— Andrei Zyuzin, how and why was your fund created?
— Our team’s primary task that emerged in EFKO Group two years ago was to engage open investments. The open investments model was once proposed by professor Henry Chesbrough from Berkeley University, who suggested that companies that use more than their proprietary developments are more successful, since they manage to timely respond to ongoing changes and are open to anything new. This model has become extremely popular in the past ten years, and its propagation has been accompanied by a rapid growth of corporate venture funds accounting for up to 20% of the entire volume of investment transactions in the world.
Then there was the question of how these global trends concern us. It is important to understand what advantage the company may get by acting as an anchor investor in various new projects.
Several models can be adapted. There is the well-known Nestle, which once had a large investment fund, but it then was closed, and is now being restored. There is also Cargill with four subdivisions engaged in venture investments. There is Michelin, investing not in startup companies, but in investment funds through which it is beneficial for them to look at a transaction portfolio.
— What model did you choose?
— We have two main tasks. The first is to act as a probe that examines various jurisdictions, different startup development ecosystems, and selects projects where we can join an investment transaction. The second is whether the selected technology can be used in Russia, where EFKO conducts its business, if the technology proves its perspective nature. We cannot create a fund and shout out to the world about it, because we will have to compete with serious players, with funds controlling billions of dollars. We have no such experience so far, no connections and no popularity. We therefore decided to look at specialized funds in the foodtech area We pay attention to investment funds that will help us form a portfolio of projects, and then select startups. In most cases, we will have to search for projects abroad, as foodtech in Russia is unfortunately not that developed as a branch of food technologies.
— Do you think it is to your advantage that a fund is affiliated with a production company?
— There is a concept of smart money, when a startup company, in choosing an investor, thinks about how it can help the company in a volatile market with numerous risks and uncertainties. In our case, the answer is that EFKO Group is the leader in the Russian food product market that is ready to provide startups with its own infrastructure.
This is primarily the infrastructure of the Biruch Innovation Center in Belgorod Region, which holds advanced equipment. We invite startup companies to our facilities for complex laboratory tests and studies. But a startup that has just left the lab is not yet ready to tackle big business. It must check its idea at a pilot unit to understand whether the parameters created in the lab will be recreated in the test project preceding the scaling process.
All three stages, that is – lab unit, pilot unit and scaling, are proposed by the partner to the startup at its own premises. We even offer opportunities for testing the first stage of the product market launch using EFKO Group’s sales channels. Experience gained by the group is of great importance in promoting the startup on the market. This may include aspect such as meeting suppliers of necessary ingredients.
Vegetable meat and protein sugar
— Your fund’s specialization is defined by the specialization of your anchor investor, which is the area of food technologies called foodtech. What is going there these days?
— Process changes over the last 5 years have brought to life many companies that are beginning to transform the market. The first story that you are well familiar with is that of Beyond Meat, a producer of meat equivalent. It makes vegetable burgers that are bought today in Russia and abroad. Another such company, although not public, is Impossible Foods.
A wave of similar process changes spurred investor interest. A perfect example is Perfect Day, which attracted USD 140 mln of investment. They make alternative milk from vegetable ingredients. You must have seen almond and oat milk on supermarket shelves. Perfect Day technology is a successor of this trend but using enzymes. This is the so-called synthetic biology, when you make a product with nutritional characteristics significantly coinciding with those of natural products. Cellular meat technology may soon be scaled: cells of desired animals are grown in a bio-reactor, a steak, so to speak. As a result, you don’t have to breed animals, as cattle breeding inflicts severe climatic damage. Today, most people in the world are consuming less animal fat in favour of vegetable analogs. One such example is using egg substitutes, which removes the need to breed a large number of hens. Eggs are used to make mayonnaise, which is one of EFKO’s most important products, making this technology quite interesting for us.
— Sugar has become another serious challenge for science…
— An alternative solution is using sweet proteins as a substitute for sugar. This might not be a universal solution as today’s sugar. We must address many issues, as sugar must be sweet and provide the bulk of the dry substance in products such as confectionary.
An advanced industry branch is the production of synthetic products. Note that these are not chemical products, but organic products that are manufactured using non-conventional methods. The United States of America take the lead in this area, closely followed by Israel and Europe. All these three regions are of the greatest interest to us.
— How did you create the project funnel?
— To create a funnel, you need to join an ecosystem. We started by working with most incubators and accelerators engaged in the search, selection and growth of projects in the sphere of foodtech. They are located in Europe, Israel, USA; we are trying to visit all the accelerators’ events. At least that was the situation before the quarantine.
Moreover, we considered potential partnership with funds specializing in investments in the foodtech sector. We met with the Newtrition Fund, managed by PeakBridge Investment Company. The company is Maltese, but it is managed by two managers with experience in the global food industry, one being Nadav Berger, operating in Israel, and the other being Erich Sieber , previously Manager of the Nestle Venture Investment Fund. We joined this fund as an investor. PeakBridge currently has three companies in which they have invested together with us.
The first such company is Nick’s, a producer of low-calorie ice-cream from Sweden that is actively developing on the USA market. It was an interesting investment for us that made us understand more low-calorie foods. In this project, we found a technology that we are now analyzing for possible launch in EFKO.
The second project is called TasteWise. This is an Israeli startup founded by people from Google. They came up with a model for using artificial intellect in prediction analytics for restaurants and suppliers of restaurant ingredients. Upon detecting a change in consumer trends in cafe visitors who prefer some new dishes or new ingredients, there is need for prompt response, as the market is highly competitive. Naturally, restaurant suppliers must know in advance what they need to supply next quarter or year. This predictive analytics is developing well in North America.
The third company, called Plexus, produces sweet fibers — prebiotics that can be added to fermented milk products, which is also relevant for EFKO, which produces yogurts.
These three projects are a source of new knowledge for us, and we are exploring cooperation opportunities with each of them. We wish to understand whether these projects can be developed in Russia.
— Are you ready to independently enter new projects?
— By communicating with a large number of incubators and accelerators, we formed our own funnel. We are currently considering five projects from various parts of the world (America, Europe, Israel) that we are analyzing for investment possibilities. I hope when the crisis is over, we will be able to talk about it in greater detail.
Searching for Russian startups
— Can we hope that you will invest in Russian projects?
— We do not lose hope, and are trying to form our own local ecosystem to be interesting for startups, first Russian, then foreign ones. Th this end, we are cooperating with existing development institutes. In particular, last year, we held the UMNIK-EFKO contest together with the Innovation Support fund. Recently, we have held a remote pre-acceleration program, and are awaiting the lifting of the quarantine to be able to invite all last year’s winners to our Biruk innovation center. Moreover, for two years in a row, we were co-organizers of the regional startup contest StartUp:Land in Belgorod Region. Finally, there is a cluster of biomedical technologies in Skolkovo that includes technologies related to food products. We are currently actively analyzing these projects, and keep in touch with the Skolkovo team. We hope to be able to become more conscientious in selection while understanding what we are interested in on a short-term and long-term scale.
— Why are you still more skeptical about Russian projects than western ones?
— There are many qualified scientists in Russia, but state support in the food technologies sector is lacking. The concept of scientific educational centers dedicated to fill this void has just started developing. We are currently participating in the activities of such center in Belgorod Region.
But looking at the perimeter of the national technological initiative, foodtech has not developed as an approved roadmap yet. Thus, it does not function. Companies cannot attract grants in this field and cannot have a platform that would ensure privileged regulatory environment. There are a few foodtech startups in Russia, and those that take up investors’ attention are into food delivery, such as Delivery Club, Yandex.Food, Samokat. The startups have quite a simple model, as you are not required to handle certification or develop any new food products, which can be a complicated process.
Working on different planning horizons
— You say that some technologies in foreign projects are being analyzed for their possible use in EFKO?
— Technologies differ. A breakthrough technology can radically change the market, but at the same time, it can be either complicated in implementation or specific regulatory conditions must be created for it, and it bears a lot of risks. The implementation horizon for a breakthrough technology is longer than the usual business planning cycle of any company in Russia.
Sweet protein production is definitely that type of technology. You have to wait until a stable connection is developed that can be used in the place of sugar and that will withstand temperature conditions. Certification is needed until this product is generally recognized safe. This is the primary complexity of investments in foodtech. Safety certification is a complex task not only in Russia, but also abroad, where it may take years. For a technology with a long horizon, the fund invests or plans to invest in the project, and EFKO Group looks at what this can give. We can envisage in the terms and conditions of the transaction that if the project is successfully developing, EFKO will be entitled to get a license in Russia.
— What if the technology has a shorter planning horizon?
— Technologies used in the production of alternative milk products serve as an example. Here, the novelty has already been by the market; the issue now is therefore certification, selection of the right ingredients and positioning because so far, these products are deemed premium. We must therefore correctly select the moment and understand how we can enter the market with this product. People are striving for a healthy lifestyle, and these products will be surely in demand. The question is about the group of consumers and the horizon. We try to deploy our activities simultaneously on three horizons — short-term, middle-term and long-term, and we do not forget about the rules: any investment must be profitable whenever possible.
— What private-income generation concept are you planning to employ? Will that involve exiting the projects after their sale? Will there be further control of these projects with profit-making? Will the income be generated within the EFKO Group by implementing new technologies, manufacturing new products, etc.?
— Generating income by EFKO Group from licensing technologies, as well as development and improvement of what we have managed to license with further production is a parallel business. The fund does not engage in these activities. The purpose of the fund is to obtain investment income; exiting the projects will therefore be relatively traditional. Probably, in most cases, as usually happens across the world — mergers and acquisitions, when a company has made a product so perfect in the technological sense and proved its ability after its first sales that there is a number of buyers who want to own the product or technology.
The second scenario is traditional, but less common — initial public offer. I think there are few examples of that kind because companies must accrue the critical mass. By the way, this was the case with Beyond Meat, which had a successful IPO, grew, and still manages rather well.
These two exit scenarios are therefore kept in mind, and for each project, we analyze its potential and try to assume which scenario is more realistic.
— How did the quarantine affect your work and interaction with projects?
— Projects requiring financial support are growing in number, as many people are unable to reach their planned sales levels due to the crisis. Nevertheless, we cannot be a support element for startups, as in most countries, this function is taken by the state, which allocates additional funds to avoid dismissals, team breakings and business bankruptcy, as well as to enable companies to survive the crisis.
In any case, the market lives on the swing of demand and supply, and it is obvious that in these hard times, startups hold a less competitive position that investors with money. This means that many companies and startups are ready to sacrifice more shares in business, which never happened before, to let in investors with real money needed for survival. This does not mean that all investors will rush in like predatory sharks and take advantage of this opportunity, because the golden rule is that you must not kill the team motivation. Taking the largest share will most likely result in decreased motivation.
Finally, inefficient companies with extremely complicated business models or at their earliest stages of development will die, and it will be impossible to find and raise capital. Many companies simply reconsider their business models on the assumption of what will likely happen should a similar situation occur.
Interviewed by Konstantin Frumkin