Lessons from Investing with S2G

Lessons from Investing with S2G

As I depart S2G to head back to business school, I reflected on a few key lessons learned from working at a systems-focused food and agriculture venture capital fund.


In 2018, the tech industry has grown to occupy the top 5 spots on the list of most valuable companies in the world.  On the other hand, the highest valued food and beverage company (Coca-Cola) ranks somewhere in the top 40 on a good day.  Tech companies, valued for their growth and profit potential, create value through their investments in innovation.  Big tech invests 13% of overall sales into R&D on average, contributing to 17% growth last year.  Conversely, CPG companies invest less than 2% of overall sales back into product innovation or channel development.  If you were a major food company that managed to stay flat in sales in 2017, then you considered it a major win.


While tech has relied on innovation, CPGs instead turned to cost cutting and acquisitions over the past few years to create value.  But when R&D is viewed as a cost center rather than a revenue generator, it is often the first department to be cut in a restructuring. I saw this first hand during my time working at Kraft Heinz, the iconic American food company stitched together by Warren Buffet and 3G Capital.  Kraft Heinz was not alone in its thinking, though. Almost all other major CPGs announced similar programs since 2010 and became stuck in a vicious decision-making cycle that continued to slash R&D budgets and ultimately destroy value.


Lesson #1: enduring value is created by innovation, not financial engineering or cost cutting.

Major food manufacturers like Kellogg’s or Tyson are now opening their eyes to changing consumer demand and have established venture arms or accelerators to invest in early-stage companies.  They recognize smaller, nimbler, and more flexible organizations are better suited to innovate and tackle technical challenges.  Despite this trend, institutional food and agriculture risk capital still only amounted to $1 billion invested last year, compared to the $38 billion in tech and $17 billion in healthcare.  Food tech, Ag tech, and all forms in between are just beginning to scratch their potential.


Lesson #2: there is still a strong need for venture funding in food and agriculture, coupled with enormous opportunity.

Having domain expertise is critical to venture investing in 2018, but even then, not all investing approaches are created equal.  Generally, if your focus is building restaurant chains, you are probably not thinking about soil health.  When I first heard of S2G’s “systems investing approach”, I frankly thought it sounded like Silicon Valley jargon. System investing requires you to understand and participate in the entire value chain of an industry. Therefore, food investing is not just limited to retail brands or restaurant concepts, but the interconnected system that gets food from the farm to the consumer.

The abstract nature of systems investing can stem from phrases like “having feedback loops at both the farmer and consumer level.”  Breaking it down in the case of organic foods, it means understanding the imbalance between increasing consumer demand for organic food and the reality at the farm with limited production capacity and challenges in the organic conversion process.


After working with some of the most brilliant people and dynamic companies, I finally came to understand what it means.  When your portfolio stretches from soil to shelf, you see how everything is related. You begin to understand what the consumer wants, but you also know the barriers and pain points within the supply chain that prevent those desires from being met today.  This is how you can gain novel insights to see when and where disruption will happen before it does.


Lesson #3: systems investing creates real, long-term competitive advantages through an understanding of the big picture, not just the sum of its parts. 

The real value of systems investing goes far beyond a financial return though – it is about fundamentally driving change within an industry.  If you only focus on one end of the spectrum, unless you have the size and clout of McDonald’s, it is hard to get other players to act the same way.  Changing an industry structure requires a systematic approach to investing across the entire value chain within a sector. Many funds pay lip service to impact, but S2G lives and breathes its mission to create a healthier and more sustainable food system.


Lesson #4 (and the most important lesson S2G taught me): making money and making an impact are not mutually exclusive.

ABOUT THE AUTHOR

Arthur Chow

Vice President

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