Impact Investing | China's First Agri-food Tech VC: Interview with Bits x Bites Founder Matilda Ho

By: Zhiqing Chen, CASVI

Over the past decades, China's agriculture sector has developed rapidly with the advent of technological innovations. The booming eGrocery market serves as a powerful growth engine for agrifool tech startups.

According to statistics from Agfunder, over 60% of agrifood startup investment flowed into the eGrocery market with government support in China. During the digital era, enterprises are seeking innovative approaches by applying advanced technologies, such as AI, IoT, and 5G, into precision farming.

We are pleased to invite the founder and managing director of Bits x Bites, Matilda Ho, to join us in discussing sustainable investment in food technology. Bits x Bites has just closed $30 million of its new $70 million China agrifood tech fund in November, 2020.

Matilda is an experienced entrepreneur and investor in the sustainable food and agricultural sectors. She was born in Taiwan and had lived in the United Kingdom and the United States for years. In the early stage of her career, she served as the management class at Unilever, IDEO, and BCG (Boston Consulting Group) in Shanghai and Washington, D.C. After earning an MBS degree from the University of Chicago, she was solemnly selected as a Global TED partner and a GLG Social Impact partner in 2017.

In this series, highlighted questions are presented below:

• Why are you interested in venture capital funding on food technology?

• How do you perceive the current imbalanced investment structure of China’s food value chain?

• How do venture capitals assess and control the risk of long-term investment projects?

• What are the emphases of Bits x Bites in future investment?

Bits x Bites is an avant-garde in venture capital investments in agriculture and food technology. As the first Chinese venture capital fund in China, this institute carries a mission of “Shaping the Future with Good Food.” It emphasizes both humanistic ideas and commercial return in its investment process, aiming to improve and innovate value food chains from farms to people through food technology.

Bits x Bites currently invests in many food-technology projects, including gene-editing technologies in producing high-quality crops. Additionally, it invented new functional chickpea proteins and other bio-technologies that grow cells in labs to produce low-cost, non-GMO, and sustainable meat products.

Main Points Made in this Interview:

• Sustainable agricultural technology business should compact with both social and business values.

• Chinese market has accumulated significantly more funds on downstream sectors for the past decades, limiting opportunities for mid- and upstream sectors to grow in sustainable agricultural fields

• Sustainable agriculture is slowly progressing as TMT investments are losing competivity in China’s rapidly saturated market.

• Cultured and plant-based meat markets have expanded continuously in recent years, along with the increased social awareness after the pandemic.

• Venture capital investments required a long-term investment cycle for at least five years showing in the example of Bits x Bites.

• It is critical to evaluate and control risk factors during pre- and post-investment management processes.

• Bits x Bites will focus on four primary areas for future investment, including sustainable agriculture, crop and animal health, feeding process, and alternative protein.

Social & Business Value

SUA: What is your original intention to create Bits x Bites?

Matilda: I have continuously been interested in agriculture and food sectors, tracing back to Unilever and BCG's previous career. I discovered many investment opportunities in food security, animal protein, and sustainable supply chain in this sector. The Chinese market had not yet outreached to these sectors with a low amount of investments. Therefore, I decided on my path as an entrepreneur.

My beginning stage of entrepreneurship focused on an online platform called YiMi. It is an e-commerce platform selling sustainable farm products to consumers and boosting economic development in rural regions. This project also helps farmers to grow organic plants without usages of pesticides or chemical fertilizers. It aims to directly deliver sustainable products from the farms to consumers by eliminating second processing and artificializing products.   

After a year, I realized a potential market margin to develop this business. When I conducted corporate social responsibility (CSR) businesses, I aligned with incorporations and consumers with the same values to improve our environment. By building an enterprise with social and company values, I firmly believe in entrepreneurship's power and its enhancing people's living conditions and the environment. Before I founded Bits x Bites, those are my previous experiences, a venture capital fund focusing on food technology and optimizing China's food innovation ecosystem.

Frankly speaking, the original intention is to invest and assist early-stage startups encountering challenges in the agricultural and food sectors. This intention drives us to continue this business for over four years.

The Process of Witnessing Value

SUA: Because Bits x Bites targets the macro-level sector, have you encountered high-pressure situations during your entrepreneurship? How did you identify future directions?

Matilda: These questions are our primary concerns for the past four years. Many Chinese venture capitals once asked us the same questions: Why didn't you invest in Luckin Coffee, e-commerce, or grocery delivery? We found that there are three tangible sectors in the food value chain, including upstream, midstream, and downstream sectors. This value chain derives from farms to consumers, as China had accumulated over USD 3.66 billion in this supply chain last year. 85% of these funds were invested in the downstream sectors, more gearing towards the sales and consumption. This situation is exceptionally imbalanced by only contributing funds to downstream investment. Meanwhile, other sectors in midstream and upstream are deprived of assets, thereby limiting opportunities to function and grow.

One thing is essential for entrepreneurs, which is patience. We can never precisely predict the next market trend. But having the motivation and consistency to develop our business, we can genuinely dive deeper into the field and witness its value. The other aspect is expanding influence to guide more people to discover deals in sustainable development and food sectors.

At first, most of these people resided in foreign counties. During the past seven or eight years, the turning point happened when they realized the tremendous value brought by food technology sectors and started to invest in startups. Thus, we have more and more opportunities to elaborate with world-leading investors in collaborative projects. We believe in the strive for consistency. Beyond Meat, a startup focusing on cultured meat products is a classic example of improving Chinese's food innovation ecosystem.

SUA: As you mentioned, most investments are accumulated in the downstream sectors of the food industry. Do you have any thoughts about this issue?

Matilda: In the past twenty years, China has been more focused on investing in the private market. Compared to western countries, Chinese venture capital and private equity markets have developed slowly and are still at a nascent stage. At the same time, Internet and TMT investment have expanded dramatically in China. This aspect stimulates investment in these fields, while Chinese funds are looking for short-term and significant returns. For instance, the combination of the Internet and products emerged as e-commerce platforms and delivery. Similarly, the variety of the Internet and traffics created Didi Luxes, a Chinese app-based transportation services. The rapid technology development facilitated a severe investment problem, as limited partnerships are rarely sustained for over three years.

In terms of our investments, we hold a much longer duration. Compared to TMT investments, we have ten years of funds in one agricultural project. Because in food sectors, growing plants take at least one year to cultivate satisfied products. Compared to other limited partnerships, we are committed to a long-term investment cycle that proves our projects' consistency and trust.

While the Chinese investments are getting mature, we consider that agricultural sectors' market margin has expanded. After the coronavirus pandemic, with TMT investments no longer safe returns in this rapidly developed market, we predict that the market will calm down and smoothen to more stable and long-term investments. In this case, Chinese investors will eventually witness the value of sustainable development.

SUA: In the past two years, has Bits X Bites enhanced its development?

Matilda: Of course. There are more investments in Chinese sustainable markets. For instance, cultured and plant-based meat products are emerging in the market. Food innovations are based on the demands of consumers. This social phenomenon provokes us to contemplate more social issues. For instance, we will think of the benefits of cultured or plant-based meats. Are they relate to climate change in recent years? Or are they related to global economics on some levels? While consumers have a high awareness regarding environmental protection and sustainability, many emerging entrepreneurs and enterprises are in these sectors.

SUA: Corresponding to a long-term investment cycle, do you expect Bits x Bites to have good returns?

Matilda: That is correct. Our investment cycle is relatively long, for at least five years. However, as I mentioned before, we are an enterprise with both social and business values. Despite promoting sustainable development, we are also building effective business strategies to seek returns. In this sector, some companies, such as Beyond Meat, had achieved initial public offering (IPO) and financial returns to 100 times of their investments.

During these years, Bits x Bites has maintained good business performance. Among 14 fund investment projects, we have at least two projects that achieve outstanding results. If we remain at this pace, we are prospective to achieve returns as much as Beyond Meat. We are an investment institute compacting with huge potentials.

Envision the Future:

SUA: Regarding venture capitals, how do you determine and control risk factors over a long investment cycle?

Matilda: Firstly, there are two highlighted processes: pre-and post-investments. In the pre-investment Phase, we would invest in enterprises before the Series A round. If the team can successfully refine the technology and commercialize its products, we will continue to invest in Series A and B funds. At the same time, we will rely on our venture capital and private equity network resources in the food agriculture field. By doing so, we can ensure that the investment in this project is secured in Series B and C funds to pre-IPO to reduce the risk of investment failure caused by a broken capital chain. Our robust network is the most valuable asset to assist investment decisions.

Secondly, post-investment management is also critical. Through close contact with state-owned enterprises such as COFCO, we can grasp future opportunities and policy trends in a forward-looking manner to ensure good results. Plans need post-investment management execution because there is a waste of good ideas if they don't apply in real-world situations.

If this is an overseas project, it encounters other interferences as it is difficult to enter the Chinese market. We will try the best to ensure that the foreign technology can be successfully applied and developed in the Chinese market in the next five years.

SUA: For long-term investments, does Bit X Bites have more preparation and evaluation?   

Matilda: Yes. The current general behavior of venture capitals in China is abnormal. For example, food and agricultural technology projects in Europe typically raise funds only once every two to two and a half years. Each round is valued at a very reasonable level. In contrast, there are projects in China or Silicon Valley with no earnings, but they are valued at ridiculously high valuations before the pandemic. I can't entirely agree with the domestic approach of judging such companies to overestimate a market cap of several hundred million dollars. Bits x Bites selects projects very carefully and sensibly, weighing both the project's profitability and the value of its contribution to the overall ecosystem. We are surprised to see more industry funds or early-stage agriculture and food funds in China.

SUA: What are the main directions of your investment?

Matilda: We have four main investment areas in the future:

1. Sustainable Agriculture: we will help small farmers in resource allocation and plant cultivation. By integrating with digital technology, we aim to construct smart farming by minimizing input and maximizing outcomes.

2. Crop and Animal Health: The typical example is the coronavirus pandemic. The pandemic exposed the vulnerability of the unstainable supply method in foods. Due to the pandemic, a shortage of pork decreased by 40% last year, causing a doubling to pork price. Under the uncertain circumstances, farmers are hurdling to increase productivity.   

3. Feeding Process: We focus on developing feed formulation to improve pork's nutritional content so that it can improve immunity and prevent diseases from foods.

4. Alternative Protein: Among our 14 projects, four projects in our Phase I fund are protein-based company. There are problems with artificial Meat with additives and potential health problems. We are continually looking for projects to develop sustainable protein that can healthily replace meat, deriving from natural ingredients like seaweed and mushroom.

SUA: Can you share with us some of your successful projects that exceeded expectations? Or some that have not performed as well as expected?

Matilda: We have an artificial meat project in Israel. It is a disruptive technology that allows the production of meat products by growing muscle and fat cells directly from plant-based nutrient solutions in fermenters. This technology could gradually solve the environmental, food consumption, and food safety problems caused by chicken suppliers. For instance, we will solve the issue that Tyson slaughters one million chickens a day in the future.

The cell-grown artificial meat project was invested in by Bits x Bites at a very early stage along with S2G Ventures, an early-stage investor in Tyson and Beyond Meat. The first stock of artificial Meat was pursued in the Series A round. When the artificial meat market was booming last year, leading companies, like New Hope and COFCO, kept asking us when such a powerful project could be introduced to China. From our point of view, this project is very successful because it can meet the growing demand of Chinese consumers for safe meat products in the future.

We have also experienced less successful cases with natural semi-finished products. The program was designed to semi-finish the ingredients and reduce the cooking time significantly. It allows even consumers who don't know how to cook can finish a roast pork or chopped fish head in 15 minutes. Raw semi-finished products have a specific substitution effect for take-out, reducing the use of disposables. However, because China's cold chain technology is still very backward, the shelf life is too short, which brings difficulties to the sales process and eventually did not successfully promote in the market.

SUA: Do you have any advice for venture capitals and investors?

Matilda: I think that you need to believe your projects have the power to transform and change the future. When you have faith in your business, it no longer limits to financial gains. Sustainable projects require you to go through trials and errors, which takes patience and time to transform the existing agricultural production model and consumer behavior patterns. We believe in development, passion, and commitment to finally excel in this sector.

Sustainable Development Goals (SDGs) Unicorn Accelerator Program

SDGs Unicorn Accelerator (SUA) is China’s first accelerator dedicated to scaling solutions for sustainable development, launched by China Alliance of Social Value Investment (CASVI). In its third year, SUA has empowered 172 start-ups and accelerated 24 social start-ups. We look for early stage (pre-A/A round) entrepreneurs with business solutions for sustainable development. SUA supports them to scale their innovative social and environmental solutions.