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Why General Mills is investing in food startups

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(Read caption) A box of General Mills' Fiber One cereal, in Philadelphia (Sept. 20, 2011).

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The next hot food trend could have some hefty financial backing. General Mills, Campbell Soup Co., and Coca-Cola are all throwing their hat in the ring to support food innovation, chiefly in response to growing demand for organic and natural options.

301 Inc., General Mills’ venture capital arm, announced in early March that it had partnered with Good Culture, a company that produces cottage cheeses without the use of artificial thickeners. Good Culture raised $2.1 million in an early funding round, half of which came from 301. 301 primarily invests in “emerging food brands,” or food startups, with a natural or organic focus behind their product offerings.

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It’s a way for General Mills to keep its finger on the pulse of what’s new in food, and much of what currently drives demand for innovation is in the natural and organics space.

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Nielsen reports that sales of natural and organic products grew more than 11 percent in the year ending Feb. 20, as compared to overall food sales, which only grew by 2 percent. Natural and organic food sales now make up 7.9 percent of all food sales nationwide, up from just 7.2 percent a year ago.

Consumers are also choosing to buy more fresh fruits and vegetables: sales in these categories have both jumped by 8 percent. Not only are consumers buying more healthy options at the grocery store, they’re also willing to pay more for them( this is especially true of Millennials and Generation Z). Nielsen reports that 81 percent of Millennials, and 78 percent of Generation Z, are willing to spend more for their food if it has carries a purported health benefit, like being gluten free.

A similar sea change, where titan companies make key investments to be more nimble in the face of changing consumer behavior, is happening in the auto industry. General Motors has made several investments anticipating fewer cars on the road and more automation, including buying  a $500 million stake in ride share company Lyft in January

General Mills is not the only major company making moves to better adapt to a changing food market. In 2007, Coca-Cola launched Venturing & Emerging Brands, a business unit that provides funding for new and emerging beverage brands. VEB was founded in the wake of mounting scrutiny of Coca-Cola and other beverage makers over the high sugar content of their drinks. Brands that Coca-Cola has invested in through its VEB arm include Honest Tea, which it purchased directly in 2011.

“For me, the exciting part is not only have we shifted the way we’re looking at the brands, but we’re looking at how we operate,” Matthew Mitchell, vice-president of portfolio strategy and ventures for VEB, told Food Business News in March.

In February, Campbell’s entered the heated world of food innovation with a $125 million venture capital fund called Acre Venture Partners. The fund, like VEB for Coca-Cola, is Campbell’s move to diversify and expand in response to consumer demand for healthier options. CrunchBase reports that Acre Venture Partners’ first funding initiative was a $70 million stake in Juicero, a startup that sells a $700 juice machine, at the end of March.

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It’s also a reflection of Campbell’s awareness that venture capital may be the wave of the future for food, and it needs to make strategic investments if the company is to stay ahead of the competition. While Acre Venture Partners is independent and managed by outside partners, a Campbell's subsidiary is the sole limited partner in the firm.

"There's a massive influx of venture capital aimed at disrupting the food ecosystem, flowing from traditional VC firms and from funds managed by large food companies. Since 2010, approximately 400 food startups have received more than $6 billion in funding," Campbell’s CEO Denise Morrison told AdAge.