Alternative Dairy Startups Disrupt the Dairy Industry
Disruption is one of those words in the tech world lexicon that is used as both a noun and verb. It’s also perhaps one of the most overused. It should be used to denote a true breakthrough in a technology or process that could upend an entire industry. A handheld ultrasound device for your smartphone is one example of a disruptive technology. 3D bioprinting organs is another tech that could change the world. So it probably seems a bit odd to be talking about disruption and the dairy industry, but Elsie the Cow is in big trouble these days. Since the 1970s, Americans have been consuming less and less of the frothy white stuff:
The reasons for the decline are spread across a variety of concerns – diet, health, environment, animal cruelty. That’s opened the door to alternative dairy companies to steal serious market share, as plant-based milks now account for 15% of the total milk market, with annual sales topping $1.6 billion as of June 30, 2018. That represents growth of 9% for plant-based milk sales, while sales of other plant-based dairy products like yogurt and ice cream jumped 50% in one year, according to Nielsen retail sales data. Those are just U.S. statistics. Globally, the plant-based milk industry reached $16 billion.
What is alternative dairy?
Until just a few years ago, alternative dairy products mainly consisted of soy milk. The vanguard consumer might have bought almond milk, and a few desperate vegans probably choked down some sort of nut-based cheese with the mouthfeel of slightly melty rubber. Today, it’s a much different story. Plant-based milks are made out of everything from oats to pea protein, providing the same creamy texture of their animal-based counterparts without any of the guilt or environmental impacts from methane-belching cows. Companies have even developed new processing technologies for creating yogurts and cheeses that don’t entirely suck either.
But it’s not just plant- or nut-based products that are giving Big Dairy a cow. A handful of synthetic biology companies have emerged that are
toying with the bounds of nature pushing the envelope by creating milk, eggs, and other dairy products using fermentation technologies that employ microbes to produce the same proteins but without the animal, begging the question: What came first – the chicken or the bacteria?
Both types of alternative dairy products, whether plant-based or microbial fermentation, are two sides of the same food science coin, meaning our food system is becoming less and less about growing food but processing it. Let’s talk about some of the alternative dairy startups operating in both spaces.
A new generation of plant-based startups is gaining the sort of cachet once reserved for tech companies. The most obvious example is Beyond Meat (BYND), which has been sizzling since it debuted on the NASDAQ back in May. Its biggest rival, Impossible Foods, picked up $300 million in a Series E the same month that Beyond Meat went public. As we noted in our article on synthetic biology startups making fake food, Beyond Meat is not using microbial fermentation to process its plant-based meats. Impossible Foods, on the other hand, does genetically modify yeast to produce the protein that makes the company’s burger bleed like a freshly killed cow. However, it’s important to note that many of these alternative foods, whether meat or dairy, are heavily processed, often adding fat or even sugar to mimic the real thing. That’s something to chew on as we discuss the following plant-based dairy alternative startups.
The Princess and the Pea of Alt Dairy
Founded in 2014, Ripple Foods out of Silicon Valley has raised more than $108 million from the likes of Google and Goldman Sachs, along with top VC firms like Khosla Ventures. Its line of alternative dairy milks are made from yellow peas, though they taste nothing like pea soup (thank goodness). The marketing churned out by the company emphasizes the healthy halo around pea plant milk, which contains as much protein as dairy milk with less than half the sugar. Ripple also hits the sustainable message hard as well:
The company’s chief rival in pea milk is Bolthouse Farms, which has been around since 1915 and produces a range of different food products. Butterfly Equity, a private equity firm, recently purchased Bolthouse from Campbell Soup Company (CPB) for $510 million in cash, illustrating the kind of appetite that investors have for these products.
Oats Aren’t Just for Oatmeal
If you thought the hipster love affair with avocado toast was out of control, let us introduce you to the nearly 30-year-old Swedish company Oatly, which caused widespread anxiety last year when New York cafes ran out of its oat-based milk for the latte crowd. Oatly is made by blending oats with water, tossing in some enzymes, cooking the slurry, then removing the bran (which is the loose shells from the oats), while leaving the loose fibers in the product. The company recently opened a processing plant in New Jersey to build further on its growing popularity. How popular? Oatly posted sales of $110 million in 2018, up from $68 million a year earlier, Bloomberg reported. The company expects 2019 to be better than a double espresso with a shot of oat milk, with sales doubling to about $230 million.
Again, there is no lack of competitors. Dallas-based Mooala has raised $5 million for its lines of alternative dairy milks that include not only oat milk and almond milk, but banana milk, which mixes pureed bananas and roasted sunflower seeds with cinnamon and salt.
Alternative Dairy Gets Cheesy
Milk isn’t the only dairy product being co-opted by
rabid vegetarians plant lovers. Founded in 2013, Kite Hill is another Silicon Valley startup in the alternative dairy business. It has raised $65.5 million, including a $40 million round last year, counting General Mills among its investors. That’s a lot of dough for making artisan cheese out of almonds. The process is surprisingly similar to traditional cheese-making, according to a story on NPR’s Science Friday: Kite Hill basically starts with pasteurized almond milk to which it adds proprietary bacterial cultures and enzymes. The latter causes the milk to coagulate, much in the same way it does in dairy cheese. The product is eventually placed in molds and into climate-controlled facilities to age, just like they do it in Europe. Break out the fondue pot.
Microbial Fermentation Startups
Unlike with the above plant-based startups – and that list is far from comprehensive given the explosive growth – we’ve already covered many of the synbio companies that are genetically tweaking yeast or bacteria to convert sugary feedstock into dairy-like proteins. Let’s revisit a couple of the main startups to see what they’ve been up to.
Founded in 2014, Cork, Ireland-based Perfect Day Foods had only taken in about $2 million when we profiled the synbio startup nearly two years ago. It had yet to produce a marketable product using its specially designed yeast, Buttercup, which produces casein and whey, the two main proteins in cow’s milk. Perfect Day has now reached $61.5 million in capital, including a $34.8 million Series B in February. Hong Kong-based firm Horizons Ventures is a repeat investor, and global food giant Archer Daniels Midland (ADM) is also backing the company. (ADM happens to be one of our dividend growth investing plays, having not only paid but increased their dividend for 44 years straight.) Perfect Day recently created a limited run of ice cream using its microbial-produced alternative dairy ingredient, mainly as a showcase for the technology. The company seems settled on a B2B model where it partners with other food companies interested in leveraging its product.
Ditto for San Francisco-based Clara Foods, which was founded in 2015 and has raised $16.8 million in disclosed funding, about triple when we first discovered the startup in 2017. It announced an undisclosed Series B in April. Clara Foods is developing a microbially fermented protein to reproduce egg whites in order to put 300 million chickens out of work. Talk about disruption. Here’s the technology in an eggshell:
Like Perfect Day, Clara Foods is marketing its ingredient to food manufacturers, saying its production process not only uses less water, land, and energy than conventional practices, but that its egg white proteins can be customized for different applications, including performance supplements, preservatives, or baking products.
Motif Ingredients, founded just this year as a spinout from Ginkgo Bioworks with a $90 million bar tab, is promising on doing some freaky lab science by drawing on Ginkgo’s vast database of microbes. Possibly on tap: camel milk and platypus milk. We first profiled the company back in March along with seven other startups creating alternative protein sources.
Update 08/16/19: Motif FoodWorks has raised $27.5 million in funding to add to and accelerate its product pipeline, expand academic collaborations across a broad set of molecular food science disciplines, scale its science and regulatory staff, and deepen its research and development efforts. This brings the company’s total funding to $117.5 million to date.
Speaking of oddball concoctions, we’ll leave you with San Francisco-based Eclipse Foods, which picked up $150,000 in March of this year for a plant-based dairy ingredient that is still short on details. The Spoon reported that “rather than just ‘milking’ nuts or oats … [Eclipse Foods is] developing a new type of plant-based milk that has micelles, or microscopic structures, that help their product mimic the real thing.” So, doesn’t sound like fermentation technology, but nor does it appear that they are relying on standard processing of plants or nuts. One of the co-founders is a Michelin star chef and the other has worked for Good Food Institute, an organization that promotes plant-based foods and lab-grown foods, including cellular agriculture for growing meat from animal cells.
Alternative dairy comes in a wide variety of flavors and functions. The plant-based market is growing like a weed, and there’s no reason to think that will change any time soon. While the Western world is only just now catching on to the possibilities of alternative dairy products, much of Asia has been churning out all sorts of exotic and esoteric “milks” and other beverages for decades if not centuries, especially since upwards of 90% of the population is lactose intolerant.
On the other side, synbio companies like Clara Foods and Perfect Day seem content to let other businesses commercialize their ingredients. Not too long ago, we would have thought most consumers would shy away from these less natural foods (though the proteins themselves are not technically GMO). But the popularity of frankenfood like the Impossible Burger has shown that people are more quick to adapt. Now that we’ve taken a bit of the apple, there’s no going back to paradise.