By: Aashna Singh and Steve Sanger
Tom Roberts, a renowned poet from London, released his poem The Great Realization earlier this year and it went viral. If you have not seen it, you must. Tom talks about how the COVID-19 era is pivotal in making humans appreciative of the Earth and conscious of their waste, consequently accelerating change in their behavior. While the last several years have certainly seen growing demand for sustainable packaging solutions, The Great Realization suggests a more voracious move towards green products could be underway.
With an enhanced appreciation for the Earth and heightened hygiene standards due to the pandemic, light is shined on the tension between the sterility single-use plastics offer at low cost and the damage of these products to the environment. This only further highlights the opportunity for innovation, and sustainable packaging solutions purport to resolve this tension
A Mintel study conducted in April 2020 found that “67% of consumers indicate no change in priorities in caring for the environment since COVID-19 and 25% indicate caring for the environment is a higher priority.” It’s a good time to contemplate how innovation will arise to meet the needs of this timely dual compulsion, what successful models may arise, and whether the investment appetite could be there to meet it.
Who is investing?
Today, green packaging represents a $190B industry, expected to grow at 5.7% CAGR between 2019–2024. Despite the large market size, active investors are not the traditional ones you see pursuing other attractive sectors.
The biggest investors in the space so far have been strategic players, likely due to the alignment sustainable packaging startups have with their strategic goals and potentially a differential willingness to invest heavily for early access to these new technologies. Corporations back the $106M fund managed by Circulate Capital, which primarily focuses on addressing ocean plastic in Southeast Asia. Other corporations across the chemicals, food, materials and beverage industries are raising their own capital to deploy against these topics. The other players in the space are impact or sustainability focused funds with a mandate to invest in circular economies, clean tech or social impact initiatives.
Like other technologies that have high capital requirements and long sales cycles, this has been a tricky space for typical financial VCs to dive into. The sector has been accused of uncertainty in consumer adoption and associated high premiums, large capex, long R&D periods and lumpy sales cycles. All these factors diverge from the traditional VC checklist (which some may argue is itself rapidly evolving) and were warning signs to stay away. Moreover, the minimal history of exits drives venture capital further away.
What has changed now?
Over the last few years, however, the industry and business models have evolved, making certain segments of the packaging landscape venture backable.
The biggest driver of this change has been consumer demand. A recent study showed a majority of this demand is coming from millennials and Gen Z, a third of whom are willing to pay more for sustainable products. Boxed Water, for example, has been especially successful in driving brand loyalty and competitive edge based on its sustainability story.
Other brands are also recognizing packaging as a marketing and customer acquisition strategy, which could further increase demand in the sector. Larger corporations have begun crystallizing this through commitments to embrace sustainable packaging by 2025 through, internal R&D or by investments in startups.
The regulatory environment is also a critical piece of the flywheel here. The pressures of voter demand and the ultimate tax on system infrastructure that governing entities are starting to see are finally motivating action. Eight states in the US have already banned single-use plastics (California, Connecticut, Delaware, Hawaii, Maine, New York, Oregon and Vermont) with many more states considering the same. Across the world, the UK, Australia, Canada and India have placed similar bans on certain single-use plastics, indicating the change underway is not just rapid but pervasive.
Over the last decade there have been advancements in technology that have made previously unviable solutions accessible today. Some solutions use fermentation technology and bio-based solutions to develop new, greener materials using highly available or even waste stream products. As the ability to efficiently source and leverage a wider range of feedstocks grows, fermentation technology proliferates, and as bacteria engineering costs decrease, this technology becomes increasingly competitive with traditional materials.
There is also an inherent capital intensity associated with building plants and investing in equipment required to compete with or disrupt massive packaging incumbents. This of course presents not only a tough startup cost hurdle, but a dynamic unfavorable to venture capital returns. In surveying the landscape, though, it’s evident startups acknowledge this hurdle, with some starting to veer away from traditional project-financing in favor of technology licensing or other less capital intensive models. Additionally, some specific areas in the space like Edible/ Dissolvable Packaging require little capex or leverage widely available capital assets, allowing startups to more nimbly broach the space.
With increased collaboration with strategics, entrepreneurs are learning fast and improving quickly. They are able to test and reformulate early in the company life cycle and therefore it is likely we will see shorter R&D cycles.
Lastly, to address the lumpy sales cycle, one can watch-out for pilots the startup has been able to secure and feel comfortable knowing that large CPGs and materials suppliers are pouring in billions to find a solution. The right point of entry and model should see commercial traction since the budgets are there.
What is important for a VC investing in this space?
Before making an investment decision in the space, one would need to understand whether the potential ecosystem advantages mentioned above are reflective of operations in the startup. There are many nuances to each segment in the packaging landscape. However, the three overarching pillars to keep in mind are limitations of the material in terms of applications, business model adopted by the startup and the technology’s path to being cost-competitive.
● Applications: Understanding the limitations of the material in terms of heat sensitivity, barrier protection, shelf-life, etc are imperative in understanding which products the technology can cater to and therefore how it scales within existing products and applications. This ultimately shapes the true TAM of any solution.
● Venture-friendly business models: It’s evident that new technologies and entrepreneur sentiments have pushed the thinking to deliver increasingly asset-light and margin friendly solutions in the space, it’s just a matter of teasing out the business model nuance. That said, as VCs and their limited partners evolve, and if potential acquirers see these businesses as double wins, the “patient capital” strategy may be a differentiator worth considering.
● Path to being cost-competitive — even today some of the sustainable solutions are anywhere between 2–5x the cost of petroleum-based plastic. Diligencing its path to being cost-competitive and understanding which critical drivers are proven vs. contingent vs. unproven is essential before making an investment.
As with any innovation-worthy space, though, the answer isn’t as simple as “do or don’t invest”. Specific approaches and technologies within sustainable packaging bear very different features. In the next section of this post, we dive into packaging sub-sectors and some of the key considerations within each.
Conducting due diligence on packaging by sector
Accelerating consumer demand, innovative business models, support from corporations and governments and new technologies are opening up pathways for venture capital investment in packaging. Certain segments are showing more promise than others and are providing opportunities which previously were not possible due to concerns around consumer adoption, high premium and heavy capex. We explore the high level themes driving potential venture investment in this space below.
However, sustainable packaging is as broad and diverse a category as any, and within it lies several rather different and unique approaches. After speaking with a handful of companies and startups in the space, we’ve identified some of the unique features of distinct segments.
Which segments are the most interesting right now?
Fiber based packaging has been around for a while. We see it commonly in e-commerce packaging and takeaway meal boxes. However, these ever-so-often used meal boxes are often not recyclable due to the coatings and barrier protection we lace them with to make them durable enough to use with wet or greasy substances. Startups like Melodea and CelluForce are fixing this problem by using green coatings like cellulose nanocrystals. No Waste Technology is developing laminations that allow fiber coated with existing chemicals to be recyclable. If you’re an avid fan of Sweetgreen salads like we are, you are probably familiar with the fiber-based bowls made with sustainable coatings developed by a leading fiber packaging company called Footprint.
This is one of the only segments to support rigid form factors, therefore making it a strong alternative to plastic in select categories. So, the demand and breadth of the application set becomes an important second consideration after considering coatings. A third element worth noting is that to-date, most models in this space are capex heavy, as entirely new machinery is needed, creating considerations around the financing dynamic.
An interesting approach to investing in this sector is looking exclusively at coating solutions. That may be the unlock for this sector and will be less capex intensive compared to vertically integrated fiber-based packaging startups. Coating solutions has seen investment from strategic players and some acquisitions by chemical and fiber-packaging companies.
Bioplastics — Polyhydroxyalkanoates (PHAs)
PHAs are a very early technology but have a promising long-term outlook. PHAs are developed by converting organic waste or greenhouse gases (GHGs) in the environment to plastic-like materials that are compostable or biodegradable. PHA’s are expected to have similar properties to plastic, therefore alleviating the concerns of limited applicability. The only caveat to this is that bioplastics will likely have to be used in the flexible form for now as their rigid form poses a risk to the recycling stream. Many startups like Genecis, LanzaTech and Mango Materials have made promising starts in this segment.
PHAs are 4–5x the price of petroleum-based plastics, driven in part by inefficient yields from their input products (currently yield 40–50% for GHGs and 5–10% for Organic Waste). As computational biology leads to improvement in yield and lower cost of formulation, we can expect PHAs to become more cost-competitive.
Investing in this space, like others, is contingent on the kinds of applications and form factors you’re betting on. Conviction on how soon PHAs are adopted, a business’s core technology (feedstocks, conversion processes, yields) and path to cost reduction are key considerations in this category.
Why is only 10% of our plastic recycled today? It is due to bad collection systems, lack of awareness and hard to recycle plastic. As packaging evolved, it became more complex, using new varied combinations of compounds. This made recycling difficult. Chemical recycling companies like Agylix, Greenmantra Technologies, Enval and Renewlogy are focusing on this issue, taking in mixed-plastics or aluminum plastic to produce virgin plastic. This technology could be promising in the near-term if municipalities are able to improve their collection systems. Additionally, processing plastic with food debris continues to make the recycling process longer and more expensive, so ongoing consumer education here is critical.
While assessing an investment in this sector, the most critical question is how soon, if at all, plastic will be replaced. Chemical recycling may improve recycling from 10% to 20%, 30% but it does not solve the plastic problem. It only elongates the life of plastic. With mostly project-finance business models, and the need for considerable improvement in collection systems, coupled with customer education, it is a tough segment to pursue. However, if you believe the prices of alternatives like fiber and bioplastics are unlikely to come down and alternatives will take a while to reach any meaningful breadth of applications, this segment might present opportunities.
Edibles / Dissolvables
Eat your packaging? A few years ago this may have sounded odd but now entrepreneurs are betting that consumers will do it, and like it. Many startups are innovating with seaweed, potato waste, milk protein and cane sugar to develop packaging that is not only sustainable but also edible. From its Shark Tank fame, Loliware gained popularity for edible straws. NOTPLA has become a common sight at a UK Marathon distributing water sachets. This segment, though not without drawbacks in terms of shelf-life and barrier protection, could carve itself a niche in on-site potential.
The primary consideration before investing in the sector is understanding whether certain applications are a gimmick and enjoying popularity because it’s new or can customers truly change their behaviors at scale. The cutlery application some businesses are leading with might be short-lived as fiber-based cutlery gains ground but the sachets and films these startups are developing provide an interesting opportunity.
A key diligence item within this segment is understanding the applications and limitations of the product. If you consider condiment sachets at fast food restaurants across the world, the potential could be notable, but durability and adoption has to improve. If not, the overall market size is much smaller than the other sectors, but since it is an asset-light niche segment it could generate a few notable companies.
Reuse / Refill models
Loop! By now most in our circles have either participated in the Loop program or have read about it somewhere. It appears consumers are willing to make the effort to actually send back or refill containers. We know the current applications and we have seen the proof-of-concept, but the data at scale is still limited. We continue to see consumer preferences shifting rapidly towards convenience, especially in this pandemic environment. So why would the same not be true here?
It may not be popular opinion, but it is entirely possible that reuse and refill models will remain limited given the fundamental shift in consumer behaviors they demand. Once consumers find convenient ways to feel good about their contribution to the planet, they may wean off these business models — switching from boxing and return-shipping their reusable detergent bottle to simply buying a fiber based or bio plastic encased detergent container in the first place.
Ultimately convenience wins in this environment. It is a question of which consumers and which applications find space or even a strong fit for refill and reuse models, and which will inevitably compel consumers to sustainable packaging or back to their old habits.
Fiber-based packaging with sustainable coatings present a real alternative to plastic for rigid packaging needs. Bioplastics, which have similar properties to petroleum-based plastics, can be promising once cost-competitive. The combination of these two segments could eliminate a substantial chunk of the world’s plastic consumption.
Both these segments also offer interesting entry points for venture capital. Coating solutions, which are the unlock for the success of fiber-based packaging, are less capex intensive and therefore make raising capital easier. In bioplastics, the new licensing business models attempt to emulate the financials of a technology company and take no capex for plant and machinery on their balance sheet.
Surmounting pressure from consumers, regulation, and corporate policy are giving this $190B market a boost like never before. Supportive technology and upcoming licensing business models are making these new innovations capital efficient. It’s clear from our work that the floodgates for packaging are slowly opening.
If you are interested in talking more about this space or an early-stage startup developing innovative packaging solutions, please feel free to reach out at firstname.lastname@example.org.