EFKO is one of the few Russian private companies to launch their own corporate investment fund. How did you make this decision?
The decision was a logical course of EFKO Group’s development strategy. We initially considered our Fuel for Growth fund not just as another potential source of profit, but as a competitive tool for the long-term development of the company.
Market development mechanisms currently usually focus innovations in industries where conventional players are major and rather inertial companies; this means that they lose connection with the end consumer, and do not quite clearly recognize changes occurring in the market. For example, this happened in the financial sector, where conventional players had and still hold huge financial resources and millions of clients but a new financial technical sector appeared where startup solutions offer bank clients new solutions or services that boost their loyalty and satisfaction (for example, commission-free cash transfers). Now we see Visa buying Plaid for USD 5.3 bln.
The same processes are emerging in the food industry. Consumer preferences and behavior are changing so rapidly that major companies lack resources to track market changes. Today, we see consumer preferences changing in favor of vegetable ingredients and low-calorie products, with the most active sector being changes in consumer behavior in the area of food delivery, when buyers are able to get the products they need in a quick and cheap manner via a mobile app.
Well, food delivery is not that technologically sophisticated…
That is absolutely true. But if we speak of FoodTech, it is an area of advanced bio-technological developments in the food industry: vegetable proteins, sugar substitution, environmentally friendly packaging, additive technologies of food printing, DNA analysis and personalized nutrition, etc. Nevertheless, we must understand that market transformation through business models is also a form innovation. Consider the transportation market (Uber) or apartment booking market (AirBnB) – in both cases, entrepreneurs spotted a niche that launched a market transformation. Are there many deep technologies in these apps? Maybe not. But it is extremely difficult to organize the process to make it useful and convenient for consumers. The same goes for food delivery. But you should note that the largest producers are investing in food delivery services also because this ensures direct access to consumers and their preferences, to the contents of their market basket – if you use this data correctly at an early stage, you can see a vector of changing consumer needs.
Thus, radical changes in nutrition mechanisms may face a negative attitude from some people, as nutrition is related to health, and people arguably exert reasonable conservatism.
Remember that the changes we are seeing on the market are dictated by consumers who are quite informed of the benefits and dangers of various food products rather than by producers of such products. Producers monitor these changes and try not to lose the market (as Nokia and Kodak once did). For example, Tyson Foods is investing almost in all vegetable meat production startups for a single simple reason – smart startups may leave them out of the artificial meat market they are trying to create.
To further extend the transportation or rental service analogy, we can say that in terms of market regulation, foodtech is almost in the same phase where new services were some time ago –at the first stage, they also faced resistance from conventional players: in some cities, Uber is still in litigation with local authorities and taxi companies, while AirBnB is being systematically bumped out of some cities. Similarly, there are suits undergoing in the USA to prohibit calling vegetable-based products as meat, sausages or milk.
Business is competition, and it is merciless to those who assume they know everything about the consumer. This is why we see some traditional players on the food market being expelled once they choose to ignore ongoing changes in technologies and consumer preferences. A good example is when Dean Foods chose to overlook the preferences of vegetarians (the American Dean Foods is one of the largest global milk producers that announced bankruptcy in 2019, one of the reasons being a decline in the consumption of milk products and growing interest in drinks based on vegetable products such as almonds and oats – Firrma) or 160-year-old Borden Dairy Co (one of the largest companies in the United States producing milk products – Firrma). On the other hand, there is Perfect Day, a California startup producing milk by fermentation (by Q4 2019, the startup had raised USD 140 mln of investments) that, as they say (and according to consumers buying the product), has the same taste as natural milk, or the startup Just, which created a vegetable equivalent of eggs.
Another extremely advanced trend is searching for alternatives to sugar. Sugar is one of the primary components used in the manufacture of carbonated beverages and products (confectionery, pastry), as sugar is quite cheap, but the challenge is to find a less harmful and equally cheap substitute.
The cases we are talking about are mainly global companies with potential market volumes of billions of dollars, but also having huge investments. Can a Russian company consider taking part in it?
What comes to my mind is a question from Lev Kassil’s novel Konduit i Shvambraniya, when Osya, the narrator’s younger brother, asks the gymnasium director:
— If an elephant tackles a whale, who wins?
— I have no idea, — the director shamefully admitted.
— No one knows, — Osya consoled him.
Fortunately, the world is not linear: on the one hand, the success of investment funds is defined by multiple parameters, and therefore depends on the quality of the existing startup portfolio; on the other hand, attractiveness of interaction with a major company is defined by its size, reputation and speed. Moreover, it is important to be able to be at the right place at the right time: it may be hard to believe, but all famous companies were small startups at their initial stages of development; nevertheless, it is important not only to find a company, but also understand whether the solution it creates has a potential. For example, I had a talk with a fund that had the opportunity to invest into Beyond Meat back when the company was valued at USD 95 mln but didn’t, but are now kicking themselves (the Bessemer fund has an entire section called «Anti-Portfolio» about it).
What project portfolio is the EFKO corporate investment fund interested in?
Considering the size of the fund and industry, we are interested in finding technologies and teams capable of transforming existing markets in the industry. Here, we have two opposite vectors – from customers (we earlier spoke of delivery services), and from technologies (we have mentioned the example of sugar).
In addition to vectors, there are also horizons: some technologies are already highly ready, and we are interested in simply becoming a minority stockholder once the company shows extremely positive dynamics, or to assess the interaction potential with the EFKO business; there are also emerging technologies that are promising but are still far from implementation, so it is hard to evaluate potential for the current business, and in this case, we invest. Today, we see the following trends:
a) low-calorie fats (including products for substituting animal fats with vegetable fats, in particular, in milk products – Firrma). For example, today, we will be examining a startup that produces fat equivalents that can be used, among other things, in meat products, which makes them less caloric.
b) sugar substitutes – consumers want to reduce sugar consumption; we are therefore looking for an adequate substitute in terms of flavor and price;
c) products and technologies that make food more functional (such as probiotics). There is also a segment that we believe can play an important role in the foodtech industry — neural networks and artificial intelligence, which can help to search for new ingredients and to find out about consumer preferences. Today’s industry is witnessing rapid changes associated with the release of new products. For example, several years ago, there were dishes with quinoa, bulgur or chia dishes on a restaurant menu, but now, this has become a widespread phenomenon. New products are emerging every day that were previously consumed exclusively within some reserved regional markets in their country of origin. Producers, retailers and the public catering industry must monitor these trends well to be able to remain relevant and to order the required volumes of products and organize the supply chain.
How can AI help this?
For example (and this is only one of the options), you can create a solution that analyzes pictures of food posted on Facebook or Instagram and signals new trends.
Based on the standard of living in Russia, how relevant are international trends related to healthy food and conscious consumption here? What are the chances that these products will be relevant only in Moscow and several large cities?
There is now a price barrier for all alternative products, for example, from Beyond Meat: a cutlet of vegetable meat substitute costs much more than the usual meat cutlet. This will continue until this technology and the production based on it become large-scale. As experts from the Rethink Food & Agriculture report, the price of protein will be 5 times less by 2030 and 10 times less by 2035 than the existing price of animal protein. This applies to any new products. Therefore, if we are talking about long-term perspectives (up to 10 years), products will have higher quality and a lower price, which means Russia represents quite an attractive market on the 10-year scale horizon.
How many corporate investment funds in Russia are founded by private companies? Could you name the most prominent of them?
Speaking of investments by private companies, I would name Serverstal’s corporate investment fund (Severstal Ventures is a division of Severstal PJSC founded in 2018 to support and develop venture projects in the area of new production technologies and materials. The company is also interested in coatings, industrial steel 3D-printing technologies and other metal-working projects – Firrma). The second case is AFK Sistema’s investment fund investing in the most promising areas of the hi-tech market. Its expert opinion and experience are attractive for external investors.
How good is it that most Russian investments are made in innovations by state authorities having top-down approaches regarding which areas are considered priority?
State funds are one of the financing tools, and everything depends on how they are used. For example, Israel also has state co-financing of innovative projects, but the volume of such funds is not critically big and the key priority is still to keep a high level of competition. For instance, if any university wants to get a state grant for one of its projects in the area of applied research, it must first show that private structures are ready to invest in the project, and only then can it seek to secure state money.
Russian science is traditionally believed to remain rather strong globally, which allows creating some promising startups within the country, particularly in the foodtech area. Is that true?
We have put in quite a lot of work, and continue working with Russian scientists. Perspective developments are in the works. But when we say «OK, science is over, now let’s do business», problems occur. On the other hand, it is not just money that we offer. We have our own competencies for commercialization of innovative developments. To support this, I would like to give an example of development that we found thanks to the EFKO UMNIK contest (EFKO Group is the first company to launch a contest together with the Innovation Support Fund – Firrma). We have gathered more than 60 applications from various university teams, and found a very interesting development in the field of sweet proteins – this area is researched by the best scientific schools in the world, and in terms of scientific achievements, our scientists are producing excellent results these days (although the technology itself is still at its early stage).
You have experience in launching innovative processes in a Western company. Is there any difference between launching corporate innovations in Russian (EFKO) and in Western companies (Cisco)?
I would like to point out two important aspects. The first is origin, size and market. Established in 1984 and entering the stock market in 1990, Cisco was at one time a pioneer in the area of open innovations, particularly in the acquisition of technologies that were seamlessly interlaced in the product launch model. Besides powerful sales competences (for example, by head-hunting), Cisco managed to create an HR-conveyer for digesting and implementing startup teams and technologies: in its peak season, Cisco bought 50 companies per year. Nevertheless, we should remember that the IT sector is a new market that has formed before our eyes and that is experiencing high competition. Cisco is a story of an extremely successful startup that grew into a dominating market player and became a conductor of the formation of new markets.
The market for agricultural companies is traditional, conservative, where startups develop according to a scenario similar to the financial sector, from the other end – from the scale and desire to single out the most critical points, form a “main strike direction” there, and then expand deeper. For example, food delivery is the most investment-attractive area in the agricultural sector. Why is that? There is almost no regulation, and it is easy to transfer the Uberization model to connect online and offline.
Therefore, major companies have the same positions as all major players: defending themselves (prohibiting calling vegetable burgers meat), imitating (we can do it too), perceiving and readjusting. Some succeed, some don’t. This is where the problem lies. After understanding that new fronts are constantly being added to old fronts, the question is: What perimeter to protect? How should we proceed? How quickly must this be done, or must we follow Chinese wisdom and wait on the shore? This is a very difficult question, the entire historical experience of large business development shows that one must not hurry; but modern trends (Kraft Heinz, Dean Foods, on the one hand; Beyond Meat, Impossible Foods, Perfect Day and Delivery Hero, Delivery Club and Yandex.Food, on the other) make us nervous and force us to decide what to do.
There is no simple answer to this, since it is almost the same as first trying out an iPad in adulthood or when you are just a child: some things come naturally, while others are hard to master.
The second aspect relates to culture and management. It is no secret that keeping the status quo is culture; challenge and struggle are culture; obviously, there will always be a mixture, but there is a dominant; that is precisely what I am talking about. In the ideal innovative development of a major company, the dominants are personal involvement and curiosity. Personal involvement is the equivalent of benchmarking that employees try to fit in the company, and curiosity is the search for answers to why and how, that is, an effort to grasp or offer something.
Another aspect is an appetite for risk. It is quite difficult to be objective here, since there is the claimed appetite (in mass media) and the real appetite (within the company): independence, tolerance for failure, perseverance, the risk budget, etc. To my great surprise, EFKO was one of the first companies where I managed to see a real appetite not only in its ambitions, but in the number of traps that the company was caught up in while launching innovative projects and it maintained its level-headedness. Risk tolerance determines maturity, as it shows willingness not only to assume the risk of technology or investments, but the more serious risk of restructuring the system and changing the culture, since there is no real innovation without it.
The main thing is: who takes the startup from the local pond to the ocean? This is usually the work of mature managers (Schmidt in Google, Sandberg in Facebook, etc.). Where are those social systems that do not only train these managers, but also anticipate the appearance of such companies? No respect of this kind exists yet; in the social consciousness, this is not yet a potential generator (nevertheless, Yandex is among the top-five preferred employers in Russia).
There is a significant difference that lies not in the Russian / Western plane, but in mature / immature planes as applicable to shareholders and the market, and in our case – to the state, as 70% of the economy is state.
EFKO is looking for startups abroad and investing in them. It is believed that Western startups are reluctant in taking money from Russian funds. How about from corporations?
Startups want to see smart money in an investor. This concept is a cliché; but the question is why it does not work well in the corporate environment and what its components are. The first attribute of smart money is speed in decision-taking. The existing hierarchy and motivation oppose such approach in corporations. But in any corporate culture, one can find a way to ensure the required speed in decision-taking, but this requires a non-standard approach.
A part of smart money is smart marketing. In order to be believed, we often have to invite potential partners, including foreign ones. These do not expect long reception parties, dinners, politics talks; they come to be sure, are very specific, and expect reactions, movement, action and decisions. As to the cliché of the Russian investor, this is a matter of statistics and trust; look at Almaz Capita, Runa Capital and other funds with Russian roots. If an investor has something to offer besides money, he / she does not become a burden for the project, and reasonable behavior wins. So Russian roots do not bother anyone.
Do startups wish to work with Russian companies? Are not they afraid to enter the market through them?
Business is almost always about money and revenue; take away the skepticism and hype, and you are left with business interest: 2% of the global market, 140 million people. Quite a market, don’t you think? One of the projects that we are looking at has an interesting example typical of reasonable startups: the company founder is a scientist with minimal competences in investment, marketing and sales, but high competences in bio-tech and a promising product, but he is balanced by the board of directors, who have tremendous experience in the industry, motivation and a deep understanding of the market. Even foreign startups with great prospects understand that it is better to maintain this balance, and a major company can become a strong and reliable partner.