On funding, investment and common food startup mistakes: An interview with Peter Bodenheimer of Food-X, #1 Food Innovation Accelerator in the World

  • On funding, investment and common food startup mistakes An interview with Peter Bodenheimer of Food-X, #1 Food Innovation Accelerator in the World (48119173817_21f6d0d0e5_b.jpg)

Peter Bodenheimer at Future Food-Tech NYC, June 2019. Image: Future Food-Tech NYC.

Peter Bodenheimer is Partner and Director at Food-X, responsible for the design and execution of the Food-X program, including recruitment, due diligence, fundraising, curriculum design, and program delivery.

Peter started his career in the food industry more than 20 years ago before shifting his focus to early-stage technology ventures. Prior to joining SOSV/Food-X, Peter co-founded and led business operations for Flatstack, a global software development firm with offices in Europe and North America. He also co-founded coworking space Launch Pad and ran Launch Pad Ignition, the first startup accelerator in the Southeastern US.

In his interview with NX-Food, Peter talks about the most common mistakes that early-stage startups make, gives tips on approaching the investors and securing funding, explains the benefits of functional food and shares his sources of inspiration.

  • Peter Bodenheimer Portrait (peter-bodenheimerfx.jpg)

    Peter Bodenheimer

In your career, you advised and invested in numerous early-stage companies. What are the most common mistakes that startups make and how can they avoid them?

The most frequent mistake that CPG companies make is trying to go broad too quickly while not being able to support that in terms of production, manufacturing or marketing resources.

We have seen companies being so excited of an opportunity to get into 2000 doors, yet not capable of promoting their products by doing demos, in-store tastings, couponing or whatever it is that will help them get discovered. Eventually, the products don’t perform as well as the companies would like them to and fall short of retailers’ expectations.

If a company right away goes too broad without sufficient resources, it often loses its spot on the retail shelf. Once you lose your spot on the shelf, it is difficult to get it back. Therefore, going deep and then going broad tends to be a more successful strategy.

When you talk about resources, you mean manpower or financial resources?

I mean either financial resources or human capital resources. If a founder or co-founders are out there doing demos of their product and trying to cover for all the tasks without a team, they can only stretch so far. When you think about mistakes that FoodTech companies make, it is underestimating the sales cycle, expecting it to be much faster than it actually is.

The other part is not speaking to their customers enough, assuming that the product they are building solves a problem. You may have heard a phrase “your solution is not my problem” — sometimes FoodTech or software companies develop an interesting solution and then get busy selling it instead of thinking about the problem it solves.

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    It is crucial for a startup to know, which problem they are solving with their product. Image: Startup Stock Photos

In your recent FoodTech Fireside podcast with Michael Wolf of The Spoon, you mentioned that startups might rely on different types of funding: venture capital, angel investments, family offices or bank financing. How can the startups identify the most appropriate funding type?

I think it is difficult for founders to think about it from the investor’s perspective. Venture capital, for instance, is a very specific model and investors have a very specific outcome they are thinking about.

Founders and entrepreneurs in the food space need to recognize that food is a different category than traditional technology or healthcare. It doesn’t necessarily scale as quickly so it doesn’t make sense to compare food business with tech companies raising large investment rounds.

Evaluating their type of company and understanding their market size can help the startup identify the type of investor that is going to be most appropriate for them.

Most companies start with friends and family money or angel money. Early-stage startup founders often raise capital from people that know them personally and believe in them. These investors know what their investees have done in the past and feel that they can trust them with their money.

Without personal guarantees and track records, getting a traditional bank funding is going to be much harder. That is why money from family and friends as well as angel investments from local angels that are geographically located where the company is are typically the best places to start.

If a startup is getting from half a million dollars to four to five million dollars in sales in a 24-month or 36-month period, that is when institutional capital, venture capital, family office money or in some cases private equity becomes more appropriate.

It also makes sense when the opportunity itself is going to be large enough. By large enough I mean seeing a path to get to 50-100 million dollars in revenue or much greater than that.

I’ve mentioned family offices because I believe that food is a different kind of space. People in food are interested in changing the system, making the world a healthier place. They are often doing it for reasons beyond just the capital return.

Family offices have a different time horizon: they don’t need to be concerned about the startup growing to 15 million in sales in five years. Instead, they can take a 20-25-year timeline and say: I believe in what this company is doing, I can see how we can get behind them and provide resources for them to scale.

What is the best way for food startups to convince an investor? How should startups present themselves to investors to secure funding?

Especially in food, people are great at talking about their product and why they decided to create something. But they are not always great in talking about the business fundamentals as well as the big vision for the company. There is a fine line of definition between talking about the product and talking about the business.

And often we see founders talking entirely about their product and how great their product is, which may be the case, but from an investor’s standpoint, there has to be a sustainable business there as well.

Depending on the type of investor, it may have to be a high-growth business versus a more traditional business.

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    When meeting an investor, startup founders should be ready to talk about the business fundamentals. Image: www.distel.co

To convince investors, entrepreneurs should focus on communicating the fundamentals of the business, such as margins, unit economics, production and customer acquisition costs as well as the lifetime value of their customers. When companies come to get interviewed for our investment program, the differentiator for me is when they can talk about the numbers of their business.

The other part to keep in mind is that investors see a lot more deals than they can possibly take on. In a certain way, investors are often looking to say no; they ask questions and go through a mental checklist: ok, let me ask this question. If I don’t get a good answer, I can say no. They gave me a good answer, so let me ask my next question and if they don’t give me a good answer to it, then I can say no.

The successful deals are typically those where the investor gets to the end of his questionnaire and says: “Wow. I could never say no to this deal, so I should make an investment”.

We at NX-Food test our startup products in the wholesale and retail environment and collect direct customer feedback. How do you collect consumer feedback with the startups from Food-X Accelerator Program?

It is hard for us to be deeply involved with that. We cooperate with startups and create a structure that we think will help them to find that out. And then it is their task to execute and make use of experts-in-residence, mentors and all the resources that we bring to the table. Ultimately, it is up to the startups to really know their customers and talk to them.

When companies come to join Food-X from outside of New York and end up in the middle of Manhattan, we often push them to go out and talk to retailers, customers and food & beverage companies. This way they can learn directly what consumers like and don’t like and how they respond to startup branding and messaging.

It is not enough to just make assumptions like “well, the other company is messaging this way so we should do the same thing”. The key is to get out, talk to people and collect real data that will help you make informed decisions.

But you are not partnering with particular stores that list your portfolio products?

No, although we had some discussions around that. We typically have a broad portfolio of startups, eight companies per Food-X cohort with normally three to four CPG companies. We work with alternative retailers, places that are a good fit for these products, but we don’t have a partnership with Whole Foods or Amazon. We do, however, work with the Amazon Launchpad team.

Typically, there is no such thing as “if you join Food-X, you are going to get on the shelf of retailer XYZ automatically”. We want our companies to earn that.

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    Companies that join Food-X Accelerator Program need to proactively talk to retailers, customers and food & beverage companies to collect consumer feedback and get their product on the store shelves. Photo by Hanson Lu on Unsplash

From my point of view, American consumers are much more open to innovation than European. What is your experience with that? How do Americans react to unusual products like insect-based food or lab-grown meat?

I think there are a lot of factors that play into it. Especially when you talk about lab-grown meat. There is a generational aspect to that for sure. The younger generation is much more open to that idea. I do think that Americans, in general, are open to food innovation in a lot of different ways. The United States is a big market and different states have different ways of thinking about the food system.

If you are in a place like New York, San Francisco or Los Angeles, you are getting a lot more plant-based foods and a lot more focus on functional ingredients and what’s new. In the Midwest, it may be more about incremental innovation and ingredient technology. The barrier for creating a food company has never been lower, so getting a new product off the ground is much more attainable than it was 20 years ago.

Companies have to be willing to move quickly — if they launch a product on the market and consumers are responding to it, they need to be able to capitalize on that opportunity. If they wait too long they are going to lose the opportunity and end up with a lot of copycat companies.

It seems that the food startup world in New York and San Francisco is developing much faster than in Europe. Whenever I look at the products in the United States, I notice quite a few trends that haven’t reached us yet.

I have no doubt that it will come. It is just a matter of an established structure for rapid innovation. San Francisco has Silicon Valley where the culture of innovation comes from. In a place like New York, you have a density of people, you have an amazing market to test new products, so there is obviously a lot of activity.

You have moderated a section on the Future of Snacking at the Future Food-Tech NYC. I would like you to answer the key question of the panel in a nutshell: How can we find a balance between things that are tasty and good for us as well as for the planet with minimal compromise?

It cannot be answered simply. Life is getting busier and busier. People are having fewer sit-down meals, they are snacking on the go, replacing breakfast with a yogurt or protein beverage. Instead of having lunch, they grab a couple of snacks throughout the day. This trend will only become more prominent over time.

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    Peter Bodenheimer at Future Food-Tech NYC, June 2019. Image: Future Food-Tech NYC.

Snacking is partially about indulgence but more about functionality. We are very driven by the idea of food as medicine that takes functional food a step further. People are looking for food products that offer more than just good taste and calories. Innovative food products that fulfil functional needs: improve focus, reduce cholesterol or provide a clean energy boost. This is the area where most of the changes will come.

Are there any particular solutions or startups working on the intersection of superfoods and medicine that impressed you lately?

One company from our program called Uplift Foods is making gut-healthy snacks. They are working with Mondelēz International to produce a line of low-sugar and high-fiber cookies that are healthy for your gut and absolutely delicious.

Another interesting company called Kojo is producing plant-based jerky. You will get the taste, texture and feeling of eating beef jerky with the same amount of protein and increased amount of fiber, lower sugar and salt and no cholesterol. So, you are getting a healthier option that tames the cravings for the original product.

There is also a lot of innovation happening on the beverage side. Right now, we are working with a company that uses a wasted part of a fruit that cannot be composted to create high-antioxidant teas.

As far as I know, you are a blockchain advocate. How can the food & beverage industry make the maximum out of this technology’s potential?

It is hard to say. There is so much opportunity in taking the fundamental technologies of blockchain and tokenization and adapting it to the needs of the food & beverage industry.

For example, Yelp is despised by restaurant operators because of the limited ways to validate reviews. By using blockchain technology, we could create a different incentive structure for people validating and sharing reviews or restaurants responding to them.

There is also a Basic Attention Token used for content production that works as a compensation model for content producers. Instead of looking at ads, people just pay a fraction of a penny to read an article.

Creating the right kinds of incentives using blockchain technology is a very interesting opportunity. And the most exciting ones are those I can’t think of yet.

What are your sources of inspiration in business? Which videos, movies, TED talks, courses, books or articles could you recommend to those starting their business in the food industry?

There are a lot of great podcasts out there including the “Taste Radio”. In terms of books, “The Hard Thing About Hard Things” by Ben Horowitz is a great book about running a business and building a business.

There are great food blogs and websites aggregating content like Food+Tech Connect, Food Dive and The Spoon. An article can have one or two insights for a founder to think about their business differently. Sometimes one insight is all it takes to make a meaningful shift in the business.

The other thing I recommend is thinking about metrics and KPIs. There is a book called “Measure What Matters” by John Doerr that says: You can’t improve, what you can’t measure. Taking time to measure things is very critical from day one.

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