For the last few years we’ve been telling entrepreneurs setting out to raise equity capital for a growing food business they’re embarking on a prolonged, uncertain and challenging journey. Even getting a working capital line from any of the well-known banks is infinitely more difficult these days than before the recession.
But the enthusiasm for technology investing has spilled over into sectors of the food and nutrition world. Rosenheim Advisors, in the always-fascinating “Food Tech & Media Report,” said $800 million went into food tech companies in September 2014 alone! Whether it’s Good Eggs, Blue Apron, Hello Fresh or Seamless, investors appear to be falling over themselves to get into the food business. Even the U.S. Postal Service is partnering with Amazon Fresh to bring groceries to my front door—and maybe putting escargots into my box along with the snail mail.
Of all the sectors of the nutrition value chain, delivery is a curious place to start. Profit margins at Wal*Mart, the largest grocer in the world, are about 3.3%, and even Whole Foods—with it’s reputation for high prices—only ekes out a profit margin of about 4.5%. And simplifying the chore of shopping for supplements or food is not exactly a new idea. But will this new crop of technology-powered companies fare any better than their predecessors from the late 1990s? Some of us might remember Webvan, which went bust in 2001 and earned the dubious distinction from CNET of the biggest dot-com flop in history.
I have no idea what’s going to happen to the food tech sector or the ability of companies in the space to raise capital at ever increasing valuations. I do know that the rise in the public capital markets will at some point come to an end and go into reverse. The speed and severity of the downturn will determine the impact in the private capital markets. Investors will need to keep plenty of cash in reserve while entrepreneurs will be hoping the cash is transferred to their balance sheets before everyone rushes for the door.
Steve Allen co-founded Nutrition Capital Network. He has more than 30 years of business experience.