The red flags that turn food tech investors off

What makes food tech VC firms think twice?

• Crowded categories with weak differentiation make investors quickly walk away
• High capital needs without clear ROI raise investor concerns
• Founders lacking food industry insight trigger immediate investor scepticism
• Cellular agriculture faces caution due to cost, regulation, adoption uncertainty

Food tech is a high-stakes game, with most start-ups thought to fail within the first three years.

It’s the job of food tech investors to not only pick the winners, but also to steer clear of companies most at-risk of underperforming. If a food tech start-up succeeds, so does its shareholders. But when a venture capital-backed operator folds, that VC’s shareholders can lose faith.

VC investors learn to quickly spot what’s hot – and importantly, what’s not. So what red flags turn them off?

Innovations in crowded categories

When a food tech start-up innovates within a crowded category, that can be a sign it will struggle to stand out.

That’s one of the biggest red flags for Israeli investor OurCrowd. If a start-up is looking to enter a crowded category and its differentiation is weak, that can be a problem, explains Leeat Bar-Eyal, head of OurCrowd’s Ag&FoodTech Portfolio. When outcomes are too heavily dependent on “luck or hype”, it’s time to sound the alarm, she suggests.

For that same reason, UK-headquartered Synthesis Capital tends to stay away from consumer-facing businesses. Particularly those without a strong, protectable underlying technology, principal Shivani Oberoi explains. “The CPG space is extremely crowded and competitive, with many undifferentiated players and low barriers to entry.”

High capital requirements

Food tech innovations often demand higher investment than others, but sometimes capital requirements seem out of proportion with return on investment. That can be reason for investors to be wary.

In some circumstances, high capital requirements can be a red flag, explains Synthesis Capital’s Oberoi. “While some level of capex is inevitable in food tech, we look for companies that demonstrate efficiency in their capital spend, or have a clear strategy for mitigating these costs.” Examples could include strategic partnerships or co-manufacturing agreements.

OurCrowd agrees there isn’t a blanket rule against high capital requirements, but is alert to it all the same. “Long, capital-intensive development timelines can lead to execution risk and delayed returns,” explains ag and food-tech lead Bar-Eyal. “These aren’t necessarily deal breakers, but they do raise the bar and require much deeper scrutiny.”

A shallow grasp of food industry dynamics

It might sound obvious, but a good understanding of the food industry is critical to a food start-up’s success. For many VC firms, that’s a non-negotiable.

A shallow grasp of food industry dynamics would lead to a “quick no”, explains PeakBridge founder general partner Erich Sieber. If a start-up doesn’t properly understand the food industry, it may end up trying to solve “things that aren’t real-world problems or pain points”, which would be another red flag.

Sieber isn’t alone. Over at Nordic Foodtech VC in Helsinki, partner Louise Heiberg gets cautious when founders underestimate “just how complex and interconnected the food system is”. She advises innovators get out from behind their lab bench and learn the industry first-hand.

“If you are developing technology for farmers, put your boots on, go visit a farm. Food is not just about flashy tech, it is deeply woven into culture, habits, and practical realities and regulations.

“We want to see founders who truly understand the system they are working to improve, not just disrupt.”

Cellular agriculture raises investor caution

Cellular agriculture is not an automatic red flag, but VC firms are increasingly cautious about putting skin in the game.

The term ‘cellular agriculture’ refers to the production of agricultural products directly from cells. Some of the best known examples include cell cultivated meat, precision fermentation-derived dairy, and lab-grown cocoa. Novel foods like these often require pre-market authorisation before they can be sold, which adds an extra layer of complexity.

OurCrowd’s Bar-Eyal is “currently very cautious” when it comes to cellular agriculture companies. “Many of these start-ups face long commercialisation timelines, have high capital requirements, and uncertain consumer acceptance.”

That doesn’t mean all cellular agriculture companies are “off the table”, Bar-Eyal stresses. “But any investment here would need a particularly compelling proposition.”

For some of the same reasons, Nordic Foodtech VC’s Heiberg is vigilant when it comes to particular types of cellular agriculture, like cultivated meat. She’s also alert to consumer-facing products, vertical farms, and “everything insect”.

“We are cautious because these areas are crowded, face challenging unit economics, and struggle with market adoption.”

Some elements of cellular agriculture aren’t attractive to Synthesis Capital, like media and cell lines for cultivated meat production. Principal Oberoi says that’s because such businesses solely cater to the food tech start-up industry.

Blinkered operators like these lack “broader commercial applicability” with major food companies, suggests Oberoi. “In this market environment, adaptability and versatility are key.”