TL;DR

In this research project, a design science research project was developed with the aim of developing a design investment vehicle and strategies to support food tech startups.​

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​The output of the project is a situated artifact that outlines the design of a closed-end deep science food tech fund engaged in production and input supply. It also contributes by establishing design principles for investment vehicles and strategies in highly research-intensive and risky ventures.

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You can read the full paper here: LINK

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PROJECT SPONSOR AND LEAD - RICHARD HENRY NACKE
 
ADDRESSING THE CHALLENGE

The $8.7 trillion global food and agriculture sector faces major challenges including unsustainable practices, natural disasters, and pandemics that threaten its ability to feed a growing population. Food tech startups are addressing these issues with innovative solutions such as plant-based proteins, precision agriculture, and gene editing.

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However, funding these high-risk ventures remains challenging, and there is little research on effective investment strategies for food tech startups. This study aims to develop investment vehicles and strategies tailored to the specific needs of these startups. Using a design science approach, the research explores investment opportunities and develops a model for supporting food tech ventures, contributing new insights to both the investment and design science fields.

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Opportunity Exploration

In this paper, opportunity exploration was used, which is defined as the process of identifying promising opportunities by analyzing problem-solution combinations. The approach involves two main steps: first, exploring the problem and solution space, and then generating and evaluating new opportunities. This process is informed by design science in entrepreneurship, using literature reviews and semi-structured interviews with key stakeholders, such as fund managers and startups, to gather insights. ​

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Analyzing the Solution Space - What Can Be Built?

The literature review on investment vehicle and strategy design outlines key design parameters for building investment vehicles and strategies for food tech ventures. The main investment vehicles are venture capital (VC) funds, which can be closed-ended (limited partnerships) or open-ended (open-ended companies). Portfolio size and structure depend on factors such as target sector, fund size and investment strategy.

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Food tech investments can focus on deep science, software or brands. Each category has different capital requirements, timelines and risks. Deep science has high risks but potentially high rewards, software requires less capital and has faster growth potential, while food brands are less innovative, with slower growth and lower risks for investors. The investment strategy focuses on sourcing, making better deals, and supporting companies, with VC funds adjusting strategies over time based on market and performance.

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Exploring the Problem Space - What Stakeholders Actually Want​

The research explores the needs of three key stakeholders in food tech investments: investment professionals, fund investors, and food tech startup founders.

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1. Investment Professionals: Their primary need is for the investment vehicle to generate positive financial returns. They also value carried interest as a source of earnings and emphasize the importance of social and environmental impacts. Additionally, they are keen to pass on expertise to startup founders.​
    

2. Fund Investors: Investors want a vehicle that delivers strong financial returns (over 20%). They are also interested in exploring new business models, accessing digital technologies, and collaborating with startups. Many investors are focused on meeting ESG (Environmental, Social, and Governance) criteria.
    

3. Food Tech Founders: Startup founders prioritize investment ticket size, valuation, and the availability of follow-up capital. They look for investors who offer operational support and have a good network within the food industry, aligning with the mission of the startup.​​​

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SOLUTION DESIGN
Once a promising opportunity was selected, an outline for an investment vehicle and strategy was designed. 

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1. Investment Vehicle:

   • The fund is structured as a closed-ended VC fund, operating for 10 years with possible extensions. It is designed for deep science food tech startups and aims for high-risk, high-return investments.

   • The target fund size is $120 million, with a portfolio divided into 32 companies: 80% in early-stage investments and 20% for follow-up funding. The fund aims for an ROI of 26.8% in its initial term.
      

2. Investment Strategy:

   • The fund's strategy includes focusing on both inbound and outbound deal sourcing, leveraging networks, and targeting companies in verticals like vertical farming and cellular production.

   • It allocates around 20% of the portfolio to companies using vertical farming, cellular production, and hydroponic systems, particularly in Europe and North America.

   • The fund also aims to support portfolio companies through operational expertise, particularly in early-stage development and scaling.
      

3. Exit Strategy:

   • The preferred exit strategy is through acquisitions by larger firms, which have been increasingly active in acquiring food tech companies. The M&A market is seen as highly attractive for food tech deep science companies due to the growing demand for innovative solutions.​​​​​​​​​​​​​​​​​​​​​​​​​​​

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CONCLUSION​

This design science research project developed a detailed blueprint for an investment vehicle and strategy to support food tech startups. It provides practical insights for venture capital firms looking to invest in high-risk, high-reward ventures within the food tech industry. The study also highlights the potential to apply this model to other sectors involving deep science and innovation.

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Key contributions include:

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1. Developing a structured methodology for investing in food tech startups by focusing on companies using controlled environment agriculture and food-as-software.
    

2. Establishing generalizable design principles using CIMO logic, which helps investors and corporate funders create more flexible and sustainable investment models.
    

3. Offering a framework for exploration projects, addressing a gap in design science methodology for entrepreneurship, and providing guidance on exploring novel investment opportunities.

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