What does the future hold?

Editor’s Note: Matilda Ho is founder and managing director at Bits x Bites, a leading Chinese food venture capital firm with technology investments worldwide ranging from gene editing and drone-based imaging to biosynthesized ingredients and alternative proteins.

The opinions expressed in this guest article are those of the author and do not necessarily represent those of AFN.

2022 was a dismal year for food industry investment, with funding down 44% year-on-year globally, partly driven by an 81% drop in funding in China. So why has funding fallen off a cliff?

If you dig deeper into the numbers, you can see that Chinese investment in the food industry underwent a major structural transition in 2022, with upstream investment – ​​those into start-ups working closer to the farm and in between – representing almost all (96%) of funding in a category historically dominated by downstream consumer-facing sectors such as food delivery.

So what prompted this realignment, and what can we expect to see in 2023 and beyond?

eGrocery retreats, biotech steps in

Back in 2021, eGrocery was China’s biggest funding story, attracting 75% of total investment. The country’s strict Covid lockdowns have made delivered fresh food ubiquitous among generations and lower-tier cities. But investors’ optimism was not sustained.

Covid supply chain challenges and increased logistics costs are putting these companies’ strained growth models under new stress: high cash burn, growth at any cost and poor supply chain management. NiceTuan, after raising more than $1 billion in total, closed in 2022. Nasdaq-listed MissFresh, which had a market capitalization of $2.27 billion at IPO, is on the verge of bankruptcy.

In contrast, agricultural biotech is being driven by important top-down tailwinds, with investment nearly tripling to nearly $1 billion in 2022, instantly making it China’s biggest growth last year .

As China races to achieve its twin goals of food security and food sustainability, biotechnology has become the centerpiece of its innovation-driven growth strategy. Startups tackling gaping supply chain issues in China are able to attract government-backed funding and a regulatory environment that increasingly favors these biotech companies.

Pig breeding company Zhongxin Breeding has raised a seed round of $372 million, making it the first upstream deal to top China’s food industry funding. This deal speaks to the government’s high priority to increase self-sufficiency in seeds and genetics.

Imported pig breeds account for 80% of China’s pork supply. This reliance was most evident during the African swine fever when 60% of the pig population was wiped out and sows had to be flown in from Europe to fill the gaps.

Zhongxin’s record increase was supported by three government-backed funds. In segments that align with China’s top-down priorities, we can expect to see more participation from state investors to fuel the growth of the startup ecosystem through the funding stages.

Other biotech companies closing in on big increases are aligned with helping China achieve its 2060 carbon neutrality goals, particularly feed and ingredient companies combining biological production methods and chemical synthesis to provide competitive alternatives to traditional chemicals

China sold $1.5 trillion worth of chemicals in 2017 and has the largest chemical industry in the world. Tightened environmental regulations have opened the door for newcomers such as biomaterials and feed companies BluePHA, which raised $125 million in 2022, and Moija Biotech (a Bits x Bites portfolio company), which raised a Temasek-led Series B for $80 million.

In 2023, we expect growing biotech activities to address these tailwinds:

  • Growing involvement of traditional industry: As traditional chemical synthesis transitions to bio-based, more state-owned corporations will heed top-down priorities to join the new bio-economy. The first signals can be seen through the acquisition of Syngenta by SinoChem; China National Petroleum Corporation’s recent US$51 million A+ investment in synbio startup PHABuilder.
  • Enthusiastic Public Market Reception for Profitable Biotech Companies: China remains one of the most attractive public markets for startups. China’s Cathay and Huaheng maintain strong PE ratios of over 50x and market capitalizations of $5.2 billion and $2.7 billion, respectively, delivering $79 million and $46 million in net earnings in 2022.
  • An evolving ecosystem around China’s fermentation capacity advantage: China ferments 66% of the world’s amino acids and 77% of its vitamins and dominates the construction of fermentation equipment. In this 2022 article, we shared our view that China could help solve the global fermentation shortage.

Animal Ag Tech to outperform animal protein in momentum

Chinese alternative protein companies raised just over $80 million in 2022. The global slowdown in the sector is also impacting ingredient players in China.

As plant-based meat company Beyond Meat reported a net loss of $366.1 million in 2022, Shuangta, the largest supplier of pea protein for meat alternatives, reported a net loss of $28.2 million for the first nine months of 2022. compared to net income of $33 million a year ago.

We are optimistic that next-generation protein ingredient companies will improve taste and function, especially those with in-house protein strains and texture capabilities. But given that the Chinese market is stubbornly unwilling to compromise on taste, it will take some time before the segment sees growth again.

China, however, has a much more pressing need to improve its animal husbandry.

Pig and high-density poultry production has grown with farm consolidation over the past few years. These compact operations likely increased the incidence of new viral diseases and the need to manage the risks of the next African swine fever. Banning growth-promoting antibiotics in feed provides another incentive to drive innovation in animal health.

Track animal biologics, from new vaccines to antimicrobial peptides, RNAi and probiotics.

The food sector is getting a demographic boost

We predict that China’s doubling down on reversing its reliance on imported biotech could have an impact on nutrition startups.

Today, China imports 70% of its enzymes and 85% of its probiotics. Two companies have raised significant rounds in 2022 to fill those gaps, including Enzymaster, an enzyme API intermediates and chemicals company, and Zhiyi Pharmaceutics, which makes probiotics and biotherapeutics.

This push for self-reliance will give a boost to young local companies developing nutrition solutions.

What to watch in 2023

Several themes will be important to watch in 2023.

China’s population declined for the first time last year. An aging population combined with urbanization make chronic health problems a growing threat. Its spending on diabetes is expected to grow to $460 billion in 2030. Solutions to address gut, brain and bone health, dietary interventions and weight management will be in high demand. There is also growing momentum in Foods for Special Medical Purposes (FSMPs).

Despite the challenges in today’s funding climate, the signals point to plenty of opportunity in the chaos, especially for companies solving the right problems.

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