Investors hungry for food safety startups

Escalating public concern about food pathogens and unhealthy chemical additives has sparked an appetite among venture funds for startups focused on making eating safer.

In recent months, VCs have funded an array of food-related startups—including developers of testing applications and makers of actual food—in a spending spree driven by consumer demand for higher quality edibles and desire to avert incidents like last year’s spinach scare.

The investments come as food distributors and regulatory agencies consider new guidelines to protect against further outbreaks. In an age of factory farming and global distribution networks, entrepreneurs and VCs say there’s growing demand for technology to detect infection agents early enough to isolate them.

“If you go back quite a few years, you really had local agriculture and markets,” says Robert Moore, CEO of Vigilistics, a developer of software for monitoring food processing operations. “But today, with the distribution chain that’s in place, something that’s contaminated could get across the country pretty quick.”

Moore joined Vigilistics about a year ago, after conducting due diligence on the startup on behalf of Tech Coast Angels. The Mission Viejo, Calif.-based company raised $2.8 million from Tech Coast Angels and Garage Technology Ventures.

Vigilistics is one of more than a half-dozen companies catering to the food industry that have secured VC funding in recent months. Other portfolio companies include a maker of devices for measuring bacteria in meat, an organic seafood distributor, a pork producer, and a developer of gaseous ozone technology for cold storage.

With the distribution chain that’s in place [today], something that’s contaminated could get across the country pretty quick.”

David Cope, CEO, Novazone

Clearly some business activities, like raising pigs or selling organic shrimp, hardly qualify in this category. But entrepreneurs in more technology-intensive food startups are eager to describe their companies as cleantech plays.

Casting food tech as cleantech makes financial sense for entrepreneurs. VC coffers are full of dollars for such targeted investments. VCs launched several dedicated cleantech funds in 2006, targeting solar power, water purification and biofuel technologies. Managers of diversified funds also upped their cleantech stakes, led by Kleiner Perkins Caufield & Byers.

Greg Sullivan, a managing director at Vancouver-based Chrysalix Energy Venture Management, says his firm’s investment in Novazone in December was motivated by the expectation that the company can deliver a more energy-efficient storage technology than rivals.

Cleantech investing is also expanding into water purification. In December, VCs invested $4 million in WaterHealth International, which makes products for treating water contaminated with bacteria, viruses and the protozoan pathogen Cryptosporidium. The new round followed a $7.2 million investment five months earlier.

Other water companies that have piqued VC interest include Boka, a Menlo Park, Calif.-based developer of water treatment technology backed by Khosla Ventures and EnviroTower. (EnviroTower, which is backed by NGEN Partners and XPV Venture Partners, markets an alternative to chemical water treatment.)

Consumer demand for all things organic is another trend driving VC interest. Profit potential is compelling in part because foods labeled “organic” sell for a premium over their non-organic counterparts. As companies like Wal-Mart move into organic, the sector’s scalability is also enticing VCs.

The world is moving into chemicals-free and moving into organic.”

Greg Sullivan, Managing Director, Chrysalix Energy Venture Capital

Be free

“The world is moving into chemicals-free and moving into organic,” says Sullivan. The draw for Novazone, he adds, is that foods disinfected with ozone are still labeled as organic.

While VCs may be attracted to the organic label, the public markets aren’t as enamored with it. Shares of two of the largest organic food retailers, Whole Foods and Wild Oats, have both fallen sharply in the past six months, though both still maintain price-to-earnings’ ratios above 30. No prominent companies in the organic food business have registered to go public, either.

Still, entrepreneurs and food safety experts see strong prospects for technologies tailored for massive processing and distribution networks.

A key issue is that the scale at which produce is grown and packaged today makes it difficult to isolate tainted items. Some of the largest farming operations might harvest 1 million heads of lettuce a day. “If the contamination is at .01 percent, how are you going to find it if you don’t sample that one head of lettuce that has it?” asks Amy Charkowski, assistant professor of plant pathology at the University of Wisconsin at Madison.

Because of the logistical challenges and cost associated with testing every head of lettuce or chicken for exposure to illness-causing bacteria, many food experts believe more detailed product tracking would be a more feasible solution. Politicians are echoing that view. Sen. Charles Schumer (D-N.Y.) in December called for the Food & Drug Administration to begin tracking produce and introduced a bill that would make one new federal agency responsible for food safety monitoring.

Whether they invest in tracking or testing technologies, VCs will funnel larger sums into food and water safety in coming years, Sullivan predicts. As for exits, those will come, too, most likely in the form of acquisitions, though possibly also through public markets, he says.

“There’s a real need to mitigate some of the risks we’re seeing with contamination and pathogens creeping into the food supply,” he says. “And these are very large markets.”