Last year Chinese Agrifood startups raised $1.8 billion in 177 investment deals, according to new research from Agfunder. The majority of the investment occurred at the consumer end in the “eGrocery” segment.
Agrifood refers to the food and agriculture industry, globally a multi-trillion dollar industry and the worlds largest employer. Investors see an opportunity in the growing Chinese middle class and a well-established technology network, according to the report.
The Agfunder report, China AgriFood Startup Investing Report, was produced in collaboration with Chinese food tech accelerator, Bits x Bites and included analysis of 177 startup financings. Not all investment deals are disclosed in China or accounted for in the report. However, the authors maintain “our database reflects the overall situation of agrifood startups in China”.
The research revealed downstream startups focusing on consumer solutions – including in-store restaurant & retail, online restaurants, eGrocery, and restaurant marketplaces – dominated the 2017 Agrifood investment, taking 94 per cent of total investment.
However upstream solutions like agtech, attracted considerably less funding – just $106 million of the $1.8 billion total investment.
“While China is behind the US in agrifood innovation, arguably in distribution it is way ahead,” the report said.
“These technology-driven network effects make the country’s food industry ripe for disruption, which often occurs when you have a new, faster, and cheaper distribution channel.”
The downstream disparity is different to global investment figures, where the split is a much more even 58 per cent – 42 per cent to downstream.
The consumer push
According to the report, many of the downstream startups to receive funding are focussing on an “exploding” middle class which continues to spend on premium food experiences. Chinese consumers favour convenience and futuristic shopping experience like unmanned stores, according to the report.
Focusing on the consumer market is a common trend, according to AgFunder cofounder and CIO, Michael Dean.
“We saw a similar effect in other markets where venture investors went after the more consumer facing technologies, which have a much larger market and tend to have more direct distribution channels,” Dean told Which-50.
“Social media is more immediately effective for marketing purposes as well. The challenge though, as we saw with many of the food delivery e-commerce platforms, is getting the unit economics right and the large amount of money required to establish a sustainable and profitable distribution model at scale.”
There are lessons in the research for Australian Agrifood startups and investors too, according to Dean. “As we saw with the troubles hit by many of the food vending startups, it is important to understand your market and the competitive landscape and to not rush to get into a noisy space.
“With so many new players entering the market at once, unless you have some sort of competitive moat, like a proprietary technology or product that separates you from the pack, it becomes a race to the bottom because then price becomes the key differentiator, and those with the deepest pockets will usually win.”
Chinese tech giants Baidu, Alibaba and Tencent (BAT) have a heavy presence in agrifood investment. The trio spent nearly $1 billion in 2017 on early to late-stage startups that fit their corporate strategies.
BAT investment produced higher rates of survival for the popular but risky unmanned stores and vending machine startups, according to the report. These startups had an overall failure rate of 90 per cent, but partnerships with BAT offered much-needed access to more robust capital and technology support, improving chances of survival.
Alibaba Group and Tencent each made major investments in food delivery services and between them now account for 90 per cent of all online food delivery in China, according to AgFunder.