Interviewee: Matilda Ho, Founder, Managing Director of Bits x Bites
CASVI: How did you get into impact investing?
Matilda: I have worked in food and agriculture throughout my entire career. My work at Unilever and BCG as part of the food and agriculture team opened my eyes to the many opportunities and challenges in this field, including food security, food safety, and sustainable supply of animal protein. At the same time, it was abundantly clear China had few startups and capital focused on food and agriculture. That inspired me to create Yimishiji, an online farmer's market to help small farmers sell their organic, chemical-free products directly to consumers. After a year of starting this business, we realized there was an opportunity to support other entrepreneurs who shared the same mission. Then we established Bits x Bites, a venture capital fund to help more early-stage startups solve systemic challenges in the food sector and create the future of good food together.
We do not identify ourselves as a social enterprise but as a sustainable VC that can create value for the business, society, and environment. Our investment portfolio is all selected for its ability to create profit and purpose, and many of them have the excellent financial performance to show. With the more recent African Swine Flu, COVID, China’s carbon neutrality target, we are seeing more and more investors beginning to focus on sustainability issues and value social and environmental impact when making investment decisions.
CASVI: What is your opinion on the Chinese food and agriculture investment market, and the current early-stage investment ecosystem?
Matilda: If we look at the food chain, including upstream, midstream, and downstream, we focus more on upstream and midstream opportunities. At present, capital funding across the Chinese food industry’s value chain is heavily skewed. In 2019, the total capital invested in food and agriculture in China was USD3.66 billion, 85% of which was invested in the downstream categories. While these investments bring new choices to consumers, without innovations and production efficiency improvement in the upstream and midstream, the supply chain will not see sustainable long-term upgrades, which are necessary to support improvements in the downstream.
This uneven development is partially attributed to the investment environment in China's primary market in the past two decades. Chinese and Asian PE/VC markets are still relatively new. Their previous focus was on TMT fields such as Alibaba and JD. The successes of these Internet platform giants have encouraged Chinese funds to look for short-term investments and rapid growth. For instance, with the dominance of e-commerce and delivery platforms and the emergence of DiDi (Chinese equivalent to Uber), many investors and their LPs are looking for an exit within just three years.
However, with declining returns for the Internet industry, it's almost impossible now to establish a company to go IPO in 18 months. Meanwhile, social and health issues began to emerge, such as COVID-19, African swine fever, etc. We believe these trends will lead to a more rational market.
Investors will gradually lengthen the investment time horizon and begin to invest in startups with disruptive innovations and sustainable value, rather than pouring resources for the fastest returns.
CASVI: Impact investing tends to have a relatively long investment cycle, so what are the challenges?
Matilda: Our fund has a "5+5" investment cycle, meaning it’s a 10-year fund. This is well suited for agriculture. Implementing any technology for plant improvement will take a year or more to see results. In fact, agrifood tech funds in Europe and the US are usually at least 10 years. The Bill and Melinda Gates Foundation's investment cycle is 20 years. At the same time, CVCs in the industry begin to emerge and look for long-term and evergreen investments that bring benefits and disruptions to the industry.
We are also very cautious about choosing co-investors. We invest in companies that will bring sustained value, so we need to be rational in the valuation in each round. I am pleased to say that there are more and more early-stage agricultural funds sharing these visions and investing for the long term in China.
CASVI: What are your thoughts on reducing the risks of long-cycle investments?
Matilda: We do a very detailed pre-investment evaluation and due diligence. After the investment, we devote ourselves to portfolio management to support our startups’ growth.
Taking funding support as an example, we have a close network of VCs and PEs that we strategically connect with our teams to support their follow-on funding rounds all the way to IPO. We also keep a tab on regulations and domestic policy to help portfolios navigate the changing environment. We do so by working closely with the government and SOEs. And to support our companies’ business development, we introduce them to corporations that can be commercialization partners. In 2019, we launched the China Food Tech Hub consortium to foster startup-corporate cooperation. This allows us to work with members including Nestle, Yili, PepsiCo to introduce partners to startups in our portfolio and our broader network.
CASVI: What is the expected return on investment for Bits x Bites?
Matilda: Investments in the food and agri-tech sector not only can create a positive impact on the society and environment but also have the potential to be a unicorn in terms of financial performance. For example, Beyond Meat has achieved a 100x return.
We have so far invested in 14 companies in Phase I of the fund. Many of our invested companies have successfully secured future funding by meeting their milestones toward their next phases of growth.
CASVI: Who are the LPs that agree with Bits x Bites's long-cycle return and social impact investment strategy?
Matilda: It’s important for VCs to partner with LPs that are aligned with their investment strategy and approaches and can extend strategic resources to help portfolio investments achieve their milestones in support of their future rounds of financing, thereby resulting in a better financial return.
Currently, there are three types of LPs that invest with us.
Strategic investors: Traditional food companies need to innovate their products to better meet consumer demand. They can be potential LPs or corporate partners for food agri-tech VCs.
Financial investors: These are mainly international VCs who have been involved in the western markets for many years and want to enter emerging markets. They will choose to partner with VCs that are familiar with the local market. Due to language and cultural barriers, they choose to invest in funds such as Bits x Bites instead of making direct investments on their own.
Family Office: Family Offices need to diversify their portfolio. The food and agriculture sector is a wide-ranging industry with long-term investment value but requires specialization and expertise. Therefore, family offices need to invest in funds like Bits x Bites to accomplish their goals.
CASVI: What are your focused investment areas?
Matilda: We have a total of four main investment areas.
First, sustainable agriculture, which includes companies that help farmers make better decisions. When farmers can manage their operations more precisely, when to water, when to apply pesticides and fertilizers, they can save on farm inputs while increasing yields.
The second focus is crop health and animal health. As a result of swine fever, 40% of pigs were lost and pork prices doubled. Without a cure, swine fever remains a concern. We also focus on farm inputs. We look at how feed and nutritional additives will improve the immunity of animals and provide more nutritious food sources for humans.
Lastly, alternative protein is a key area of interest. Four out of 14 projects in our Phase I fund are alternative protein innovations. Today’s plant-based meat is highly processed and contains undesirable additives. We believe there is an opportunity for alternative protein sources that are healthy and sustainable, such as algae or fungi.
CASVI: What are your investment range and exit method of the fund?
Matilda: We co-invest in companies between pre-A and Series B. We invest between about USD1 million to USD7 million. In many cases, we participate in follow-on investments in their future rounds. Our exits may take the form of sales of shares, IPO, and acquisitions.
CASVI: What advice would you give to fund managers looking forward to entering the impact investing field?
Matilda: Embrace a combination of optimism, idealism, and pragmatism.
We are working on something ground-breaking and revolutionary. This is not just a project, but a series of changes. It will take time. Be patient and resilient.