The Future of the Bioeconomy Episode 1: Nourishing Change

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  Speaker 1:
  Hey, hello everyone. I am Drew Wandzilak, an investor here at Alumni Ventures, and this is one piece of a larger podcast video series on the future of the bioeconomy. And I’m joined by Rafaella Fontes, an investor at Supply Change Capital. Hello, Rafaella.

  Speaker 2:
  Hi Drew, how are you?

  Speaker 1:
  I’m doing great. I’d love to just kick things off. We’ll get right into it. Tell us a little bit more about yourself and Supply Change, how you got there, what your origin story was, and what led to your journey into the venture side of things.

  Speaker 2:
  Yeah, of course. And I think a common thread I found when I was listening to people’s stories of how they got into venture is that there was no common thread. So I will follow that model. I come from a family of doctors. My dad’s a liver transplant surgeon, so my first model for what work meant was saving lives. So low bar to follow up on—thought I would go into medicine and healthcare—decided to do a strong left and followed a passion into the wine industry.

  I spent five years actually in agriculture and learning about the climate impact on our crops, with wine being the main focus at the time. While that was a really fulfilling and fun career, it really wasn’t giving me that impact that I was looking for. So then I chose to go to business school, seeking innovation with sustainability.

  At a startup pitch event, the founders of Supply Change were pitching the thesis for Supply Change Capital, which is a thesis around how the food system needs to transform by 2050—how climate and culture are these disruptive forces of the generation, and they’re going to force us to rethink how our food system has been constructed. And this is an opportunity for us to invest in the future of food that we want to see—one that is more diverse, polycultural, better for you, better for the environment.

  I thought, let’s join this venture fund. Little did I know we were not a fund yet. We had no capital committed or portfolio companies, but the vision is really what was the most important to launch us. So I joined and helped build up our deal flow, our pipeline, helped the founders come to first close, and saw us through the last close, which was this summer. We’ve closed on a $40 million fund. We are actively investing in the future of food and ag systems. We’ve made 16 investments out of this first $40 million fund, focusing primarily at the pre-seed and seed stage, and continue to look for founders that are innovating along the space. I’m sure we’ll talk about some of those areas of interest now.

  Speaker 1:
  Yeah, totally. That was a fantastic overview on you and Supply Change. And I didn’t realize actually when we first met how early you joined in the creation of that fund. What has that experience been like—coming in really just on the thesis and the story to where you guys are now with a growing portfolio with funds raised? How has that experience been for you?

  Speaker 2:
  Yeah, a quote I love is “Luck is what happens when preparation meets opportunity.” And I feel like it was the right place, the right time. I happened to be at the school the two partners had met 10 years prior, and all of our interests were really aligned at that time. I think the founding of a firm is surprisingly a lot like a startup, so we had a lot of founder empathy.

  We were also ourselves going out to LPs and pitching and putting together our cap stack—who’s going to come in on what close—and then details like website and colors and palette and logos, which is really fun to kind of get into the nitty gritty. And then you really have a chance to create something from scratch. You don’t have to follow a template—the wheel doesn’t need to be recreated—but we can paint it whatever color we want.

  It’s been really interesting to see how the partners came from two different angles. Shayna spent multiple decades of her career in big food and agriculture, also worked at startups, and had some board advisory roles for some supply chain traceability companies. Norma comes from aerospace, mechanical engineering, and investing. So the two of them together bring this amazing confluence of ideas, perspectives, and networks.

  I have to say, working at a fund that was started by two women who are really passionate about bringing more diversity into the space, we naturally have a pipeline that is extremely diverse. I find myself often in circles where everyone talks about how not diverse ventures can be, but there are pockets of it that are. We are excited to have a portfolio that is over 80% identifying as women or Latinx or BIPOC. And with that, we have no mandate. We will invest in any founder as long as they are driving impact in the food system. So it’s been really interesting to see how the thought leadership at the top really does trickle down.

  Speaker 1:
  Yeah, that’s incredible. And then on supply, you mentioned it right there—I mean, looking at all things in the food system, so it’s a specialized fund, but still really kind of broad within food. And that’s something that you’ve mentioned a few times in previous conversations. When we’re thinking about this food system, we’re thinking about sustainability, we’re thinking about climate, one of these big things is kind of the bioeconomy and the future of that, right?

  Talking about alternative proteins and feedstocks—what does that mean to you? When I talk about that, I invited you on this to talk about the future of the bioeconomy. How does that land with you? What do you think about that? Is that the term that you’re using? And just general thoughts around that kind of emerging market.

  Speaker 2:
  It’s funny to even call it an emerging market, right? When you think of the food system—a multi-trillion-dollar industry, more than a quarter of global emissions are linked to food—something that every single person on the planet touches every single day. It’s really the only thing that we need to survive: food and water. AI, as transformative as it is for capital markets, is not keeping us necessarily alive.

  But it’s an emerging field at the same time. So it is interesting in being one of the largest and least digitized industries, really ripe for new thought to bring it into a new era. And the way we think about it is really from the whole value chain, thinking of ag as being the most upstream and then looking at all the downstream through packaging, shipping, manufacturing, food creation itself, and then some end product.

  We think there are some fine touchpoints where food overlaps with materials, where food overlaps with healthcare, where food overlaps with energy. And there’s usually a point in our investment process where we’ll talk to founders and we’ll say, is food really central to your mission?

  There are so many funds that invest in the bioeconomy more generally. I think our niche is really thinking about our impact on the food sector specifically. And that is a way that the bioeconomy covers so much ground, but this emerging food space is big enough to play in alone.

  Speaker 1:
  And it really is a massive market. And obviously food is huge. One of the things that I keep coming across is the innovations that we’re seeing within the bioeconomy. With alternative proteins, a lot of that infrastructure can be transferable to other industries. Do you agree with that? Do you see food as this wedge for how we can have a more sustainable future, or do you feel like it’s maybe lagging behind other industries?

  Speaker 2:
  I will say I think alt protein as a sector is a bit overhyped. It’s this obsession with protein, protein, protein. And yes, we all need to eat protein to survive, but the branded alt protein play and the amount of capital flooding into creating novel proteins—which I’ll put in quotations because oftentimes it’s repurposed, repackaged other plants. So it’s a lot of wheat, soy, and pea that’s being reshaped and recolored.

  That doesn’t excite me. I don’t think we’re creating value and really transforming food systems. We made one investment in what we’ll call our alt protein company. It’s called Aquacultured Foods. It’s a team that is using precision fermentation on mycelia to transform that into a fish-like substance. So it is an entire mushroom that you’re eating that they are able, through science, to make taste like fish—which to us is as far as we’ll go into that space.

  Knowing how our oceans are warming, coral reefs are sadly bleaching and dying faster and faster by the day, all the microplastics in the water, a complete lack of traceability on what fish you’re actually eating—there are some really crazy and sad studies when you look at what you think is in your freezer or on your plate and what it actually is.

  For us, that was an important investment to make, thinking about how protein and fish should be consumed going forward. But I think generally the whole alt protein space gets a little too much hype. It’s pulling a little too many people that want to just bulk up or feel like this is how you need to eat.

  And there are other things in our food system. I think what has been really exciting about the past two years with Supply Change is seeing the diversity in our deal flow. People think food’s so niche. I don’t know a day where I’ve had three founders pitch me on a similar topic.

  It’s like algae for packaging, then we’re looking at mastitis treatment for livestock, then software to manage labor on farms, and then fermentation for natural colors. It’s quite a range. You can’t say it’s every day. If I have three relative protein companies in a row, it’s a pretty boring day.

  Speaker 1:
  I think that’s a super interesting point around alt proteins, because I think for the general viewer or listener, when they think about innovations in food, it’s either new consumer products that they see on the shelves at Whole Foods or whatever grocery store they go to, or it’s Impossible or Beyond Meat, and it’s like these fake meats.

  So I think it’s a super interesting point of you feeling like that’s overhyped and a lot of money’s gone there. Where is an area that you feel is almost underhyped—but I’ll ask it in a slightly different way—that deserves that same level of treatment? And is that also the most valuable point that you would want to spend most of your time in?

  Speaker 2:
  An area for us—we’ve written an article about it, it’s on our Substack—is the cold chain being the sleeping giant of innovation. It’s definitely the invisible part of our food supply chain. You just assume your food should just arrive and it shouldn’t be spoiled.

  Hopefully that meant it was refrigerated once it left a farm long ago, however that was. It’s truly this network that underlies our entire food process, and it’s extremely carbon-intensive—necessarily so—to keep our food fresh and to decrease foodborne illness. But it’s by no means efficient and it’s a huge cost center for many food companies.

  There are many stakeholders interested in improving the cold chain, but that doesn’t make it an easy place to solve. We’ve looked at software solutions, novel physics solutions that are looking at vacuum technologies, different preservatives that you can either put in the packaging or in the vehicle, IoT devices that are better at managing the humidity and creating better traceability.

  But there’s no single bullet solution. For us, that makes it truly a place where a lot of value can be created because there’s a lot of money spent there and many people willing to invest to make the process a bit cheaper, but much better.

  Speaker 1:
  I think that’s incredible. We’ve talked a little bit about that cold chain before. Again, thinking about the general person—when they think of a cold chain, my mind immediately goes to when I get my Blue Apron box and it’s got this packaging to keep everything fresh.

  I’d love it if we could even drill down into that a little bit more. Where is that problem the biggest, and talk about that industry. Is it coming to people’s homes? Is it coming to grocery stores, or is it something broader? And where is the real problem there, or where are people feeling it the most? And when I say people, I mean even the corporations or industries more generally.

  Speaker 2:
  Yeah, I think that’s the challenging part—there isn’t one major area of concern. The problem is broadly dispersed, so it’s extremely fragmented across a number of stakeholders, a number of different customers, varying willingness to pay.

  There’s the first mile—as soon as it leaves the farm—but you can actually even drill down and say the first mile is as soon as the berry leaves the vine and what happens between when it leaves the vine to when it gets to the pack house. That’s the first step. And then of course the last mile, which is extremely costly.

  What we’ve found is the whole trucking infrastructure is not super willing to fully digitize, and stakeholders on either side don’t like sharing information for various reasons. So just creating a platform for traceability and expectation that you will get this information is extremely important.

  What we really think is going to drive that through are government regulations forcing companies to report on Scope 3 emissions. Once a company is required to actually report on their Scope 3 emissions, they need to understand their Scope 3 emissions. Then they need to work with their suppliers and have a better understanding of their whole supply chain.

  Once they have that full understanding, there’s going to be less asymmetric information and the market can come to a more natural settling place. That’s an area that we’ve thought about a lot. A lot of the companies that we see starting in the space have this cold-start problem where they’re also capital constrained. They’re a small team, so they often end up finding small, other refrigerated food companies in their local cities that are looking for their initial DTC shipments.

  So it’s like someone that’s at the local food hub and they have 10 orders in Chicago, so this person finds a truck to go pick it up and then they’ll do the 10 orders efficiently. But that’s really hard to scale, and that’s the piece that we’ve found to be really interesting to solve.

  I think there is a lot to be said for ML and AI models to do better predictive planning and for people to change their expectations around convenience. I think an absurd amount of capital went into a 15-minute delivery that was completely unnecessary. Fifteen-minute delivery for an EpiPen—someone’s having anaphylactic shock—yes, 15 minutes you need. Oreos? I don’t know if that’s where we should have put so much capital.

  Speaker 1:
  Gotcha. No, that’s fantastic. And then shifting gears a little bit into the world of alternative proteins—overhyped—but really just the world more broadly of fermentation.

  The first mini question is, you come from a wine background, which obviously has fermentation parallels, and when people think of fermentation, alcohol may come to mind first. Has that educated you at all in your role at Supply Change about fermentation? Totally separate?

  And question 1B: How do you view the world of fermentation? Is it one of these things that’s overhyped, underhyped? And where are you spending your time in that world, if at all?

  Speaker 2:
  This is an excellent question that I didn’t realize how much was under the iceberg that I didn’t know. I was like, oh, I’ve actually made wine. I’ve spent time measuring the pH, measuring the acidity, adding the yeast, monitoring the fermentations, doing the filtration—I get this, I’ve done it.

  And then we have a brilliant PhD student who just completed his program working with us, and he said, “Guys, I’m going to get on my TED Talk pulpit and tell you what fermentation really is.”

  He said, that is one type of fermentation. A lot of scientists would actually consider precision fermentation or biomass or surface fermentation that is being used for a lot of these alternative protein production processes not to be traditional fermentation.

  What’s exciting about it for us is the potential to do more with less and to do more with different inputs. There are companies that are thinking of creating large fermentation facilities, which historically have been more directed toward biotech—more toward vaccine or medicine development. These facilities have always been very high-cost, using very high-input materials.

  When our food companies have started to go into those trying to scale up, the costs are prohibitive. Of course, you’re not able to produce a chicken breast at the cost of a chicken breast in the grocery store. You’re producing something much more akin to an entire Michelin-starred meal just for one breast that’s uncooked.

  We see the costs are coming down. What concerns us a bit is how the inputs are being repackaged. The future of food coming from fermentation—if it’s still just using high fructose corn syrup, because a lot of these facilities are locating themselves in the Midwest where many corn producers are looking to continue to sell their products—we’re not sure if that’s truly a better output.

  We are really excited about what Hyfé is doing and thinking about the variety of feedstocks that can really enable better fermentation. How do you truly think about upcycling in a way that you can use the waste—all the sugar that we’ve created—and put that into creating something with a second life, and not just continuously depleting our fields that have grown corn and fed so many of us but have other uses?

  Speaker 1:
  I think it’s a great point. What I’m hearing is that fermentation is net positive. The things that we can do with it are beneficial for eventual costs, for our earth, for climate, for sustainability. But with anything, we have to be thoughtful about the entire supply chain there, because if the sources are high value or high stress, high risk, we could still have negative impacts even if the end innovation is better.

  And then really the last couple of questions here. You guys, as we mentioned before, are looking all across the food spectrum. Where are you most excited about? Where are you spending your time?

  Even in a specialized fund like Supply Change, you’re still largely a generalist, right? Within food, as we’ve talked about, there is a huge market. So where are you spending your time? What are you kind of nerding out about, or where do you think is the next big phase of innovation in food?

  Speaker 2:
  We are still really interested in innovations in AgTech. AgTech itself is such a broad term. There are funds dedicated exclusively to ag, but we’re thinking a lot about how our food is grown.

  We made one investment in a company that’s using microbial, biological solutions instead of chemicals as a pesticide—thinking about increasing biodiversity. How can we find mechanisms to get more farmers interested in regenerative farming? Finding high-value uses for cover crops so we’re not using the same farming practices in a monoculture setting, but having more farmers convert.

  A lot of those business models are not venture-backable, but we’re looking for the ones that are. We’re thinking about water as a localized problem, unlike carbon, which we talk about on a more global level. If you capture carbon over here, net carbon decreases. If you save water over here but you’re drinking it from over there, they don’t always go back to the same place.

  Water as a localized solution is becoming increasingly important as climate stresses are really bringing into stark effect how drought is impacting many different farming areas. Flooding, of course, destroys them. So you get the net amount of water you need, but not at the right time.

  In ag, that’s generally an area that we’re interested in. Along all those buckets, we’ve spent some time looking at robotics. I think it’s still probably a way out for us and not our key area of interest, although one of our partners, Nome, has made over two dozen hardware investments and is quite comfortable in that space.

  I think looking at more software-enabled or biological solutions in ag is of greater interest. And also packaging. I am someone that has always carried reusable water. It kills me to ever have to use a plastic water bottle, but I don’t acknowledge how much plastic is just generally in my fridge and in my life.

  We’ve seen so many fantastic packaging companies over the past two years that are doing interesting things with seaweed, reusable, biodegradable, or even ingestible packaging. I think there’s going to be a new way of packaging. A lot of it’s coming from fermentation, coming from mycelium.

  The biological decomposition questions, of course, are challenging—can it hold your food, but only for how long? You don’t want it to decompose as it’s coming to you. But I think the packaging landscape is ripe for disruption. There will be some really exciting companies emerging there.

  That’s a really interesting intersection of materials companies, bioeconomy companies, climate companies, design companies, and food companies that find this confluence around packaging.

  Speaker 1:
  I mean, packaging is very cool. And if you want to maybe not get interested, but just understand the scale of it, there’s plenty of content out there—even stuff as little as the ink that’s used to print on packaging is largely petroleum-based.

  When we’re thinking about sustainability, it’s like, “Oh, this is recycled cardboard,” or whatnot, and you go, “Okay, this is great. This is a net positive.” But it can be as small as what are these labels made out of, and what are the inserts in that packaging? Those could almost be worse than just replacing the packaging itself.

  Speaker 2:
  Super cool. The reverse logistics aspect—which so many people are trying to tackle—requires a lot of consumer behavior change, which is probably the hardest thing to bet on because we are stubborn creatures and very unpredictable in how we will change our behaviors.

  But I know there was a New Yorker article—and I’ll just leave this as a plug for anyone that wants to look it up—that looked into Amazon’s reverse logistics network. When you look at the number of TVs that are returned after the Super Bowl or the number of services that they’re contracting just to test how we send something out that we essentially know is going to be picked back up, then you can’t resell it.

  Furniture stores that sell pillows—someone puts it out for their house party and then they just send them back. Someone’s like, “This pillow was used, we can’t resell it. What do you do with it?” To me, that whole reverse logistics network is fascinating and not an area that we’ve had great success in building companies that are operating profitably yet. But there is hope.

  Speaker 1:
  There is hope. There is hope indeed. And you touched on an interesting point, and I think it’s something that we deal with in ventures a lot. We can believe in innovation, believe in a technology, but also understand the roadblocks to actually seeing that at scale.

  You touched on changing consumer behavior, which is a very hard thing to do. Another thing that I’ve noticed a lot within food and agriculture—and keep them kind of separate; they’re obviously connected but very different in a lot of different ways—but one thing that’s kind of common is you have these massive companies in both of these industries that control a lot of what happens.

  When you talk about agriculture, it’s not a long list of people that are controlling how agriculture operates, at least in the United States. How do you understand and contextualize that when you’re thinking about or viewing innovations in agriculture or in food?

  Because at the end of the day, they have to sell these big companies. Whereas if I’m maybe building a software platform, I can sell it to a lot of small companies to start and you can get to a good point of scale without necessarily going to the Facebooks or the Amazons. So how do you think about the market of food and agriculture within the context of these massive companies that control a lot of what happens in that industry?

  Speaker 2:
  It’s definitely challenging because we’re not selling widgets. We’re selling physical goods that have real margins and real-world impacts. I think what’s unique about Supply Change—and we were fortunate to be one of two venture firms that General Mills decided to back—is that General Mills themselves said, “Hey, we got the cereal thing. We’ve been growing year over year for as far as we can look back—with roadblocks—but we don’t know how to defend against our future.”

  We have really fascinating conversations with them. They’re asking us, “What are you guys seeing around Ozempic? What are you guys seeing around food safety?” And they will give us one side of the telephone: here are things that we’ve been talking about internally.

  Then we will say, “Here’s what we’re seeing out in the market,” and we have these really important conversations around where the future of food should go and what’s going to get backing. They’ll give us feedback saying, “There’s no interest at the highest levels to make an investment in this now until it’s necessary,” or “We really want to move on this before it’s a problem.”

  Getting the big corporate minds in the room when we’re talking about innovation and understanding willingness to pay and urgency is important. We ask startups, “Why is this important now? Why are you building this now?” If the corporations don’t see the “why now,” it’s okay. Sometimes the products take five years to get to market, pass regulatory, and even to be viable. But it is important to get their lens.

  Food—more so than maybe other pure software segments—does require more partnerships because a lot of the gains that companies are going to see are going to be in shared distribution. Sharing distribution on fiber optic cables is different from sharing distribution on retail shelves and in trucks. So there’s definitely a bigger need and interest from food companies to see what’s happening and either partner or find clever ways to be part of the new conversation around the future consumer.

  Speaker 1:
  I just always love to highlight that because I think when people think about it, it’s one thing to say, “Look at this new technology, look what it can do,” and a lot of times people are like, “This is great. Cool. I would love packaging that’s more sustainable. I would love it if I knew that there was less of a carbon impact in the food that I eat.”

  But there’s a million steps between that point and actually getting it done. Having that context is always super helpful. Having those relationships like you guys do is incredibly important.

  Well, my parting question is: If I said to you, “Rafaella, I’ll give you half a billion dollars—leave Supply Change—where are you spending it? Are you going and building something? Are you going and investing in something?” It has to be one singular thing. What’s the big issue for you? It doesn’t have to be food, it doesn’t have to be agriculture. What comes to mind?

  Speaker 2:
  I think I might go back to my roots, and I think food as medicine is a fascinating field that we didn’t touch on, but that intersection is where I see my career going more and more. I don’t think food as medicine means a vitamin.

  If we can truly find clinically backed diets and train an entire medical team on how to properly diagnose and recommend diet and food that actually keeps people healthier and doesn’t bring them back into the hospital, I think there’s a lot to be learned.

  There’s so much inflammation—physical and mental—that comes from our food system, and there’s no one that’s really motivated to change that because there’s a lot of money to be made. So if I had a big bunch of money, I’d clear the cap stack and say food can solve medicine.

  Speaker 1:
  That’s awesome—and a great topic. That may necessitate another interview because I think there’s a lot there as well. Well, great. This was fantastic. Again, I really appreciate you taking the time to chat.

  I want to keep these brief—we could probably talk about this for another couple of hours—but I appreciate your insights, sharing more about yourself, Supply Change Capital, and I’m really excited to keep working with you guys on the future of food, the future of ag, and what the food system looks like going forward.

  Speaker 2:
  Excellent. And any founders that are listening—if you guys are working on something in the future of food or the future of ag, we look at everything that comes in from our website: supplychange.fund. You’ll see an area to apply, and I review all of those. So we’ll be in touch if we are ready to have a call with you.

  Speaker 1:
  And send it to her first because she’ll have way more experience in this space, and then she’ll send it to me, and then we can both work together on it.

  Well, great. Thank you, Rafaella. I really appreciate it.

  Speaker 2:
  Thanks, Drew.