Traditionally, most venture capital funds have focused their attention on the tech industry. But after watching CPG startups grow into large companies and be acquired for staggering amounts, many investors are now shifting their attention to a new category – consumer packaged goods.

The rise of e-commerce and direct-to-consumer channels has brought a high-tech overlay to the traditionally low-tech CPG industry. At the same time, Big CPG firms have started taking a page from tech’s playbook, establishing incubators and accelerators to help with new product innovation. Two dramatically different industries are finally beginning to overlap, and investors are taking note.

Why now?

Venture capital funds have been slow to shift their attention to the consumer packaged goods industry. The universal understanding for investors was that there wasn’t enough differentiation between consumer products to cause the type of change that would disrupt an entire industry. Thousands of new brands have tried to overtake Coca-Cola as the world’s largest beverage producer, but fresh ingredients, packaging, marketing, and sustainability haven’t unseated Coke from its throne.

Furthermore, investors didn’t believe that small startups could find a new market or invent a new category that would allow them to reach the size of big CPG companies like Unilever organically. It didn’t make sense to make a big bet on smaller startups with lower payoffs.

The tide has started to turn, however, as the CPG industry has launched a wave of M&A activity while small brands have begun to threaten the behemoth incumbents.

What has changed?

VCs are finding out that consumer goods may be more high-tech than they previously thought. The rise of the direct-to-consumer business model has given companies direct access to customers, data on their behavior, and the ability to build out an e-commerce offering without relying on anyone else.

Investors have also come to terms with the fact that CPG companies are unlikely to turn into an oligopoly like traditional tech companies. Amazon is responsible for nearly half of U.S. e-commerce sales. In ridesharing, Uber generates $6.5 billion in net revenue, while Lyft comes in at just $700 million. Mark Zuckerberg is living through Groundhog Day trying to convince congressional committees that Facebook isn’t a monopoly.

By contrast, in the CPG world, 51 companies produce baby diapers, selling nearly 100 different brands. The market leader Procter & Gamble only accounted for 32% of sales in 2017, according to GlobalData.

In more competitive categories, the number of brands is even higher. Anyone who has walked into a Sephora store can tell you that the makeup category has an overwhelming amount of choice. Market leader L’Oreal owns 39 brands, but it only generated 23.7% of U.S. makeup sales in 2016.

Investors have seen successful startups cut into the incumbents’ revenue, and they want in on the earnings. Dollar Shave Club was started in 2012 with $1 million in funding during its seed round. Their success scared Unilever into purchasing them in mid-2016 for $1 billion.

How do CPG and tech overlap?

Historically, there hasn’t been a significant overlap between the CPG and tech worlds. Recently, however, creative combinations of venture capital funds, accelerators and incubators have begun to encourage these industries to coexist and partner together.

CPG companies certainly have the experience and knowledge to bring a product from the early stages, through years of development, into your local Walmart store. That expertise can create the unfortunate side effect of a culture that is dismissive of new ideas because previous attempts have failed or a new idea conflicts with industry best practices. Look no further than the aforementioned Dollar Shave Club example. An idea like that would immediately be dismissed at Gillette or Schick.

An incubator helps products and companies grow from the smallest idea to the point where there is a full business plan and path forward. An accelerator helps an idea grow rapidly from its current iteration to a more scalable and permanent solution. Venture capital funding, combined with accelerators and incubators, help big companies avoid the detrimental industry phrases “That will never work” and “We’ve always done it this way.”

What examples are paving the way?

There isn’t one individual model for success in this new relationship between CPG and tech, but some of the manifestations are unique and interesting, as we see in these examples.

AccelFoods

• AccelFoods is an accelerator and venture fund that specializes in food and beverage startups. Although CPG startups are notably different than multinational CPG companies, AccelFoods knows the value of partnering with larger firms. They even raised $15 million from Danone Ventures and Acre Venture Partners in their most recent investment round. Many funds may believe that hands-on advice from large companies could kill a startup’s creativity. AccelFoods views these partners as essential resources and avoids creative attrition by retaining full decision-making power.
• Notable Investments and Products: Brami, Bear Squeeze, JicaChips, Purely Pinole, BOU, Kidfresh, Mansi, The Toasted Oat, Skinny Dipped Almonds

PowerPlant Ventures

• PowerPlant Ventures adds intriguing specificity to its venture fund by only supporting brands that “leverage the power of plants to deliver nutrition in more sustainable and ethical ways.” Any venture capital fund can contribute cash to the growth of a company. Successful funds provide support, advice, expertise, and guidance. Co-founder Mark Rampolla was previously the Founder and CEO of ZICO Beverages, which was acquired by Coca-Cola. If anyone knows how to build a plant-based food or beverage company, it is Mark and the PowerPlant Ventures team.
• Notable Investments and Products: Beyond Meat, Oh My Green, Nutriati, REBBL, Ripple Foods, Hail Merry, Veggie Grill

Tyson Ventures LLC

• Tyson Ventures launched in 2016 as the venture capital arm of Tyson Foods. It now has a stake in four companies. The amounts of the investments are undisclosed, but it owns less than 20 percent of each startup. As the Chicago Tribune astutely notes, “While Tyson could acquire these companies outright, other outcomes are also possible, including early exits and joint ventures.” Ventures like this open up multiple opportunities and give CPG companies more flexibility than building a brand from within.
• Notable Investments and Products: Beyond Meat, Tovala, FoodLogiQ, Memphis Meats

Nutrition Greenhouse

• PepsiCo chose the incubator model for its venture to connect with emerging brands. It launched the Nutrition Greenhouse in Europe in April 2017, inviting businesses with sales of less than €2 million. Each year, Pepsi will grant up to eight companies €25,000 along with access to a six-month incubator program to tap into Pepsi’s resources and expertise. The top brand is awarded an additional €100,000.
• Notable Investments and Products: Erbology, Frecious, Fit Kitchen, DIVINGMAR, JIMINI’S, Nature On Tap, No Fairytales, Your Superfoods

The direct-to-consumer model has opened new doors for young CPG startups. Meanwhile, Big CPG companies have pushed aside their egos and realized that they need a mix of venture capital funds, accelerators, and incubators to keep up with the industry’s changing landscape. As a result, many VCs are starting to see that betting on the CPG industry could be a safe bet with quick profit potential.