What do you want to be when you grow up? 4 guiding principles for alternative protein startups looking to scale

The alternative protein sector is at a critical juncture. Just as ideas are worthless unless they’re executed, alternative proteins will only have impact if they scale. But scaling is a tricky business in any sector, and especially in one like alternative proteins. As companies walk the tightrope towards success in the brutal market that is the food sector, those that have the best shot at success will be those that (from the outset and at regular intervals) ask the right questions to guide their decision-making, put in place key building blocks at the right moment, and anticipate roadblocks that will inevitably arise based on learnings from similar sectors.

In this first article, we suggest four broad strategic questions for companies to think about early and often as they grow up. The rest of the series dives into specific pressure points that are critical to get right for alternative proteins to reach the end state our planet so badly needs: scale.

Four questions to plan who you will be when you grow up:

1. What is the nature of your business?

There are four main alternative protein business models: 1) Sell ingredients; 2) Sell end products; 3) License technology; and 4) Provide enabling technologies or services. Do you want to be an ingredient manufacturer or a consumer brand? Are you an innovator selling a technology, a platform selling a service, a manufacturer selling an ingredient, or a food company selling an experience? While companies can be a combination of these, they are unique business models with different customers and demand unique capabilities. You will compete in each domain with deeply specialised and large companies. While some startups can try to build a full-stack, vertically-integrated empire themselves, that is not how most companies succeed, or how most sectors are structured. The quicker you figure out which business you want to be, the easier it is to stay focused, say no, and hone in on core strengths.

“One of the best pieces of advice we got early on was that doing something innovative creates risk, and you can only compound so many risks in your company before the wheels come off the bus. And so make sure that when you’re innovating, it’s in the areas you need to, especially for something like what we were doing…real tech innovation on the biology side…We were innovating like crazy over there.”

Jason Kelly, CEO and Co-Founder of Ginkgo Bioworks (Episode 174, GRIT podcast)

2. What kind of market are you selling into?

Markets for alternative proteins are typically either low-margin, high-volume markets or high-margin, low-volume markets. While successful businesses can be built at both ends, the choice of end market should be factored early into decision-making, as this will determine your market viable price. While pricing is often done after the product is created and launched into the market with a margin added, a better strategy is to design the product around the price. There are psychological thresholds that are critical to investigate in your market that will shape the price range customers will pay for your class of product or service. 

If you find you are some way away from your target production cost, you need to find a way to be viable at every scale before reaching your target. The “trickle-down” strategy of starting with high prices and lowering them over time won’t work if your starting point is well beyond the willingness to pay in the market you’re in.

Here’s the kicker about alternative proteins: most transitions only happen when things are better and cheaper. The challenge for innovations like alternative proteins, as with other climate tech sectors such as green steel and sustainable fuels, is that early adopters must often pay for something that is frequently, at least at the outset, more expensive and less good. Market forces kick into gear when products become more affordable, but until that happens, products are in a low-volume, high-price trap.

Are you assuming consumers will pay much more than the market norm at any point in your scaling journey, and is that a realistic and qualified assumption? How will you finance your growth at different scale-up stages if you can’t rely on steadily growing revenue generation? These are critical questions to answer, and you might find that you need to design your business differently from day one to tap into particular types of financing sources later, pivot to an alternative technology innovation, or grow in a different market.

3. What problem are you solving for customers?

Businesses succeed when they solve a problem. It has to be a problem that enough customers have, that they don’t have better ways to solve, and they care enough about the problem to pay (more) for it. If you are selling business to business (B2B), your customers will care primarily about cost as well as functionality and label claims, and they will need a lot of samples to test their formulations. If you are selling business to consumer (B2C), you need to figure out if you are making defensible assumptions about your consumer being comfortable with repeatedly paying for products that solve a societal problem (eg better for environment), that promise functional equivalence to what they already eat (eg tastes like meat), or because it’s made in a certain way (eg animal-free dairy.)

“You’ve got to dig to find the markets where you are solving a problem. For example, we went to China to try and sell our egg solution, but realised we had no hope as eggs are produced so cheaply there in abundance, so we can knock on doors but people will ask why you are wasting their time. Compare that to our success in Sri Lanka, where the cost of chicken has risen significantly. We are working with one of the biggest frozen meat manufacturers there because we can markedly reduce their chicken costs using a plant-based chicken fat and plant-based protein blended into their conventional hotdogs. It’s never about moving to plant-based because it’s plant-based. It’s what it can do for them. We showed them how with meat, they need to thaw it, mince it, and cook it. With our plant-based meat dry ingredient mixes, they can just pour it in and mix it to decrease process time and drastically increase throughput. 

“We also find gaps and think from the perspective of: what we can uniquely do with a plant-based innovation? For example, we couldn’t find any sauces in supermarkets that tasted like seafood. We found out it’s really hard to do this the legacy way because if you mix crustacean and egg protein compounds together, separation is really prominent. So we created our own plant-based lobster mayo and plant-based lobster which has no allergens, zero cholesterol, and we can produce it at a quarter of the price compared to a leading fast-casual chain. Distributors get a better margin than their legacy mayo, and manufacturers get something that is only possible to do with plant-based. Find the gap in the market, the market in the gap, and why plant-based innovations can uniquely go there.”

Tom Hew, Chief Development Officer of BaseFood Sdn Bhd (MADEBETTER^TM | RightSide^TM brands)

4. How will you finance your growth?

Market forces kick into gear when products become more affordable, but until that happens, products are in a low-volume, high-price trap. To get out of the trap, companies need to scale up. Usually, venture capital takes companies to the stage where they can start to grow in niche markets with willingness to pay to fund their climb down the cost curve. The challenge comes in markets where money does not come alongside the scaling, in other words, where you have to build expensive facilities to get to the unit economics you need to get customers in the door. Few financial providers are structured to give CapEx-intensive companies with a weak value proposition in early markets the enormous amounts of capital they need to get to the required scale to drop prices and generate stable revenues. This plunges these companies into a second “valley of death” before market forces can kick in.

We would be wise to heed the lessons of the venture capital (VC) boom and bust of “Cleantech 1.0.” Between 2006 and 2011, VC firms spent over US$25 billion funding green technology (then termed cleantech) startups from 2006 to 2011 and lost over half their money, leading to an abrupt funding winter. In a now-infamous MIT working paper analysing VC-backed startups in three sectors in this period, while software-based green tech companies were found to return results consistent with the superior performance of the software sector, those developing new materials, hardware, chemicals, or processes that required significant capital, long development timelines, and were uncompetitive in commodity markets, were more likely to fail, and even if they did not fail, they returned limited capital to investors.

“One lesson that entrepreneurs may take away from this story is that cleantech companies need to adapt to fit the constraints of VCs…That lesson is wrong and could be a disastrous impediment to the development of much-needed clean technologies to upend the world’s energy systems—a transformation that software alone cannot accomplish. The correct lesson is that cleantech clearly does not fit the risk, return, or time profiles of traditional venture capital investors. And as a result, the sector requires a more diverse set of actors and innovation models.”

“Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation,” MIT Energy Initiative Working Paper, July 2016

Venture capital can be a lifeline for new companies that face high technology and market risks in their journey to scale. But it’s important to understand the implications of venture financing, and be aware of alternatives. When you take money from venture investors, all the money you take in will eventually have to be paid out. Equity holders will take money either as cashflows, an exit, or when they sell their stake. High valuations too early make it difficult to raise money later, and can attract money from investors who don’t thoroughly understand your sector or business. If you have a sky-high valuation with a high multiple on sales, you may be forced to prioritise growth at all costs, pursue high-margin products that are a distraction from your core strategy, and make non-ideal strategic decisions. Overly optimistic valuations may also result in down rounds later on. Virtually all successful VC-backed startups exit via a merger or acquisition, and very few will IPO. Thinking about your likely exit early and often may lead to different decision-making over time.

Many thriving businesses do not pursue hyper-growth, and not every business fits the venture mould. Securing key technological milestones at earlier stages of growth is critical to prove there is a path towards long-term sustainable unit economics. Can your product or service grow rapidly without proportionately increasing costs? Does your offering stand out as significantly superior to existing solutions? Some companies can bootstrap their way to success without adhering to the high-speed growth trajectories required by VCs. Government grants and incubator programs that provide seed funding are alternative ways of early-stage financing, while different types of capital and non-dilutive financing options are emerging to plug the capital gap for hardware-intensive yet mission-critical innovations like climate tech.

“Although the challenges for scaling asset-heavy sustainability solutions businesses are daunting, there are solutions that already work, or can work as a matter of engineering and physics.… A path forward will require capital-intensive climate tech to de-risk the business case, get creative about financing (often by taking advantage of public incentives), and scale up operations more quickly.”

A different high-growth story: The unique challenges of climate tech, McKinsey, January 2024

Growing a startup to a mature company is an incredibly difficult journey. Therefore it is critical to ask yourself the tough questions about business models, target markets, customers, and financing early and often. 

This is part one in our new monthly Scale-Up series. Check out part two, where we explore how to scale in the right market (which might not be the one you started in).

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