By Blake Friesen

Interest in the food and beverage sector is currently going through a growth spurt in the United States.  Investment has blossomed to a record high this year, with investors forking over US$368.7-million to U.S.-based startups in the third quarter, according to VentureSource data from Dow Jones.  That is the highest total for any quarter, and almost as much as the whole of fiscal 2014, when U.S.-based startups raised US$376.8-million from investors.  After three quarters in 2015, the total amount invested in U.S. startups was a robust US$542.4-million.

The prime reason for the increase in investment is that large companies are recognizing a change in consumer tastes and as a result they are rapidly scooping up smaller competitors.  The food companies that are focused on organic, gluten-free and grain-fed products have been this year’s benefactors.

For the most part, startups require investment from sophisticated investors who can check the various boxes necessary to qualify as an investor capable of handling high-risk investments.  We will address what those investors are up to in a moment.  For anyone else who simply thinks investing in the food and beverage industry is a smart bet, the easiest way to get exposure is to buy shares of an ETF such as PowerShares Dynamic Food & Beverage Fund, which trades on the New York Stock Exchange under the delectably appropriate ticker symbol, PBJ.  The fund has 30 stocks in its portfolio, with 5.37 percent tied to the performance of Starbucks Corp.  Other large holdings include PepsiCo, General Mills Inc., Kroger Co., Fresh Del Monte Produce Inc. and Tyson Foods Inc.  The fund has risen year over year since the start of 2009, and so far in 2015 it is up about 8 percent.

In Europe, meanwhile, a smaller fund for the food and beverage sector is iShare STOXX Europe 600 Food & Beverage UCITS ETF, which trades in Germany and provides investors with exposure to the euro.  This ETF is very closely tied to Nestle SA, which consumes 29.44 percent of its holdings, followed by Anheuser-Busch InBev SA with 14.32 per cent, then Diageo PLC with 13.01 per cent.  Since inception in July, 2002, the fund has had an average it's annual return of 9.22 percent.

Then there are the high net-worth investors who are interested in taking greater risk and finding the next Starbucks.  They usually prefer to deal with venture capital funds or specialized investment firms.  There are several venture capital firms that have impressive track records and are worth following. The best of the list is probably Trinity Ventures, a venture capital fund in Menlo Park, Calif., that was founded in 1986.  It went on to participate in early-stage financings of many tech companies but also several of today’s best-known food stocks, including Starbucks Corp., PF Chang’s Bistro Inc. and Jamba Inc. (Jamba Juice).  In total, Trinity has launched 12 funds and invested in over 250 companies.  In early November, it raised US$400-million for its Fund XII.  This is the largest fund Trinity has managed since inception.  It previously raised US$325-million for Fund XI and US$307-million for Fund X.

Starbucks and Jamba Juice are now blue chip players that long ago provided large returns to Trinity, and so the venture capital firm has to hunt for new startups with similar potential in order to continue to attract investors for future funds.  It recently invested US$9-million in Bulletproof Digital Inc., a coffee company managed by Silicon Valley entrepreneur Dave Asprey, who puts butter in his coffee and preaches a sugar-free, gluten-free diet.  The first Bulletproof Cafe opened in Santa Monica on July 25.

Even more recently, in October, 2015, Trinity led a US$10.75-million Series A equity financing for Gobble Inc., a meal-kit delivery startup.  Other venture capital investors that participated in the financing included Silicon Valley veterans Andreessen Horowitz and Fenox VC.  Gobble measures, chops and mixes fresh ingredients, eliminating nearly all the work that otherwise goes into cooking at home.  It then delivers them to customers in a dinner kit that they can turn into a fully-cooked gourmet meal in 10 minutes, using a single pan.  Think Blue Apron, but in less time (Blue Apron estimates up to 35 minutes for its meals) and using only one pan: just stir then serve.

Gobble says it now serves more than one million meals per year in California and Nevada, and the recent round of financing will help with expansion into other states.  So far, it only has service in the above-mentioned two states, with prices ranging from US$11.95 to US$13.95 per meal, depending how many you order.  If placed in the refrigerator after delivered, the meals will keep for up to five days.  The company plans to expand to Washington, Oregon and Arizona shortly, and if all goes well in those states, it will then turn its attention to the East Coast, notably New York City, Miami and Philadelphia.

Other large companies are also using other methods to access investments in the food and beverage sector.  General Mills Inc., for example, recently launched a venture capital subsidiary, 301 Inc., which will invest in food startups through CircleUp.com, an equity crowdfunding platform specifically for businesses targeting the consumer goods market. 

The General Mills fund has already found its first investment, Beyond Meat, which makes Beast Burgers -- soy free, gluten free and non-GMO -- and other plant-based products that are meat substitutes.

In Asia, meanwhile, CDH Investments has filed a prospectus to list its Dali Foods Group Co. Ltd., a Chinese snack and beverage producer, on the Hong Kong Stock Exchange.  CDH Investments anticipates selling a US$1.34-billion initial public offering, making it one of the top 10 listings in Hong Kong in 2015.  The IPO has already attracted three key investors, including Arisaig Partners, that have agreed to subscribe for US$305-million worth of shares.  Dali Foods, which has its headquarters in Fujian province, sells Daliyuan cakes and Copico brand potato chips.

The company is listing at a good time for the sector, with Frost & Sullivan recently releasing a report stating it expects China’s snack market to rise by 72 percent by 2019.  As more Chinese move overseas, the market for Dali Foods products will also increase outside China.  Earlier this year, the company began exporting its products to North America.  As more expats travel to further corners of the globe, food companies will find that expansion into new markets can be a less daunting and a more rewarding decision. Help from venture capital firms, which have seen a steady rise in demand for their funds over the past decade, is rarely too far away.