While it remains a tough time for dining on the High Street, the seeds of recovery are being planted, thanks to the health of start-ups in the food industry. The UK, led by London, is now one of the leading investment centres for the food and beverage sector.
Angel investment is becoming an increasingly popular method of equity financing due to favourable tax relief being offered by Government for individuals backing early stage businesses. We have seen investment in food businesses rocket over the past few years, with some of the largest raises occurring in this evergreen sector. Earlier this year Angel investment Network produced the ‘State of the Nation’ UK angel investment report, based on the data of more than 100,000 businesses and 30,000 investors. Food as a category rose from the 4th to the 2nd most backed category. Meanwhile it is the third most popular category for pitch ideas. This is important because the health of an industry is underpinned by the dynamism of its start-up culture, pointing to its future success.
Energy, investment and ideas at the seed funding stage will help to support profitable businesses that could be the business goliaths of the future. Unlike say venture capitalism, angel investors invest out of passion and personal interest as well as profit. Food is one of our great passions and this is shared by consumers and investors.
So what are the key facets that food businesses need to focus on to win support from angel investors?
Firstly, the team is essential. The first thing a potential investor will look at in a pitch deck is who is the founding team? After all their decisions will determine the future trajectory of a business and they will want people with experience in the industry. Also which advisors can the business call on, will they be hands on or just names designed to impress?
Address a niche
Secondly is it different from what has come before? From speaking to food investors we know they are looking for businesses that address some kind of niche, whether it be a restaurant, food supplier or a food-based product. Is the niche they are addressing bang on trend? If the concept is perceived as being dated it is unlikely to fly with investors. Investors will closely follow consumer trends and will have a nose for when they are changing in this rapidly changing category.
Small is beautiful
A few years ago people were clamouring for casual dining but we have seen the challenges in this marketplace. Jamie’s Italian is one of the most recent high-profile casualties. For investors, a lot of those chains expanded far too quickly and lost their initial charm and soul as they were given to managers/staff just there to earn a crust rather than feel part of something. What we are seeing interest for are small groups of restaurants whose original founders can maintain the initial passion. This might lead to mini chains of 6-10 restaurants in key areas doing well and early stage investors doing well if they exit to private equity groups but then after that I think they will struggle.
Provenance and premiumisation
Businesses that focus on trends like provenance and premiumisation are winning backing. One of the biggest raises conducted in the past year was for a bakery named Orée, offering authentic French Patisserie to a market that is increasingly captivated by continental cuisine. Meanwhile another restaurant raised for that also has provenance as a key USP is 28 Well Hung. It won the thumbs up from investors because of its focus on ‘pasture-raised, native breed meats and heritage veggies’. Another key facet of the business is that 28 Well Hung also trumpets partnerships with farmers and growers who manage grazing and growing in ways that ‘support and regenerate the soil’. With climate change in the spotlight like never before, investors are looking for businesses that address environmentalism. Over the past year investor searches for impact-related terms were up an average of 25%, mirroring the rising public interest in this area. The fastest growing sector was ’renewables’ which climbed from 40th to 32nd a 25% increase in searches. Meanwhile ‘environmental’ had a 23.5% increase.
However slightly paradoxically, given their carbon footprints, the trend for home delivery is also changing the game. We are seeing innovative delivery businesses also winning backing. Brands like Gousto and Hello Fresh have opened up new markets for quality home delivery. Skandl, who are taking this model into the fish market, offer market fresh delivery using a data-led approach to ensure the freshness is retained.
With the convenience offered by this method and people happy to stay home and get delivery, food businesses with a physical location will need to really focus on what is special/ different and individual to entice potential diners out.
A relentless focus on quality and convenience, as well as keeping track of trends will be the best way for food businesses to maintain their great standing with angel investors. On the menu of investments, food businesses will remain today’s special for angels.
By Xavier Ballester, director at Angel Investment Network’s brokerage