Image courtesy of General Mills
This is the 1st in a series of interviews with corporate venture/incubator groups.
The food and beverage industry has been undergoing a major re-orientation around how to innovate. Since the dawn of branded foods, companies have incubated and accelerated their own ideas. Innovation was highly secretive, done independently, and most of it was about swinging for the fences. It was the age of the maximally-viable prototype.
The opposite is true today. Most of the big branded food companies have realized they’re not very successful at true innovation, and have shifted their future growth strategy from looking inside to looking outside. This fundamental change is a necessary result of big branded companies getting too big to get innovation done quickly, and big branded products losing steam as they age and their customers start to die off. Brands quickly realized that replacing them with younger consumers from a different generation isn’t as easy as offering a new kale- or adaptogen-containing version.
This has also coincided with the recent advent of social media and e-commerce, both of which enable fledgling food brands to launch their businesses inexpensively on a small scale, find their target consumer, and market to them directly a more relevant product than the old brands their parents grew up with.
One of the most highly visible results of this shift are the venture groups, incubators, and accelerators popping up inside billion-dollar companies. This article is the first in a series focused on understanding the trend. I’ve talked with leaders from the corporate parents (Coca-Cola, General Mills, and Nestle) as well as participants/members of venture portfolios or incubators (Chobani Incubator, Mondelez SnackFutures, and Constellation Brands)
In talking with John Haugen, Founder & Managing Director of General Mills’ 301 INC, he explained that the current model in place wasn’t the one they envisioned from the start. After starting as an internal incubator where they tried to build their own businesses from scratch, they eventually pivoted.
Haugen: “We made the decision to kind of go inside out, and (re-)launch as a venture capital model where we find really promising food startups, and then take that investment capital and combine it with access to resources to help them grow. So that’s what we’ve been doing over the last roughly four years: ten investments in the portfolio today.”
301 INC. TEAM
COURTESY OF GENERAL MILLS
Forbes: Startup founders have tolerance for risk and long timelines. We all know about the seven-year overnight success. I asked if this is what makes the VC model so compelling: that someone else is shouldering the risk for General Mills?
Haugen: “I think that’s a big part of it… The people oftentimes in big companies stay with their current job for less than seven years. I mean, you’ve worked with a lot of big companies. You’ve worked with them on strategic R&D projects. You probably have gotten that phone call, nine months into a project … and someone says, “Hey, guess what? I’m rotating into another area. Not to say there’s not turnover in small entrepreneurial companies… But not the really key people who are setting the course and really sort of the heartbeat of the brand and the company.”
Forbes: Since 301 INC promises resources to their portfolio companies, I was curious about what they need most.
Haugen: “Let me start off with what they don’t need. They don’t need us to come in and run their business. One of the most important things we say is, ‘You need to know how to run your business.’ The types of things they need tend to fall in a few different buckets: supply chain, capacity expansion, logistics, quality, R&D, food safety, the sort of technical and supply chain side. And we’ve got resources to help out with that. We have roughly 20 or so fully dedicated people to serve our partners which is a lot about what it means to be an indispensable partner for growth.”
Forbes: I asked for a case study example of one of their investments that’s gone well, and one that went, well, not-so-well.
Haugen: “Uh-oh. Asking me to talk about the brands in the portfolio—you know, I’ve got four kids—and what you’re asking me to say is which one I love best! So, it’s always a little dangerous, because there’s aspects we really like about all the brands in our portfolio.
Meatless Burger Maker Beyond Meat was one of 301 INC’s early investments.
Getty Images
Years ago, we were already investors in Beyond Meat. But we saw this growing momentum behind people looking for plant-based solutions, and everything we do ultimately has to be driven by areas of consumer needs. Whether it’s environmental issues, health issues, what have you, we knew that plant-based, both in terms of meat and dairy, were going to continue to evolve. So, Kite Hill is a (plant-based yogurt) brand we’ve been involved with now for about three-and-a-half years from our original investment … We’ve got a significant partnership: innovation, supply chain, working with their purchasing, manufacturing facility. We have been really involved with hiring in and partnering with the new leadership team, which is completely different today than it was certainly when we were first involved.
We’re really, really excited about where the plant-based (yogurt) category is going. We’ve got a lot of resources because we’re a significant player in the (dairy) yogurt business… Aside from our product being milk, and Kite Hill being almonds or other plant-based products—there’s a lot of ways we can help them. That’s an example of one that we feel really good about.”
Forbes: This begged the question of whether a 301 INC investment in the plant-based yogurt business would preclude General Mills’ big yogurt brands such as Yoplait from getting into that growing category.
Haugen: “It’s a good question. At General Mills, we are fully dedicated to the work of investing and innovation in our core brands. Would General Mills be precluded from launching a plant-based yogurt? I would say no. The fact that we (301 INC) are separate from the day-to-day operations of General Mills allows us to operate independently.”
Forbes: And what about a not-so-good investment?
Haugen: “First of all, I would say there’s nothing in our portfolio that hasn’t worked, to date. But there are businesses that have performed better than others.
We look at two successful outcomes. The first is, we want to make sure we drive a competitive rate of return with the company, capital-wise, and so that’s one success criteria. Another goal is for some of these businesses to become fully acquired brands within the General Mills portfolio, over a period of time. We’re still relatively early in that journey.
On a brand called Tio—a line of refrigerated, drinkable gazpacho—we were excited about that exit. It was a more nascent area of investment, from a category perspective, and didn’t work out. The space developed a little bit more slowly than we thought.
One of the challenges with innovative brands is … sometimes it’s hard for the consumer to navigate what the benefit is, or where to find it in the store. It’s a phenomenal product. The brand is great, but it was difficult to find in the store, because it was in five different places in five different retailers. Also, is this a veggie smoothie? Is it supposed to be a refreshing complement to the meal or is it the meal? Or is it a snack?
I think the brand still really has a really promising future. But we learned six months in that it isn’t as value-added as we thought, and so it’s probably more effort than the return that we were getting.”
Forbes: I asked about investment in innovation internally at General Mills, versus having to pay a high multiple to buy a successful business with an innovative product. I asked if it was cheaper to do it in house, rather than acquire.
Haugen: “Well, loaded question. It would be cheaper to do it in-house, but as you know, most new innovation is unsuccessful.
There’s immediate scale innovation, and there’s emerging scale innovation. We feel that continued, smart, and well-executed brand expansion and brand extension for General Mills brands is always going to be critical to keep us fresh, new, dynamic. I believe in General Mills brands. I believe in the ability to innovate on those brands.
As it relates to new innovation that is more emerging in nature, it’s more difficult. It takes time, and it’s costly, and it’s worth it if it’s successful. But nobody really calculates the high failure rate to do that type of innovation internally. People tend to only think about success, but you need to look at the cost of the ones that didn’t work. I think internal innovation is always going to be cost-efficient, when it works. But the reality is that most new innovation doesn’t work.
(As for paying high multiples) There’s always a premium on great ideas, and we want to be competitive.”
Forbes: Given the number of corporate F&B incubators, accelerators, and in-house venture groups, I asked whether this represents FOMO (Fear Of Missing Out). Or is it happening because we have a really strong economy? And what does this mean for 301 INC?
Haugen: “I do believe some are like, “Hey, you know, we need to have a venture, and we need to have a funky name, and … that’s one of the reasons why there’s just a lot of dollars available.
Food has also become … in vogue to get into. Now even celebrities want to be in food. Once they realize what it actually means to run a food business, they may be slightly less interested. Because they realize even if you have a famous name, the Kroger re-set happens when the Kroger re-set happens. They think they can make a phone call and change it, and then they realize no. There’s no question the robust economy is driving investment. And possibly even heating the market, and/or allowing brands that maybe wouldn’t otherwise get funding to attract funding.
If there’s a deep recession, brands that are truly remarkable and resonate in a powerful way with the consumer, and are strong on strategy, food, taste, I think those are going to have access to funding. You’re going to see a washout of the kind of next tier, fringe brands that you know maybe just didn’t have a strong value proposition to begin with. I think even in funding you will see a reduction of people launching new food funds. I think it’s just a natural outcome.
For what we’re doing at 301 INC, we’re going to stay at it.”
——————————————
Read the full interview with John Haugen here.
Many thanks to Mattson‘s Emily McCue for help coordinating and editing interviews with the authors of this series.