General Mills Inc., facing sluggish sales as consumers seek less processed products, is turning to a foodie favorite to help snap a slump weighing down the U.S. packaged food industry.
The maker of Cheerios and Progresso soup, which has seen sales fall in 12 of the last 13 quarters, is leading a $6 million funding round for Rhythm Superfoods, an Austin, Texas-based startup best known for its kale chips. It’s the latest investment from General Mills 301 Inc., the venture fund launched in 2015 to put money into food startups capitalizing on the shift in eating trends.
Big Food’s search for growth has increasingly led to acquisitions and investments in small startups in recent years, bucking an established trend of waiting until a consumer brand had proven itself and hit at least $100 million in sales. Campbell Soup Co. and Kellogg Co., two of General Mills’ chief rivals, also have venture funds to help find the next big thing.
Large packaged-food companies, adept at managing billion-dollar brands, have recognized that reacting quickly to changing trends with in-house innovation isn’t their strong suit. Instead, they’re investing in startups to find growth, said John Grubb, managing partner at Sterling-Rice Group, a food consulting firm.
“It’s a capitulation to the fact that they can’t move that fast,” he said. “Their fine motor skills are not very good.”
Over the past two years, venture capitalists poured about $1.5 billion into food and beverage startups, about a 50 percent increase from the previous two-year period, according to PitchBook Data, a research firm. The surge has been led by Silicon Valley, where the tech community has turned its attention to developing the next generation of consumer food products. Blueberry Ventures, based in San Francisco, also participated in the recent funding round for Rhythm.
Rhythm Superfoods surpassed $10 million in sales last year, and should top $20 million this year, according to co-founder and Chief Executive Officer Scott Jensen. The company hit the market with kale chips in 2010 and has since expanded into snacks made from broccoli and beets. Rhythm has its products in about 8,000 stores, including Whole Foods stores across the U.S, and another 8,000 Starbucks locations. The company should be profitable by 2018, Jensen said, declining to provide a valuation.
301 Inc. first invested in Rhythm about year ago, leading a $3 million investment round. The fund, which started as an innovation unit at General Mills before shifting to investing in startups, has put money into a handful of small companies, including Kite Hill, which makes vegan cheese from almond milk, and Beyond Meat, which produces vegan burgers. Last year, Tyson Foods, the largest U.S. meat producer, also launched a venture fund that invested in Beyond Meat.
Investments have started flowing to smaller food and beverage companies in recent years, in part because those companies are growing faster than ever. Marketing and distribution costs have dropped in the industry, with retailers eager to put upstart products on their shelves to meet consumer demand, said Ryan Caldbeck, founder and CEO of CircleUp, a food-and-beverage investment platform.
Big Food companies use CircleUp to identify targets. Since 2012, when it was founded, more than 200 companies have raised about $300 million on the platform. CircleUp also operates two investment funds, with about about $25 million to work with, that have put money into Rhythm and other companies.
The investment dollars have helped Rhythm double its production capacity and improve distribution and marketing. Last summer, the company started producing chips at a new factory in Mexico that is closer to farms that supply the vegetables needed to make its products. They’ve added dehydration equipment to make more chips, and are working on a series of new products with the help of food scientists at General Mills, Jensen said.
For years, food startups were leery of working with large players like General Mills, fearful of losing their authenticity and ability to connect with customers. But after watching General Mills’ 2014 acquisition of Annie’s, the maker of organic macaroni-and-cheese, Jensen was comfortable taking an investment from 301 Inc.
“They’re blowing wind in our sails and we have to steer the ship,” he said. “We’re able to make bigger bets, beyond anything a company of our size could figure out.”