CPG Companies Outsourcing Innovation Through Foodtech Acquisitions

For foodtech companies developing new software platforms, CPG companies may seem old-hat, but recent trends suggest corporate food companies could become more frequent acquirers of foodtech startups. Below, we explain what the potential benefits and pitfalls could be for startup founders.  

As CPG companies look to expand market share and engage an ever-changing demographic of consumers, a lot of attention has been paid to the food products space for its potential for outsized returns. For years, corporate food companies have outsourced much of their early-stage R&D through the expanded use of new product acquisitions. Campbell’s is a great example of this with its purchase of Bolthouse Farms and Garden Fresh, among others. And the pace of this activity shows no signs of slowing down, especially now that many large CPG companies have launched their own venture arms to get an early seat at the table.

But, as these same companies invest in solving pressing internal challenges such as strengthening supply chain dynamics, creating more efficient business models, and reducing environmental impact, foodtech companies innovating new software and platform solutions should consider CPG companies as potential acquirers. US Foods acquired Food Genius in April 2016, in part to leverage the startup’s data-driven food analytics to better track ingredient costs, margins and menu-level detail across their entire company. Subway, the popular sandwich chain, announced an acquisition of Avanti Commerce in September 2016 to bolster their mobile ordering and payment infrastructure.

While traditional CPG may seem old-hat compared to an acquisition by Google, Amazon or Facebook, there’s enormous potential for foodtech startups to realize successful exits by targeting a different group of acquirers. In the first place, for startups working on tech-enabled B2B solutions in food, many of these CPG companies could be customers first. That gives an entrepreneur an opportunity to build relationships early-on with multiple strategic partners, both with an eye towards building the business and towards a potential exit. With that said, entrepreneurs should not build a solution with one specific acquirer in mind. The temptation is to tailor functionality to suit the needs of one or two strategic partners with the hope that it will be a natural fit within their existing infrastructure. The danger of doing so is obvious, but worth restating: startups are already risky without putting all your eggs in one basket.

Another benefit of CPG acquisitions for foodtech startups is that many of these corporate players don’t have a clear strategy or resources dedicated to tech innovation. Rather than build internal teams to work on amorphous (and somewhat undefined) problems, it’s more logical that a CPG company will experiment with a number of different solutions offered by startups to judge their efficacy. There’s always the risk of having IP taken and replicated in a corporate environment, but more often than not, it’s makes much more sense for CPG companies to acquire that technology and bring it in-house.

Post-acquisition, there’s the potential for greater longevity as part of the acquirer’s infrastructure. Life after acquisition is never guaranteed, and there are many examples of acquired startups’ technology being shut down by the acquirer in 6-12 months after the acquisition. The acquisition of foodtech platforms and software by CPG companies working directly in the food space means that the technology likely has greater relevance and staying power. If you’re an entrepreneur who wants to see your startup have a life beyond early-stage, that may be appealing.

One of the most obvious downsides to a tech acquisition by a CPG company is that it’s very likely that technology will end up in a “walled garden,” used only to manage internal processes for the one acquiring company. In most instances, existing customers of the technology wouldn’t be keen to give away insights and data about their back-end business practices to the new owner of that technology, especially if it’s a competitor. The risk then is that the impact of such a technology is fairly limited, but that risk has to be weighed against the factors above. In the “right” kind of acquisition, the potential impact (even with only one company using the platform) could be substantial.