‘VCs need their money back’: why sustainable startups struggle to fix our broken food system | Agriculture

When Andrew Carter and Adam DeMartino started their business Smallhold in 2017, they set out with a simple vision they thought could have a big impact: feed people mushrooms.

“Mushrooms are one of the most sustainable calories on the planet, in every aspect,” Carter said, whether you’re looking at water, waste, plastic use or greenhouse gas emissions. “We just wanted to get more people eating them.”

For the better part of seven years, Smallhold successfully did just that, getting specialty mushrooms such as shiitake, blue oyster and trumpets into grocery stores and on to Americans’ plates. And they built a cult favorite brand while doing so – a feat made notable by how much harder it is to accomplish with produce than, say, processed snack foods. (Think about how differently you shop for chips or ice-cream, on the lookout for a specific brand you like, versus peaches or tomatoes, the brand of which you may not even notice.)

As mushrooms became emblematic of a new vision of sustainability at the start of the pandemic lockdowns, achieving zeitgeist-y star status, Smallhold found itself both riding that wave and helping propel it, earning a range of buzzy media coverage and being valued at $90m at its peak. Just six years after starting in a shipping container in Brooklyn, the brand had built out farms in New York, Texas and California, and had begun selling in 1,400 stores across the country, including Whole Foods.

“We gave others hope that a sustainable business could rise quickly, become popular, and change an entire category for the better,” said DeMartino. Smallhold was just one of a host of food startups that have cropped up with the promise that they’re growing food more sustainably or reducing waste.

So it came as a disappointing shock to many when the founders both stepped down this spring and Smallhold announced that it was filing for bankruptcy shortly thereafter.

Though the company was taken over by investors who restructured and brought the company out of bankruptcy at the end of August, Smallhold emerged as a “shadow” of the company DeMartino once envisioned; it shut down its farms and laid off much of its staff without severance, to the dismay of the founders and customers who had come to associate the brand with the ethical treatment of its employees and farmers as well as the earth. (The brand’s current leadership declined to comment for this article.)

What does the brand’s trajectory mean for the prospects of using entrepreneurship to right traditional agriculture’s wrongs? In the example of Smallhold and other produce-focused startups like it, there are lessons to be learned about what role business can – and can’t – play in fixing our food system.

Do: find a niche, and sell more than sustainability

Elly Truesdell was working at Whole Foods as a “forager” who helped the grocery chain identify new local suppliers when Smallhold started out, and she remembers being impressed at their unique offering. Where most shoppers had only encountered the most common varieties of button mushrooms, Smallhold was introducing varieties with more interesting and varied flavor profiles, such as lion’s mane and blue oyster.

“I traveled the country and visited a ton of local food stores and other grocers and very, very rarely could you see specialty mushrooms of the varieties that they were growing in grocery stores,” she said. That’s some of what convinced her, once she left Whole Foods to get into venture capital with a focus on food businesses, to invest in Smallhold.

For a world increasingly thinking about both personal and planetary health, mushrooms hold great appeal as an easy and nutritious meat alternative. And Smallhold was paying farmers a living wage to grow them on waste material, using minimal water and electricity, composting the leftover materials after, and selling their product in compostable retail packaging (an industry first).

But startups that gain a foothold in the produce aisle have to offer customers more than that to succeed, Truesdell said. “You cannot hang your hat on sustainability only. Product quality, cost – all of the things that matter in a typical food business still matter.”

In some ways, Smallhold excelled at that: in addition to the unique flavor and high quality of its produce, it also built a strong brand through a combination of the charming aesthetics of the mushrooms themselves, a witty social media presence and the relationships its founders built with tastemakers who helped cement Smallhold as part of the zeitgeist.

Smallhold isn’t the only produce company that has benefited from creating a unique visual identity. Bowery Farming, an indoor agriculture company that sells greens and berries, and Gotham Greens, which sells salad greens, dressings and herbs, are two others that have invested in top-notch design and branding.

While all three companies have claimed to be growing food more sustainably than peer companies in their categories, their unique approach to branding produce is part of what lures in new customers, Truesdell noted.

Don’t: take on too much money

Entrepreneurs who want their business to be sustainable by environmental standards have to also be sustainable in the financial sense of the word.

Though what Smallhold set out to do was sell mushrooms that would help people “reconnect with their food, environment, and farmers”, the technology it was using to do so was often what excited funders. “Over time, we were really leading with that,” said DeMartino. “The pitch got crafted around technology further and further.” He often felt that they were adding tech that was cool, but overcomplicated things: “You don’t need to press a button to open a window. You can just open the window,” he said.

Plus, creating and maintaining the technology infrastructure was expensive, which made building new farms costly. That in turn made becoming profitable more difficult to do – and when venture capitalists are looking for a return on their investment quickly, a slow path to profitability can be a death knell.

“VCs need their money back,” said Ari Greensburg, professor of entrepreneurship and management at NYU Stern. “They need you to get there by five, six years, seven maximum … If you can’t do that, they abandon you.”

That is, in some sense, what happened to Smallhold: after years of ample VC funding, investors decided they weren’t making enough progress toward profitability, stopped cutting them checks, and the company was left without adequate cashflow.

Smallhold wasn’t the only buzzy produce company to go bankrupt under these circumstances. AeroFarms and AppHarvest, two other indoor farming companies that had attracted big venture capital investments in the past, also declared bankruptcy last year when the VC landscape began to shift away from its former optimism about tech-based food startups.

Lessons for other entrepreneurs

It’s easy to tell an entrepreneur that it’s dangerous to take on VC funding, but often harder to offer viable alternatives for startups that need cash. But those options do exist, insisted Truesdell, especially for agriculture companies. She pointed to Ark Foods, a produce startup founded in 2013 that helped create the US market for shishito peppers, as an example. Though the company has taken on some modest equity investments from funds including Truesdell’s, those haven’t made up the bulk of the company’s funding.

“They rely a ton on farm credit and on loans from the Farm Bureau, rather than on venture dollars,” she said. “They’re almost always hovering at break-even or slightly profitable, so that they’re not in this difficult situation that companies like Smallhold found themselves in.” She named the family-owned salad and greens business Taylor Farms, which has opted to grow slowly over time rather than taking on big investments in the hopes of scaling up quickly, as another example of how to do things differently.

There’s no one-size-fits-all way to build or run a produce startup to ensure that it’ll be around in the long run, and the most effective strategy for changing the food system for the better won’t rely on entrepreneurship alone, but will incorporate policy change and regulation, too.

But there are a few lessons worth trying to take away from the successes and failures of the startups that have tried to do so in the last few years: build a strong brand, even in a category like produce that hasn’t historically been known for branding. Offer sustainability, but pair that with other values, such as new flavors or higher quality to lure in customers. And take financial responsibility just as seriously as planetary and social responsibility.

“No matter how much you love it, this business runs on money, not on love,” DeMartino said. “We needed to make really key decisions around that in order to sustain the vision of a circular economy business.”

Lastly, learn to define success on your own terms.

Despite its eventual bankruptcy, Smallhold did help carve out a market across the nation for specialty mushrooms – and getting more people hooked on what could be the “most sustainable calories on the planet” is a legacy the company’s founders think is worth celebrating.