Wall Street for Locavores

Eric Kessler knows more than a few foodie billionaires who want to put their money where their mouth is. Specifically, they want to put it behind companies that are making the healthy, responsibly produced food they love to eat.

His company, Arabella Advisors, helps foundations and high-net-worth individuals align their dollars with their cause, whether it’s fighting climate change or empowering women in the workplace. But over the past few years, Kessler has shifted his focus to harnessing capital for the sake of transforming the food system. This is partially a passion project on his part — he cofounded the Chef Action Network with Michel Nischan and created the Chefs Boot Camp for Policy and Change at the James Beard Foundation. But Kessler also has clients who want to get in on the bottom floor on a crop of up-and-coming companies that they believe — or, at least, hope — will soon rule the food system.

“Right now, there is so much money going into companies that are working to produce healthy food in ways that are both sustainable and equitable — what I call the ‘good food system,’” says Kessler. “There are literally billions of dollars of capital just waiting to be put to work.”

In 2017, Kessler launched an initiative through Arabella called Good Food Ventures, an “investment club,” as he calls it, in which food and agriculture entrepreneurs can pitch directly to Kessler’s billionaire buddies in hopes of landing the capital they need to scale up their businesses. He can’t share details of the transactions out of respect for his investors’ privacy, but he says the group has done “about a dozen deals that total several million dollars” so far. He adds that another 150 potential deals are in the pipeline, along with “hundreds of millions of dollars in available capital.”

Good Food Ventures provides series A and series B funding, in investorspeak, to companies working in markets that range from sustainable seafood to food waste. One early beneficiary is Divert, a business that converts rotten produce from grocery stores into biogas. Another recipient of funding is SLM Partners, which provides financing to help farmers make the arduous transition from conventional to organic production.

Kessler is far from the only person in the venture capital world to latch onto the trend. David Barber, brother of chef Dan Barber of Blue Hill Stone Barns fame, established a foodcentric venture capital fund called Almanac Insights in January. Billionaire environmentalist Tom Steyer and his wife hoe a similar row with their own investment fund, Radicle Impact Partners.

Big Food has also joined the locavore gravy train, as companies like Kraft, Heinz, General Mills and Kellogg’s establish in-house incubators and venture capital funds to promote entrepreneurs in the local/organic space that they believe have a chance to “disrupt” the food system. The Campbell Soup Company’s venture capital arm, Acre Venture Partners, counts none other than Sam Kass, the Obamas’ former food guru, as one of its partners.

What should an upstart entrepreneur expect when approaching investors? “It’s not like Shark Tank,” says Dan Pullman, who heads Fresh Source Capital, a five-year-old venture capital fund that he believes was the first to focus exclusively on the sustainable-food market. “At least we hope it doesn’t feel that intimidating. We’re really here to help — the investor-entrepreneur relationship is ultimately more like a marriage.”

Pullman says that the process starts by sending in a 10- to 15-page PowerPoint presentation pitching the business: how it’s positioned to fill unmet market demands, plans for scaling up and financial performance to date. If it fits his criteria, he’ll then invite you to an in-person meeting. He turns down lots of investment-worthy businesses simply because they don’t fit the niche of his particular investment group, which is focused on what he calls “centre of the plate” foods. Sfoglini, a boutique Brooklyn pasta company that employs organic heritage-grain varieties, primarily from regional farms, is a recent recipient of Fresh Source Capital funding.

“We keep getting approached about organic popsicles, but we’re not in the snack space,” says Pullman. “We’re really only looking at main meals right now. Often, the most important things that entrepreneurs overlook are the interests and expectations of the investors they’re pitching to.”

To find the right match, it helps to be conversant in the language of finance. Venture capital investors are generally looking for a 15 percent “internal rate of return,” says Pullman, which translates to the idea that “they want to get roughly five times their money back after 10 years.” The best-positioned companies for venture capital are those that have already managed to reach roughly $1 million in annual revenue and are looking for an investment of several million dollars, he adds. “They need to have a pretty convincing story that they’re going to get to $10 million in revenue within two to four years and well north of that in five to seven years,” he says.

Recognizing that many small-scale food and agriculture companies don’t even dream of that sort of revenue, Fresh Source Capital also offers “debt instruments.” These require a much lower rate of return and are roughly equivalent to a bank loan, except Fresh Source Capital is providing the financing to companies that banks would deem too risky, says Pullman. “Those investments typically go to local and regional businesses that are really making an impact on the sustainable-food market in their areas but aren’t looking to build nationwide enterprises,” he says. “We want to support those types of companies, too.”

For companies that are just starting out and not yet at the stage where they can expect to attract venture capital, Pullman recommends applying to one of the scores of food hubs, incubators and accelerators that have sprung up around the country in recent years. These groups, which act as mentors to start-up food businesses, often refer their most promising mentees to investment funds like Fresh Source Capital.

Are America’s foodie investors happy with how their money has been put to work so far? Consumer demand has certainly remained strong. Pullman reports that the value of the 12 companies in the Fresh Source Capital portfolio has roughly doubled to date, “putting us on track to meet our investors’ expectations.”

Kessler says things look good from where he stands as well but sounds one note of caution: New markets typically need government incentives to grow, in the form of subsidies or, at least, policy reforms designed to support the sector.

“There is a lot of bad policy standing in the way of good food,” he says. That was starting to change under the Obama administration, which is when the surge of venture capital aimed at innovative food companies first took shape. “We are very much on the defense right now by virtue of the Trump administration and the leadership in Congress,” he says.

Kessler believes the upcoming Farm Bill, which he is advocating for behind the scenes, represents a critical moment for the industry. The once-every-five-years omnibus legislation that rules the food and ag world is due for renewal and should be finalized this fall. “We are working hard for the sake of good food, and for the sake of our investors who are supporting it, to prevent as much damage as possible in the Farm Bill,” he says. “We hope to see a Farm Bill that’s better than the last one — or, at least, not worse.”

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