Over the last 18 months, digital grocery has gone from the fringe to the forefront of consumer purchasing behaviors. Far before U.S. adoption skyrocketed to 43% in 2020 from 24% in 2018, our team set out to figure out “if digital grocery adoption became meaningful, what would happen?. We knew we’d be behind the curve to invest in a digital grocery upstart like Imperfect or Misfit given our investment stage, but felt that there had to be additional opportunities created as the value chain evolved.
After countless hours of research, we came to the conclusion that the food value chain was forever going to be changed. As consumers undergo tremendous fundamental changes in the way they eat (sustainable, healthy, local, etc.), Big Food has forced its supply chain upon consumers in the interest of achieving economies of scale in manufacturing, distribution and marketing. The products that we buy in the store are purpose built to satisfy what the industry believes to drive the most mass-market appeal and are the byproduct of an industrial supply chain focused on producing at the lowest possible cost.
Ingredients are purchased on commodity derivative contracts (wedding brands to the inputs for their products years in advance of selling them)
Specialized manufacturing equipment/facilities are deployed to produce products at the lowest possible cost (often requiring length paybacks)
Warehousing/distribution centers are developed as close as possible to their grocery customers to reduce the cost of transportation (in some cases, with brands even stocking the shelves of their grocer partners themselves)
Mass marketing campaigns are formed to drive broad-based awareness of their products to improve sell-through at local grocers (appealing to mass-market awareness, rather than actual acquisition)
Through this work, it became increasingly clear that it wasn’t that Big Food doesn’t want to make products for today’s consumer- it’s that they can’t. Breaking away from the vertically integrated, economies of scale business model they’ve constructed would cannibalize existing business and force them to mark down derivatives contracts, equipment, warehouses and brand goodwill worth hundreds of billions of dollars. Furthermore, going digital-first would incite conflict with their core path to the consumer - the grocers. Why take that risk if you didn’t need to? Business for Big Food has been good (for context, Nestle is worth ~$350b), and their positioning in the value chain has been incredibly strong over commodity providers, grocers and advertisers. This is how they can convince the market to eat “fat free” when they know it’s terrible for you and why we see “innovations” like green ketchup, clear cola and pumpkin spiced processed meat. At the end of the day, it’s easier to market “innovation” with a change in food coloring or flavor than it is to create products customers will actually want.
All that changes with digital-first grocery. With hundreds of billions of dollar flows changing from legacy grocers to new digital platforms in 2020 only, consumers now own the value chain. It doesn’t matter if you are in the Lower East Side or Toledo, OH, you can now buy any niche, specialty product you want through the beauty that is Amazon. This is THE digital moment for the food industry and we’re seeing an absolute revolution in not just the way that consumers are purchasing food, but what they are eating. The growth of these specialty brands is nothing but dizzying despite the fact that many of these brands are operating out of shared kitchens with nothing but a website and a 3PL.
While we find the macro growth of this category compelling, we find that these brands are strongest (and most profitable) when they are small. Many of these initial product concepts were derived out of intuition, rather than insight. As they attempt to scale beyond their initial core product, they often dilute their core positioning. The Journal of Consumer Marketing confirmed this noting a large-scale study where they found that products launched with new brand names performed significantly better than brand extension products. While many of these micro brands can build great products, Big Food often acquires or replicates what they do, limiting the potential for them to scale and reinvent the industry itself.
At Equal, we didn’t want to back the best product in the market, we wanted to back the best platform. We felt there was a tremendous opportunity for someone to build a food conglomerate that was structured in a fundamentally different way than the incumbents. Digital-first, asset-light, data-driven, a better “Big Food” company for today’s consumer. One that could consistently make products that customers love and do that for decades to come. One that could be not just one great brand, but hundreds, all with tremendous profitability.
We believe that we found that with Starday Foods. Our team has been fortunate enough to know Chaz for years. His background speaks for itself, including most recently being on the founding team of Pattern Brands, one of the first investments we made at Equal Ventures. Chaz mutually felt that digital grocery represented one of the largest catalysts of our time and leapt into his own research. Over the coming months, we saw him do exhaustive analysis leveraging the countless new forms of data hitting the market, validating an opportunity to use data to predict and optimize what customers would buy.
He also recruited what is objectively one of the strongest consumer product teams I’ve ever seen. Caroline McCarthy was most recently a Sr. Director & Head of Growth at One and previously led growth initiatives at notable tech companies like Slack, Google, and Civis. Lena Kwak has been a leading food innovation consultant and CPG founder and also served as Director of R&D at the famed French Laundry. Lily Burtis also comes from Pattern, where she was the Sr. Director of Consumer Insights, and previously was at Gin Lane as a senior strategist for some of the world’s leading brands.
This team communicated to us the power of a platform, one that could leverage its own technology to bring compelling brands to market faster, more efficient and better than anyone had ever done before. Their goal was simple, to launch 100 brands over the next decade that would produce a billion in annual EBITDA. Today, they announced not only their fundraise, but the first of many brands that we think will be smashing success - Gooey Snacks, a better for you vegan chocolate hazelnut spread. Gooey has half the calories of Nutella, is vegan/dairy free and has 80% less sugar. It’s embarrassingly good (combining it with fluff made it a family favorite for “Smokeless S’mores” over our recent camping trip). If you need further evidence, see a picture of my 2 year old daughter below (there are others with her covered in it and the tantrum she had when I took it away, but I’ll save her from future embarrassment :)
What’s most impressive about this product isn’t the product itself, but the tremendous amount of data behind it and the efficiency of its launch. This team launched a product from scratch in months, doing what would normally take years of intuition, testing and refinement. (fun fact: periwinkle packaging outperformed every other color by 2.5x) They’ve forged retail partnerships before even selling the product, smashing time to market standards set in place by even the most competent upstarts. They’re executing with 100x the R&D efficiency of established food players and doing so in a sustainable way that we see the ability to do hundreds of times over.
Today, Starday is announcing a $4m seed round co-led by us and Slow Ventures. They’ve brought along other leading firms such as Haystack, Great Oaks Venture Capital, XFactor Ventures and ABV. We’re also thrilled to be joined by entrepreneurs and operators from some of the leading brands and retail platforms, including founders from Away, Blue Apron, ThirdLove, Olive&June, Italic, and CircleUp.
Please join us in welcoming Chaz, Caroline, Lena, Lily and Starday to the Equal family and congratulating them both on this round and the successful launch of their first product!
PS - If you are interested in getting some Gooey for yourself, please check it out here. Starday is set to launch its next brand later this Fall, so be on the lookout for what’s next!
PPS - To see more about our thesis on this opportunity, please check out this redacted version of our “Prepared Mind” research memo on the space here.