Investors bite into food safety startups

Escalating public awareness about food pathogens and unhealthy chemical additives has sparked an appetite among venture funds for startups focused on making eating safer.

In recent months, VCs have funded a full platter of food-related startups—including developers of testing applications and makers of actual food—in a spending spree driven by consumer demand for higher quality edibles and desire to avert such incidents as last year’s E. coli spinach scare.

For example, Vigilistics Inc., a developer of software for monitoring food processing operations, is one of more than a half-dozen companies catering to the food industry that have secured VC funding in recent months. The Mission Viejo, Calif.-based company raised $2.8 million from Tech Coast Angels and Garage Technology Ventures. Other portfolio companies include a maker of devices for measuring bacteria in meat, an organic seafood distributor, a pork producer, and a developer of gaseous ozone technology for cold storage.

So far, food-related venture investments haven’t taken a large bite out of funds. With the exception of Novazone Inc., which raised more than $20 million in six VC rounds over the past three years, food-related investments have commonly been in the range of a few million dollars. But that could change, entrepreneurs say, as recently funded startups return for later rounds.

Plus the need for new solutions is undisputed. Worldwide, an estimated 2 million people or more die each year as a result of diarrheal diseases commonly linked to contaminated food and water, according to the World Health Organization. In the United States, the Centers for Disease Control estimates that 76 million Americans get sick and 5,000 die from food-borne illnesses each year.

About 200 people in 21 different states were sickened and three died after eating spinach tainted by E. coli in August and September of last year. Three months later, about 60 Taco Bell patrons in New Jersey, New York, Pennsylvania and Delaware got sick from eating green onions contaminated with the bacteria.

Some interpret VCs’ recent fondness for food plays as an extension of the industry’s newfound fascination with environmentally friendly technologies. “We’re seeing a trend taking place where consumers are saying: ‘I want safe food, but I also want you to reduce the use of chemicals in my food,” says David Cope, CEO of Novazone, which uses ozone derived from oxygen to disinfect and store food. “But how do you do that? That’s the intersection where cleantech comes in.”

Greg Sullivan, a managing director at Vancouver-based Chrysalix Energy Venture Management, says his firm’s investment in Livermore, Calif.-based Novazone in December was motivated by the expectation that the company can deliver a more energy-efficient storage technology than rivals.

Clearly some business activities, such as raising pigs or selling organic shrimp, hardly qualify in this category. But entrepreneurs in more tech-intensive food startups are eager to describe their companies as cleantech plays. Cleantech investing is also expanding into water purification. In December, VCs invested $4 million in WaterHealth International, which makes products for treating water contaminated with bacteria, viruses and the protozoan pathogen Cryptosporidium. The new round followed a $7.2 million investment five months earlier.

Other water companies that have piqued VC interest include Boka, a Menlo Park, Calif.-based developer of water treatment technology backed by Khosla Ventures and EnviroTower. (EnviroTower, which is funded by NGEN Partners and XPV Venture Partners, markets an alternative to chemical water treatment.)

While VCs may be attracted to the organic label, the public markets aren’t as enamored with it. Shares of two of the largest organic food retailers, Whole Foods and Wild Oats, have fallen in the past six months, though both still maintain price-to-earnings’ ratios above 30. No prominent companies in the organic food business have registered to go public, either.

Still, entrepreneurs and food safety experts see strong prospects for technologies tailored for massive processing and distribution networks.

A key issue is that the scale at which produce is grown and packaged today makes it difficult to isolate tainted items. Some of the largest farming operations might harvest 1 million heads of lettuce a day. “If the contamination is at .01 percent, how are you going to find it if you don’t sample that one head of lettuce that has it?” asks Amy Charkowski, assistant professor of plant pathology at the University of Wisconsin at Madison.

Because of the logistical challenges and cost associated with testing every head of lettuce or chicken for exposure to illness-causing bacteria, many food experts believe more detailed product tracking would be a more feasible solution. Politicians are echoing that view. Sen. Charles Schumer (D-N.Y.) in December called for the Food & Drug Administration to begin tracking produce and introduced a bill that would make one new federal agency responsible for food safety monitoring.

Whether they invest in tracking or testing technologies, VCs will funnel larger sums into food and water safety in coming years, Sullivan predicts. As for exits, those will come, too, most likely in the form of acquisitions, though possibly also through public markets, he says.

“There’s a real need to mitigate some of the risks we’re seeing with contamination and pathogens creeping into the food supply,” he says. “And these are very large markets.”

A longer version of this story previously was published in Venture Capital Journal, a sister publication.