In 2015, $6.8 billion of capital flowed into private food tech and food media companies, according to Rosenheim Advisors. $2.3 billion of those dollars were invested within the United States. “A few years ago, good luck trying to get any investment in the food business. Now we’re seeing food business turn down opportunities for funding,” says Natalie Shmulik, a food business consultant at the new food incubator The Hatchery Chicago.
In recent years, food business incubators have popped up around the globe to support the rising tide of interest in food entrepreneurship. Among them: KitchenCru in Portland, Oregon, The Food Foundry in London, and Brooklyn Foodworks in New York. Chobani recently launched their own in-house incubator as well, with the goal of helping “small companies with big hearts and ideas follow the path to challenge the food industry, improve broken systems, and make a difference.”
A few months back, I spoke with Shmulik, a food entrepreneur herself, about the explosion of food-business investments, the challenges faced by novice food entrepreneurs, and what we all can expect from The Hatchery Chicago.
- Eve Turow Paul: First, can you tell me the difference between an ‘incubator’ and an ‘accelerator’?
- Natalie Shmulik: Accelerators typically run 6-to-12 month programs to help businesses grow rapidly and build out. Usually, a business already has some sales when they join an accelerator. The purpose is to grow. As an incubator, we work with companies at every stage. We’ll work with people who are just playing around with the idea of starting a food business. They may be career changers and don’t know what it takes to start a food business, or just new to the field. We’re there to tell them: here’s the certification you need, here’s the documents you need, here’s what to consider, here’s the primary investment.
We vet our members through an application process and if we think they really have the opportunity to lead a successful business, we invite those companies to be members. We help set them up for success. We’ll tell them: there’s a grant funding opportunity, there’s a competition, there’s a pitch session, there’s a trade show where they’re giving a discount for Hatchery members, there’s an opportunity to speak to a food blogger. Our main goal is to get these businesses to a place where they can create new job opportunities. This is one of the only industries where you can find jobs for all education types.
We see it as a partnership where we are in it for the long haul and will help you grow any which way we can. But we also have services and classes that are open to the public. We have people who attend a lot of our classes who aren’t members.
- Turow Paul: What kinds of classes do you offer at The Hatchery?
- Shmulik: We have a full curriculum. We cover everything from marketing to insurance to legal help to brand packaging.
We run a monthly food business class that is intended for anyone and everyone thinking about starting a food business. And honestly, maybe only 50% of people will actually show up to the second class because they will realize this is not the industry for them. I think as much as it is my job to support and nourish entrepreneurs that have that opportunity to grow a successful and viable business, it’s just as much my job to dissuade individuals who probably won’t have a sustainable business from investing their life savings into a dead end. So that’s really important for us as an incubator is to provide resources to everybody who wants to better understand or be part of the food industry.
- Turow Paul: In the past year, we’ve seen several stories about food startups cutting corners—Buzzfeed released an investigative report on Blue Apron, noting that “the rush to scale its supply chain at the speed of startup, the company has had health and safety violations, violent incidents, and unhappy workers at one of its packing facilities.” Hampton Creek, as reported by Bloomberg, “undertook a large-scale operation to buy back its own mayo, which made the product appear more popular than it really was.” What’s your theory on why these scandals are taking place?
- Shmulik: There’s definitely been rapid growth in food startups and unfortunately, to keep up with the pace of acceleration, some startups are overlooking certain features.
You can’t get away with much in the food industry. It’s not like tech. You are putting things into people’s mouths. You can suffer major consequences if something goes wrong. The USDA and FDA are very strict.
- Turow Paul: So are there any signs of slowing down? Who is pressuring these businesses to scale so rapidly?
- Shmulik: I think that many venture capitalists are expecting multiple returns based on what they’ve seen in the tech industry. Food is perishable. Even if there’s a long shelf life, it’s still perishable and there’s a production timeline.
Also, the are so many different channels that you have to go through to get a food product on shelves—farmers, distributors, storage, retailers—so the types of returns many are expecting often can’t be met. And because you’re getting investors from tech or the healthcare world, they’re only now realizing they may not get the same 10X return that they may get in other fields. So right now you’re seeing some companies overstep their boundaries, skip regulations, sacrifice certain things. I think that’s going to change. You’re getting more investors like S2G who understand the food space. They have a mission to do well and invest in companies that don’t just meet growth standards but also do good in the world.
- Turow Paul: What are the goals of most food entrepreneurs that you see? What’s the end game?
- Shmulik: Five years ago the majority of individuals wanted to have full control of their businesses. Now, 95% of the companies I speak with, their goal is acquisition.
The number of acquisitions that have taken place over the last few years is incredible. Just recently Rick Bayless’ Frontera packaged foods business was bought out by ConAgra. Big companies are really trying to stay on top of their game and the only way to do that is buy these small, unique companies.
I was at an event recently where an audience member asked a panel of chefs what their business goals are. They all said that they’re trying to create product lines. It’s not enough to just run a restaurant. Unanimously they wanted acquisition. It’s your only exit strategy. Maybe not 100% across the board—some want local businesses—but the majority are looking for acquisition.
That said, acquisition has changed. It’s not just selling your business and waving goodbye. Now, acquisition also involves bringing many of the employees and strategists along to retain brand integrity.
- Turow Paul: The Hatchery Chicago is still in planning, building stages. What can people expect once complete?
- Shmulik: Many food and beverage entrepreneurs face the challenge of dispersed resources. They typically have their production facility in one part of town, their office in another and resources scattered throughout the city. We are hoping to provide everything under one roof to save time and energy but to also be a support center for entrepreneurs at every stage.
The facility will be approximately 80,000 square feet, complete with production, storage, and co-working office spaces, ideation rooms, event spaces and we’ll be offering the full Hatchery curriculum, which is already running. We envision it as the Silicon Valley for food and beverage. This will be one of the largest food business incubators in the country and one of the first to be built entirely from the ground up. This allows us to really keep the food entrepreneur’s needs in mind so that we are built for utmost efficiency and success.
Another exciting feature is that The Hatchery Chicago will be built in East Garfield Park. This new space will help with economic development as well as provide local entrepreneurs in the community establish their own food businesses. We are predicting 900 new jobs created at The Hatchery within the first few years of opening.
The interview has been edited and condensed.
The businesses mentioned in this article are not affiliated with The Chef Alliance.
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