiasm is also backed up by a recent Net Zero Insights report. In the first half of 2024, European companies raised over €164 million (US$183 million) for fermentation technologies, surpassing the €100 million (US$111 million) raised in all of 2023. Biomass fermentation companies attracted €115 million (US$128.5 million) in funding during this period, compared with €67 million (US$75 million) in 2023. Precision fermentation companies raised €49 million (US$55 million), up from €33 million (US$37 million).

Scanning the investment landscape

There are few more qualified people in the alt proteins industry than Andrew D. Ive, Founder & Managing General Partner of Big Idea Ventures, to offer an inside view on the investment landscape. Although he concedes that there has been a recent slowdown in funding, he nevertheless believes alternative proteins remain attractive to investors. “Corporations and family offices were previously major investors, but now governments are increasingly supporting fermentation and other alternative protein technologies due to geopolitical instability and food security concerns,” he says. “This shift is creating opportunities for innovation and investment in key regions. Companies seeking funding should therefore focus on aligning with appropriate investors based on their stage of development and goals. Accelerators, grants, and corporate partnerships can provide valuable support. Additionally, companies may need to consider geographic flexibility to access regions with strong fermentation ecosystems. Overall, the funding landscape for alternative proteins remains robust, and companies that can effectively demonstrate their potential and align with investor interests will continue to attract capital.”

“Despite potential changes in government priorities, there’s a growing interest in bio manufacturing in the USA,” reports Wendy Goodson, Vice President, Government Business Development at Ginkgo Bioworks. “Agencies such as the National Science Foundation (NSF) are investing in regional hubs to promote economic development through bio fermentation. These initiatives – combined with local feedstock availability – will likely continue for at least the next five years. Although the focus on climate and sustainability may evolve, the momentum behind these efforts is strong.”

Air today, food tomorrow

Across the Atlantic, Finnish food tech, Solar Foods (famous for creating its protein-packed ingredient called ‘Solein’ from thin air) has demonstrated significant investment success, securing funding from various sources, including European Innovation Council (EIC) grants and private investors. “Our fermentation process uses a unique hydrogen-oxidizing bacteria,” explains Arttu Luukanen, Senior Vice President, Space & Defense at Solar Foods. “Unlike algae, this microbe uses hydrogen for energy and captures CO₂ from the air. The primary feedstocks are hydrogen and CO₂ gases. To support protein production, we cultivate the bacteria in a nutrient-rich medium containing water, inorganic salts, and ammonia. Our continuous fermentation process involves harvesting and recycling the growth medium, resulting in a dried protein powder that can be used as a food ingredient.”

The EIC grant has provided crucial support for Solar Foods’ R&D efforts, allowing it to advance its technology and scale up production. Diversifying funding sources helps to mitigate risks, maintain flexibility, and enhance Solar Foods’ credibility in the market. Overall, its investment success is a testament to the potential of its technology and the growing interest in sustainable food solutions.

“Hydro Cow is developing a genetically modified microbe to produce milk protein,” continues Luukanen. “We’re collaborating with partners such as the Technical University of Aachen, University of Groningen, and FGN (a subsidiary of Ginkgo Bioworks), to optimize the microbe’s metabolic pathways and enable protein secretion. The project involves advanced techniques such as metabolic modeling and high-throughput screening to identify the most-efficient strains for milk protein production.”

We’ve combined various sources of funding, including a sale-and-leaseback agreement, debt financing, and government grants. This mixed approach has been essential for reaching our current stage of development

“We’re a typical example of a VC-backed company but scaling up in the agriculture industry requires different funding strategies,” Luukanen stresses. “Going public or securing strategic investors are options, but few examples exist in this sector – we did this in September. Scaling up to a factory requires significant investment, making it difficult to attract traditional venture capital. To fund our growth, we’ve combined various sources of funding, including a sale-and-leaseback agreement, debt financing, and government grants. This mixed approach has been essential for reaching our current stage of development.”

Less than a month after our webinar, Solar Foods confirmed its plans for a technical listing on the Nasdaq First North Growth Market in Helsinki, a listing that is intended to enhance visibility, provide liquidity to shareholders, and facilitate the future growth that Luukanen alluded to at the end of July.

Given Solar Foods’ success in raising funds, what advice would Luukanen have for other startups in the sector? “One significant factor is the substantial amount of funding required to scale up our operations due to the relatively large ticket size,” he says. “Early-stage venture capitalists often grapple with the existential question of whether our ingredient will ever reach the market. Will it be approved? Will it ever be accepted as a food ingredient? A key factor that has helped us de-risk our investment proposition is our early-stage pilot plant. This facility has been producing protein material from the beginning, allowing us to conduct analytics and testing on its use as an ingredient in foodstuffs. This early-stage validation has been instrumental in securing those initial venture capital investments.”

They seek it here, they seek it there…

When seeking investment as a seed or early-stage company, Big Idea Ventures’ Ive admits that there’s a greater emphasis on commercial rigor when compared to a few years ago. “Investors now expect a clear path from concept to commercialization,” he suggests. “For instance, if your technology currently produces a microgram of protein, they’ll want to understand your strategy for scaling up to a fully formed product. This includes market plans, regulatory requirements, and a timeline for achieving commercial viability.”

He also notes that venture capitalists typically have a five- to six-year horizon, so they’re looking for companies with a clear path to exit, whether through acquisition or IPO. “If your commercial viability is projected for 2030, venture capital might not be the best fit,” Ive says. “In such cases, grants or strategic investors might be more suitable.”

One recent trend Ive has observed is for government agencies to require a preliminary scoping project, where you receive a smaller amount of funding to develop a comprehensive business plan. “Although this can be beneficial for forcing you to think deeply about your strategy, it also means you won’t receive the larger funding upfront.”

“If you’re lower on the technology readiness scale – especially when seeking funding from agencies such as the DOD or NSF – you might need to satisfy the program manager’s objectives while also pursuing your internal goals,” adds Goodson. “This can be a bit distracting, but we’ve found it worthwhile in the end.

“We’re also seeing a trend towards the government investing in higher Technology Readiness Level (TRL) opportunities,” Goodson notes. “This often requires some cost-sharing from the company, which can be offset by local governments. The main point is the government expects you to have some skin in the game.”

Similar to Ive, Goodson is also witnessing that agencies are increasingly asking for preliminary scoping projects. “They’ll give you a smaller amount of funding to develop your business plan, and then you might get a larger grant later,” she says. “This can be both good and bad. On the one hand, it forces you to think deeply about your business plan. On the other hand, you don’t get the big funding upfront. We’re seeing some changes in how the government operates these days.”

Alternative avenues for investment

Goodson also sees potential for fermentation companies in the impact investing space. “Sustainability funds are the most common type of impact fund, and they’re increasingly interested in alternative proteins,” she says. “Although some challenges remain – such as the need for revenue growth and concerns about monocrop feed stocks – many sustainability funds are aware of the potential of fermentation.

“Evidence of sustainability improvements, such as LCA data and deforestation-free supply chains, is crucial,” she notes. “Upcycled and gaseous feedstocks are also gaining interest, as they align with circular economy and carbon-capture goals. Investors with food security mandates are focused on lowering costs and increasing access to high-quality proteins. Health and nutrition investors are interested in the nutritional attributes of the ingredients. To effectively pitch to impact investors, it’s important to tailor your approach and evidence to their specific mandate.”

Building on Goodson’s point, Ive has also seen the surge in investment in climate tech funds, with billions raised by firms such as a16z and BlackRock. “As transportation and food/agriculture are big contributors to climate change, it’s crucial these funds allocate a significant portion of their investments to this sector,” he says.

However, Ive goes on to suggest that some climate tech funds lack the expertise to make informed decisions about food and agriculture investments. “This is where experts such as Wendy, Sharyn, Erin and possibly myself can play a valuable role,” he states. “We can engage with these funds to educate them about the climate challenges in food and agriculture and advocate for at least 20% of their investments to be allocated to this area. Although impact funds and family offices are already focused on this, the vast amount of money in climate tech funds presents an opportunity to address climate issues through alternative proteins and related technologies.”

Upcycled and gaseous feedstocks are also gaining interest, as they align with circular economy and carbon capture goals

Philanthropy can also be particularly valuable in de-risking early-stage research and development, making it more attractive to governments and VCs. “Our GFI Research Grant Program has demonstrated this by investing millions annually into alternative protein research,” says Murray. “It’s important for researchers and companies to consider the broader context of their work, including economic feasibility and real-world implementation. Philanthropy focuses on real-world impact, so aligning research with these goals is crucial. The growing interest from climate philanthropy is encouraging, as it recognizes the need to transform food production to meet climate goals. This increased interest presents opportunities for alternative protein research receive significant philanthropic support.”

Likewise, crowdfunding can be a powerful financing tool. By raising funds from a large number of people, companies can secure capital for R&D, build a customer base, and mitigate financial risks. “Although not strictly crowdfunding, we’ve participated in two funding rounds facilitated by a Finnish investment bank called Spring West,” reveals Luukanen. “This platform connects companies with individual investors who can syndicate their investments into funding rounds. The experience has been valuable, especially when we were considering going public. The regulatory requirements for these rounds are similar to those for public offerings, so it’s a kind of pre-IPO preparation. We’ve gained experience in organizing our company, improving our processes, and attracting a large number of individual investors.”

“We’ve recently worked on a report about the current financing landscape and strategies for food-tech companies,” reveals GFI’s Murray. “Even though overall VC funding has decreased, they’re still interested in companies with clear operational milestones, a strong path to profitability, innovative business models such as platform technologies or solutions that address critical industry pain points, a focus on core competencies (potentially outsourcing non-core functions), and scalable technologies that can be applied to multiple industries. VCs also like companies that combine hardware and software. They’re looking for companies with a long-term vision for growth and commercial success.”

Ultimately, fermentation’s versatility and potential to address pressing global challenges make it a promising avenue for sustainable food production, while its environmental and nutritional benefits – and innovative applications – could make it a cornerstone of the future food system. It seems only natural that as investment continues to flow into this sector, we can expect to see even more groundbreaking advancements in technology that will shape the way we produce and consume food.

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