NutraIngredients-USA spoke with two experts, Grant Ferrier, CEO of Nutrition Capital Network and Marc Brush, founder of the consultancy Bend LLC, to get a view of what investors who fund entrepreneurs and growth stage companies in the dietary supplement industry are looking for, and to peer into the crystal ball as to what they ought to be looking for. Ferrier is a co-founder of NCN, which matches growth stage companies with investors. Brush founded his consultancy after a stint as the editor of Nutrition Business Journal.
Challenge and opportunity for supplements investment
Investments and financings in the dietary supplement space appear to be flattening out, in keeping with a somewhat soft sales picture. Brush said it appears that even as sales of supplements overall are trending lazily up, some sales have been left on the table, perhaps to a tune of as much as $1 billion sector-wide over the past several years. For Brush, this challenging atmosphere creates a window of opportunity.
“When an industry is beat up as the dietary supplement industry appears to be at the moment that is also the best time to do something new. It’s the Warren Buffett contrarian investment approach; when everyone is excited about something that is not the time to put your money there. In the last few years there have been a lot of black eyes, such as concerns about quality in dietary supplements. During that kind of trough, that’s where you can make some money,” Brush told NutraIngredients-USA.
NCN connects investors with growth stage companies in the sector and conducts five meetings yearly worldwide where entrepreneurs can pitch their messages. The company also tracks M&A and financing activity in the sector, deals which arise both from their own matchmaking activity and in the general market. Ferrier said the most recent report is the most optimistic in a long time. The report shows 102 M&A deals of all types in the first two quarters of 2015, compared to 168 for all of 2014 and 160 for 2013. Of the 102 deals detailed in that time frame in 2015, 60 were in ‘foodtech’ compared to 79 in 2014 and 29 in 2013. That meteoric growth is being fueled by new money coming into the sector, Ferrier said.
In contrast to the heated activity in foodtech and alternative proteins, M&A activity in the supplement realm has flattened out. As of late October, NCN had tracked only a lone supplement deal in 2015. That compares to six acquisitions in 2014 and three in 2013.
So what are investors looking for when they decide on what companies to fund and/or acquire? Ferrier said it is a mix of considerations, but first and foremost is a judgement of the people involved.
“Part one is the people involved. You are putting your faith in a particular person to execute a business around a particular idea. So that person or team is probably the most important consideration,” Ferrier said.
“Part two is the idea itself. Is it an idea that has some wind behind it? Is it one that has some novelty and some potential for traction? The third part is the business plan. That has to be detailed enough to exhibit that the company’s idea can be articulated clearly and efficiently so as to make the company appear structured and organized,” he said.
There is a trap inherent in that three-part scheme, Ferrier said. Some entrepreneurs, either out of a desire to appear highly responsible and organized, or out of need to perhaps paper over a less-than-scintillating core idea, spend too much time articulating the business plan. It’s better to forge ahead with a certain amount of velocity rather than trying to nail down every detail beforehand, Ferrier said. An entrepreneur is more likely to catch a favorable business window that way, and in any case trying to plan out the details of future events is a largely futile exercise, he said.
“I’m a big fan of not over planning. In a small, entrepreneurial, startup-stage business there are so many unknowns, so many factors that can shift your approach down the road. It’s more a matter of having clear objectives and a clear management and decision-making process,” he said.
Home run ideas
It’s coming up with a truly innovative idea that is the biggest challenge in Brush’s eyes. After a number of years trying to read the tea leaves at the helm of NBJ, Brush said he’s seen relatively few truly groundbreaking ideas in the supplement sphere. Food applications have yielded more game-changing concepts in recent years, and in Brush’s view, entrepreneurs in that space have gone further down the road of trying to identify where the market is going, what motivates the new sets of consumers, and trying to meet them there. Incrementalism, it has been said, leads to irrelevance, and Brush said he fears that much of the thinking in the dietary supplement sphere is leading down this path. Trying to find new health indications for existing ingredients, or improving their digestibility and bioavailability profiles, while important, is an approach unlikely to shake whole new opportunities loose from the tree.
“I spend a lot of time thinking at a cultural level about what is going to excite consumers in various industries and in this space it has been the mega shift into natural and organic food. So what comes after that?” Brush asked.
“It’s a world full of big problems in search of big solutions. There is keen interest in food coming from the tech community looking to bring that tech mindset to some of the problems in the food space. Solutions like finding a way to create vegetarian ‘seafood’ that would lessen the pressure on the oceans. Vegetarian ‘meat’ is already there,” he said.
Where tech meets health effect
What would these ‘big’ solutions look like in the supplement space? Brush said that is harder to discern, but the future will almost certainly incorporate a marriage of technological solutions to the health effects of dietary supplements, whether that is through genomic testing, real time metabolic readers that might operate on a smart phone or some other personalized tracking and measuring tool.
“Bringing a new ingredient to market, there are already best practices in place for how to do that,” Brush said. The real opportunity is to be able to show that a given ingredient and/or formula is actually having the effects claimed on the label. But to flip the old aphorism on its head, within this opportunity lies danger, that being that some well-known supplement categories might not shine when subjected to this kind of test.
“Sometimes I get some heat for saying this, but the question I ask is, how many years do you have as an industry before people start demanding some real results? If you are an entrepreneur trying to build a business that will be relevant in 10 years, I think you need to think in terms of what kind of tools will be available in that time. Maybe you’ll be able to get blood results with a few taps on your phone. It’s that kind of thinking that excites me, as opposed to what is the next 'superfruit' I can create some marketing sizzle around,” he said.