Beyond Meat went public on the NASDAQ on May 2nd. The Los Angeles-based company makes plant-based alternatives to beef and chicken products.
Its Initial Public Offering price of $25 per share increased 163% on the first day of trading, closing at $65.75, giving the company a valuation of $3.8 billion.
This IPO share price performance has been the best since 2008. Since May 2nd, Beyond Meat’s share price has held up. By comparison, two other recent high profile IPOs, Lyft and Uber, saw share price declines.
Initial trading patterns are not indicative of a company’s long term performance. What we are seeing at this moment is an extraordinary level of investor enthusiasm for Beyond Meat’s products and for this market segment. Alternatively, this may be simply short term hype. Which will it be?
There are many perspectives on this company and this market opportunity provided by investors.
Let’s unpack this story from the perspective of science and entrepreneurship, which begins with an exploration of this company’s early days.
The difference between the narrative of the company’s founding — the story of the entrepreneur and the technology — and the narratives that have been presented more recently offers a good case study of how innovation can unfold.
The framework for considering Beyond Meat: supply and demand
I will be consistent by using the same framework laid out in an earlier post discussing the flavors and fragrance (F&F) industry.
Peter Drucker articulates seven sources of innovation:
- Unexpected Occurrences
- Process Needs
- Industry and Market Changes
- Demographic Changes
- Changes in Perception
- New Knowledge
For alternative meat products, these seven drivers of innovation can affect either Supply or Demand.
If we use this framework to look at Beyond Meat, the perspective in 2009, when Beyond Meat was founded, would be different than the perspective today. We can see this by looking at the company’s evolution over the last ten years.
As we review the history, consider which of the above sources of innovation were in play and whether they were affecting supply or demand.
Evaluating the entrepreneur
When early stage investors look at an opportunity, criteria include the business model, the technology and intellectual property, the market opportunity and competition, the tangible assets, any prototypes, and most importantly, the team.
Most investors consider the quality of the team paramount, because without this, nothing else is possible.
Nowadays, many startup teams are comprised of young people who do not have a long career resume. How does one discern the capability and the potential of such individuals?
Every talent-based industry has a system to find and evaluate its talent.
Record labels have Artists and Repertoire (A&R) departments to find and develop talent. This job is now being disrupted as new channels for music, driven by algorithms and social media, are elevating artists.
When it comes to entrepreneurship and early stage investing, the practice of talent evaluation is not anywhere near as methodical. The resume proxy is that someone has started up companies before. Hence, the rising trend of candidates calling themselves a “serial entrepreneur.”
There are more accurate and insightful ways than looking at resumes for “serial entrepreneurship.”
Evaluating young entrepreneurs requires using a mix of intuition and character judgment to consider a lot of information that actually does exist. This information never shows up on a resume. These are the motives and impact of one’s life trajectory starting from a very early age. These imprints are established in the first two decades of life.
Exceptions to this approach do occur in people who have life-changing epiphanies later in life, but these are very rare and are easily identifiable by a transformational event.
It’s exciting to dig up this information and to make the connections. It’s a joy when the information supports a strong hypothesis of a compelling entrepreneurial story. It’s like Simon Cowell’s and his audience’s faces lighting up at seeing a talented act that surprises or when a lonely sports scout identifies the patterns in an undiscovered athlete’s special talent.
Let’s profile the founder and CEO of Beyond Meat: Ethan Brown. To respect his privacy, I will not disclose anything that is not already public information, and I will only cover points which he himself has provided.
Ethan Brown: CEO and founder of Beyond Meat
Ethan Brown’s LinkedIn profile is very sparse. It simply lists his role at Beyond Meat, even though he has held other jobs prior and had founded a non-profit energy and environment organization in his twenties. His profile does not even list his academic background.
It is like that of Robert Orr, founding CEO of Ocean Nutrition Canada (ONC), which I mentioned in an earlier post: that to this day, there are no details reported anywhere about his life prior to ONC.
This is the complete antithesis of the narrative of the serial entrepreneur.
I have seen this pattern a few times before.
Standout examples include Howard Schultz, CEO and founder of Starbucks, and Richard Branson, founder of the Virgin Group of companies.
In these active LinkedIn profiles, I interpret this to represent their complete commitment to their stated role. For those at an earlier career stage, it is a presentation of an aspiration.
What was the early aspiration and driving motives of Ethan Brown?
His father is Peter G. Brown, a professor who is presently at McGill University in Montreal, Canada with cross appointments to the departments on Environment and Geography. Professor Peter G. Brown’s self-described work is:
concentrated on the practical uses of philosophy to think critically about the goals of society. Since the 1980s this work has centered on the deterioration of Earth’s life support capacity and the thought systems that facilitate and legitimate this decline.
Did Ethan’s father convey these values to him, or did Ethan rebel from this upbringing? It was the former. He actually states that he admires his father’s values the most.
In many interviews, Ethan always retells the story from his youth, of the dairy farm in Maryland that his father purchased. The experience influenced him to become a vegetarian at the age of 17, and then a vegan at the age of 27.
Ethan graduated in 1994 from Connecticut College, a private liberal arts college located in New London, Connecticut, where he studied government and history. He cites environmental ethics as the course having most influence on him.
His first short term job was for the Organization for Security and Cooperation in post-war Bosnia. Upon returning to the U.S., he founded a non-profit energy and environment organization, from which he was fired shortly thereafter by the board.
These milestones from his early life are outside of the ordinary. They suggest certain aspects of initiative, capability, intent, and potential. It is also noteworthy that he prefers to not mention these roles in his early life.
He obtained his Masters in Public Policy from the University of Maryland in 1997. It was from the same department that his father founded while serving as a professor at the University of Maryland.
He then worked at Ballard Power Systems from around about 1998 to 2008. Ballard Power Systems is a small company based in Burnaby, British Columbia that makes fuel cells. These fuel cells generate electricity by combining hydrogen and oxygen gas as input streams and producing water as the by-product. It is a clean energy company.
While he was at Ballard, Ethan also completed his MBA in 2008 from Columbia University in New York City.
His job choices seem to align with his value system.
As an interesting side note, Ballard Power Systems had developed the world’s most efficient proton exchange membrane fuel cell at the time. These were used in emergency power generators and other niche applications. In 1999 the company attempted a pivot to developing fuel cells for electric cars. The hype from this investor pitch caused a huge stock price bubble from 2000 to 2001, before management and investors discovered the technical difficulty of serving the automotive application. By the time Ethan left the company in 2008, Ballard had reverted back to developing fuel cells for niche applications.
If Ethan had in-the-money stock options that could be exercised during that bubble, he would have made a nice little profit. He probably did, because he became an investor in two vegetarian restaurants in Washington D.C.
This was when he began to think about plant-based alternatives to meat.
Beyond Meat’s technology
Around 2006, Ethan started thinking about making animal protein products from plant sources.
He started looking through scientific publications, whereupon he found the work of Fu-hung Hsieh (produced “shay”), professor of biological engineering and food science at the University of Missouri.
Professor Hsieh’s relevant publications up to 2006 would appear like this to anyone surveying the literature at the time. Note that 2006 was the breakthrough year with the most publications:
- Extrusion and extrudate properties of rice flour, Journal of Food Engineering (1993)
- Influence of Particle Size on the Twin‐Screw Extrusion of Corn Meal, Cereal Chemistry (1997)
- Extrusion cooking of rapeseed meal for feeding value improvement, Applied engineering in agriculture (2002)
- Effects of Salt, Sugar and Screw Speed on Processing and Product Variables of Corn Meal Extruded with a Twin‐Screw Extruder, Journal of Food Science (2006)
- An Image Processing Method for Quantifying Fiber Formation in Meat Analogs Under High Moisture Extrusion, Journal of Food Science (2006)
- A Photon Migration Method for Characterizing Fiber Formation in Meat Analogs, Journal of Food Science (2006)
- A New Method for Characterizing Fiber Formation in Meat Analogs during High‐moisture Extrusion, Journal of Food Science (2006)
- Extrusion Process Parameters, Sensory Characteristics, and Structural Properties of a High Moisture Soy Protein Meat Analog, Journal of Food Science (2006)
- Effect of Process Conditions on the Physical and Sensory Properties of Extruded Oat‐Corn Puff, Journal of Food Science (2006)
The most relevant paper noted by Ethan was the one published that very year: Extrusion Process Parameters, Sensory Characteristics, and Structural Properties of a High Moisture Soy Protein Meat Analog.
Professor Hseih was using a common piece of food processing equipment called an extruder:
Since 1993, Hseih was studying process conditions for mixing and cooking grain-based materials (plant flour and plant meal) in an extruder under heat, pressure, and high moisture conditions to make products that have a fibrous structure where all the fibers were in alignment.
The objective was to create a product having sensory and structural features that were similar to meat: imagine the stringy muscle fibers when pulling on chicken meat or pulled pork.
The taste and colour of a meat substitute made with plant proteins can be made to resemble that of real meat easily by using flavorants and natural dye additives. However, creating the characteristic texture of meat in plant proteins had eluded food technologists. “Veggie burgers” made from plant meal all fall apart easily and have a very dry consistency. The publication by Hseih suggested that they had developed a possible solution after a decade of work.
Ethan visited the University of Missouri and met with Professor Hseih and his assistant, Harold Huff. The extruded “veggie chicken substitute” looked like this:
The extruded product in the video does not look very appetizing. Pilot lab tours happen all the time. Demonstrations like this are almost always casual observations that appear “interesting” but with no follow-up.
However, to an aspiring entrepreneur with a vision, the right features can be a prototype for a product with business intent. Ethan’s tasting notes of this extruded product were that “it was very hard, but the basic structure was there.”
Path to commercialization
The meeting with Hseih and Huff led to an agreement to commercialize the technology and to retain them as consultants.
Ethan obtained an exclusive license for the intellectual property from the University of Missouri, which eventually comprised provisional patents filed in 2010 and 2011. This agreement required his company to make a future investment in Missouri, such as establishing a manufacturing facility.
The seed investment round came from “friends and family” with a big amount of that coming from Evan’s personal savings and from the sale of his home.
They continued to refine the flavour and texture. Since Ethan was an investor in two vegetarian restaurants in Washington D.C., they shipped samples to these restaurants for recipe development and customer testing. Ethan also pitched the product to Whole Foods, which was looking to source a vegetarian chicken substitute that had a shredded structure.
By 2010, the technology had advanced far enough for the work to be announced widely by the University of Missouri (link), the American Association for the Advancement of Science (link), and Time magazine (link). The Time article caught the attention of venture capital firm Kleiner Perkins, who invested in Beyond Meat’s Series A round in 2011.
Ethan enlisted Martin Lo, a professor of nutrition and food science at University of Maryland to help improve the mouth feel, taste and flavor of the extruded product. Lo’s account of the initial product from the Hseih lab was:
“…like a broken tire torn apart. We were able to successfully tenderize the rubbery material and make it more like pulled chicken.”
An important good practice to note here is that while Ethan worked with the original inventors, he also enlisted additional expertise. He set up Beyond Meat’s pilot plant in Maryland near Professor Lo. Ethan only relocated the pilot plant to Columbia Missouri in 2012 to be near the original inventors and in fulfillment of the licensing terms, after the first product was launched. Whether intentional or not, this sequence of tech transfer allowed Beyond Meat to develop their in-house product faster and to Ethan’s vision, separate from the biases of the original inventors.
Ethan’s critical pivots
It was easy enough to have vegetarians sampling and buying the product. Many would have just targeted this market segment as the easy and obvious way forward for such a business. This was not the path of Beyond Meat.
The first critical component of the product vision was to develop products that mainstream meat eaters would also be buying and consuming.
This increased the development time as the product had to have the flavor, aroma, and finish profiles of a real meat product.
The first chicken-free commercial product was formulated and engineered to look like chicken, taste like chicken, and to feel like chicken when biting and chewing. It was in the form of rectangular strips made from soy protein isolate, pea protein isolate, and amaranth, with plant-derived chicken flavourant supplied by Givaudan, a flavor and fragrance company.
The second critical component of the product vision was to remove gluten and soy protein isolate from the recipe.
Gluten are proteins from certain cereal grains. They have viscoelastic and adhesive properties which make them useful in food processing to confer chewy and elastic properties in food products. Gluten was a critical ingredient used in the original recipe to create the fibrous texture. However, this ingredient is not suitable for people with gluten related disorders such as Celiac disease or non-Celiac gluten sensitivities.
As for soy protein, an emerging consumer concern is the high level of phytoestrogens in soy products.
In 2013, Ethan chose to pivot away from these two ingredients. This was no simple challenge. It took Hseih and Huff a decade to create their prototype, and now, just after launching their first product, Ethan was restarting by eliminating two critical ingredients.
To achieve this pivot, Ethan brought two key people to the R&D team.
The first was a vegetarian chef, David Anderson. David had the expected star resume. He developed recipes for other alternative meat companies, most notably Hampton Creek. He was named Chef-of-the-Year by VegNews Magazine. He has catered to numerous Hollywood celebrities, including Ellen DeGeneres, Bryce Howard, Jason Schwartzman and Chevy Chase. He was the chef and co-owner of Madelaine Bistro, listed as one of the “Top Eight Vegetarian Restaurants in America” by PETA.
The second was Tim Geistlinger, hired as Beyond Meat’s first Chief Technology Officer. It took two industry experts from the University of Missouri ten years to develop the first generation prototype of Beyond Meat’s product. What kind of CTO would you hire to fast-track a second generation breakthrough? As noted earlier about the practice of profiling founders and entrepreneurs, the best cannot be found from traditional resumes. The same applies to the technology side.
Tim obtained his BSc in biochemistry in 1992 from a state university in California. He worked in various labs for six years before going back to school to start a PhD at the University of California, San Francisco from 1998 to 2003. This is not your typical star academic career path. During his PhD, he spent eight months in Tokyo on a fellowship. Then he did a lengthy four year postdoc in Boston at Harvard-affiliated Dana Farber Cancer Institute. Then he returned to San Francisco to join a synthetic biology company called Amyris and stayed there for five years. I will feature a future post on synthetic biology. Suffice to say, medical researchers do not typically go to a company like Amyris. This guy is eclectic and is able engage in new scientific domains every half decade. Noteworthy to me: he also bikes on the beach every night and competes in Tough Mudders. The only superficial point that seems to make him “a fit” for working at Beyond Meat is that he is vegetarian. However, from all of this, I infer creative attitude and self-driven engagement.
That was the team that achieved their product goal, against all industry wisdom, in under a year, by substituting soy protein isolate with yellow pea protein isolate and finding the right process conditions. As Tim recounts:
The food scientists had been arguing to go in one direction, because that’s how things had always been done, and I said, ‘Well, this is a different protein. I think we should push this in the opposite direction.’ They were like, ‘Why would you do that? You can’t do that.’ I said, ‘Well, let’s just give it a shot, and…it was immediately apparent. We tasted it right when it came out, and we just went, ‘Wow! We’ve never had that before.’ It was awesome. You could see the fibers. You could feel them. It didn’t get dry in your mouth! All these problems that we’d had just went away. Later that day, we met with our CFO and I said, ‘Here, try this,’ and he said, ‘Holy shit! What is that?’ It turned out much, much better than we ever thought it was going to be.
The final critical decision was to engage with elite athletes, such as from Tough Mudders, ultramarathons, surfing, as well as mainstream sports. A 2014 profile in Outside magazine was another channel to such athletes.
In a related line of thinking, they are also promoting products at university campuses, beginning with Yale University. This targets a new demographic, Gen Z, whose values about environment, health, and animal welfare align with Beyond Meat’s brand.
Ethan explains that Beyond Meat has a very high level of staffing in marketing, because he is friends of the founders of Warby Parker, the New York City-based direct-to-consumer prescription eyeglass company targeting millennials. They taught him the importance of promoting an experience.
The primary source for investor information
When companies prepare to go public on a U.S. stock exchange, they file a prospectus with the U.S. Securities and Exchange Commission called an S-1. Beyond Meat’s S-1 was filed November 16 last year, which can be found here.
Here is a brief introductory paragraph about how they explain their company:
Beyond Meat is … offering a portfolio of revolutionary plant-based meats. We build meat directly from plants, an innovation that enables consumers to experience the taste, texture and other sensory attributes of popular animal-based meat products while enjoying the nutritional benefits of eating our plant-based meat products … Our breakthrough product innovations have enabled a paradigm shift in both marketing and target audience—tapping into the curious and enthusiastic pull from mainstream consumers for delicious and satisfying yet better-for-you plant-based meats.
Here is a brief description of their R&D operations:
Our research and development team, create, tests and refines our products at our Manhattan Beach Project Innovation Center. We employ in-house scientists, engineers, researchers and testers to help create the next iterations to plant-based meat products … As of March 30, 2019, we employed approximately 63 scientists, engineers, researchers, technicians and chefs to help create the next generation of food for our consumers.
Typical items to review are the income statement, balance sheet, and cash flow. The lengthy statement of risks is important. This section is loaded with “typical” risks. The key items are the ones unique to the company, which are uncommon to the rest of its industry.
It is also important to note who they view as their competitors:
We compete with conventional animal-protein companies such as Cargill, Hormel, JBS, Tyson and WH Group (including its Smithfield division), who may have substantially greater financial and other resources than us… We also compete with other food brands that develop and sell plant-based protein products, including, but not limited to, Boca Foods, Field Roast Grain Meat Co., Gardein, Impossible Foods, Lightlife, Morningstar Farms and Tofurky, and with companies which may be more innovative, have more resources and be able to bring new products to market faster and to more quickly exploit and serve niche markets such as lab-grown or “clean meat.” We compete with these competitors for foodservice and restaurant customers, retailer shelf space and consumers.
There are plenty of business news and reviews about Beyond Meat over the last few weeks, so I will not repeat any of these. Analyst reports will also be issued shortly after the black-out period expires. I forgot if it is still 45 days after the IPO date, but there is a short black-out period.
I will only note that just prior to the IPO, Ethan released a letter to shareholders. It is the human side of his story. It is found on pages 78 to 79 of the S-1.
This letter was the last piece of evidence in this review. Its tone, expression of driving values, and its intentional vision remind me of the same presentations made by certain past entrepreneurs: Howard Schultz in the early and formative years of Starbucks came to mind. That is my thesis of Beyond Meat.
The innovation of Beyond Meat and the investment thesis
When Beyond Meat was first founded, it was merely the vision and ideal of a founder to create a better meat-substitute product. Vegetarian recipes for solid foods have been around for millennia. Veggie burgers have been marketed since the 1980s. Chicken-flavored protein has been around for 30 years. Would another product be any different?
Coffee has been around for just as long. Would another coffee chain be any different?
The initial sources of innovation for Ethan Brown were “Process Needs” which he found at the University of Missouri. The extrusion process developed by Hseih and Huff, further developed by Lo, and then the next generation process developed by Geistlinger was the “New Knowledge.”
These provide manufacturing innovations. They affect Supply by providing another product. That was the state of the opportunity in 2009, one year after the depth of the 2008 recession.
My perspective in my post about the fragrance industry is that today, Supply is no longer a compelling problem in a world of abundance. Innovation is needed on the Demand side: how do you create new Demand (preferably in a sustainable way)? In fragrances, Michelle Pfeiffer and Kylie Jenner were two examples of this new shift to Demand-driven innovation.
In the case of Beyond Meat, its new products enabled Demand-driven innovation, because three changes surpassed a tipping point after 2009.
One of these is the “Change in Perception.” Meat-based products leave a much larger environmental footprint. Environmentally sustainable brands became much more compelling among certain consumers in the last few years. The perception of what foods are healthy are also changing. Concurrently “Demographic Changes” are providing opportunities for new brands and new products to capture the emerging spending power of millennials and Gen Z by aligning with their values. Finally, these demographics are also driving “Market Changes.” Social channels and experience are supplanting the way the traditional food brands market.
Even if the large, global food brands have more resources to compete, their brand essence is different. For example, the unfolding demise of Kraft-Heinz and its owner, 3G Capital, which focuses only on cost cutting and minimal R&D, leaves large open spaces for innovation by companies like Beyond Meat to revolutionize the food industry.
Beyond Meat is now executing on its Demand-driven innovations by targeting meat-eating segments, focusing initially on certain demographics and social groups, and creating a brand built on the founder’s personal values of sustainability and animal welfare.
Originally, I was skeptical about the long term potential of this company, but as I dug deeper for this post, I found that the profile of the founder and CEO, and his company’s performance, have the traits of how, for example, Howard Schultz elevated a centuries-old coffee industry into a global brand.
Ethan has hired non-traditional people for critical roles on his team. No one came from an Ivy League undergraduate background. He worked with universities that are not top tier academic institutions. He made bold (unconventional) product choices.
My view is that the stock price is fairly valued or even slightly over-valued as of last week (at about $3.8 billion). However, my investment thesis is that this company has the potential for long run growth towards becoming a more valuable global brand, because it is being driven by an entrepreneur and visionary that has shown these telltale signs not found on a traditional resume nor customary LinkedIn profile: one who can motivate and inspire people and company partners to perform to a higher standard. I believe he is in it for the long run and will keep the company independent as long as possible.
Finally, this segment of the industry is now also growing.
For example, today, there is a non-profit called The Good Food Institute (GFI, founded in 2016) that provides excellent resources and networking connections to entrepreneurs and supporters of plant-based food.
Other companies are emerging and growing in this space. Here is a non-comprehensive table of other next generation companies in the alternative meats space.
Not surprisingly, the Bay Area is becoming a hub for this activity, but pockets are also emerging around the world.
However, a common tide will not raise all boats. The innovation that will elevate any one of these other companies will be different from that of Beyond Meat. Discerning which companies will be successful will require deeper profiling into the vision and intentions of each of its founders and their chosen business.
In this group, where is the commonality, and which will not belong among those common traits: an environmental projects leader, a biochemistry professor, a cardiologist, a stem cell scientist, an IP strategist, a foreign affairs consultant… We have to examine each one.
The aspiration for a better world is that there will not be just one successful company that disrupts the current food industry, but that many distinct companies will do so as a transformational force.