Preparing for Investment (and Success) as an Early-Stage Alternative Protein Business

Our last two alerts in this series covered key considerations for early-stage companies in the alternative protein industry and provided an overview of financing in the alternative protein industry. This alert follows those and provides guidance on how to ensure that an early-stage alternative protein business can increase its readiness for successful investment and take advantage of the new regulatory framework on the horizon. In particular, this alert covers:

• Update on the UK Market; and
• Readiness for Investment:
• Pre-funding considerations;
• ESG considerations; and
• Practical considerations when operating an early-stage company.

UK Market Update

The alternate protein industry has not avoided the fate of other early-stage technologies in the last 18 months, with reduced appetite for investment. However, given the macro forces at play (food security, climate disruption and population growth), funding has remained more resilient, especially for companies with a strong asset base and clear growth proposition. Regulatory success in the US and organised tastings in the Netherlands show that authorities are slowly realising that they need to act to keep up.

Meanwhile, in September 2023, the UK and Israel signed an MoU to collaborate in science, technology, research and innovation. £1.7m of funding will be allocated for joint research focused on critical technologies including health and the environment. At the time, it was reported that the UK government may accelerate regulatory approval of alternative proteins through its cooperation with Israel. We will report if this comes to fruition and the impact this may have. The MoU may facilitate supporting research projects conducted by scientists and the establishment of joint scientific innovation programs, which may include regulatory sandboxes. It is a clear indication of the UK’s direction of travel in this area.

In December 2023, the UK government announced its National Vision for Engineering Biology, which set out a £2bn planned investment into research development and infrastructure over the next 10 years. UK companies in the cultivated meat and fermentation sector are key to this strategy. As part of the strategy, the UK government established the Engineering Biology Regulators’ Network (“EBRN”) to build connections between UK regulators and the engineering biology community to support the development of regulatory reforms. The EBRN will receive £5m to launch three to five engineering biology regulatory sandboxes and tackle the most pressing regulatory challenges and opportunities. Meanwhile, the UK Food Standards Agency (“FSA”) is considering how reform of legislation, frameworks and processes could remove barriers to innovation, while maintaining the UK’s regulatory integrity. It has recently completed its review of the Novel Foods Regulatory Framework and launched a public consultation on proposals for a new regulatory framework for precision bred organisms used for food and animal feed.

The following have been proposed as regulatory sandboxes:

• Cell-free systems (programmable liquids) – currently, there is a lack of clarity regarding cell free systems, how they are classified and how they will be regulated. A sandbox would offer clarification and allow more companies to innovate without being hampered by regulation or regulatory uncertainty.
• Livestock feed – currently, some retained EU laws (such as the Novel Foods Regulatory Framework) are slowing down innovation. A sandbox would allow companies who are working on alternative proteins to experiment with more resources and less regulation, which could result in more breakthroughs. 

Newcomers may wish to read our other articles in this series, which include: an introduction to this series; a comparison of the regulation of insect protein as food and feed; a quick guide to JVs in the alternative protein industry; and 10 aspects to consider on transactions involving alternative protein companies.

Readiness for Investment

1. Pre-Funding Considerations

In preparation for a funding round and to ensure a smooth funding process, companies should consider the below points:

• Investor Deck/Confidential Information Memorandum (“CIM”) – Investor decks and CIMs are used to pitch to investors and should be prepared in advance of each funding round. Investor decks usually comprise of around 10 detailed slides which summarise a company’s business plan and vision and, importantly, focus on the value of investing in the company. Similarly, CIMs are documents that highlight the business’s key investment and growth opportunities for potential investors.
  
  There are many free resources on how to produce the best deck/CIM, however, it is increasingly important to focus on the message you want to convey. If that is difficult with a detailed deck, it might work out better to trim the deck and prepare more for how you can best communicate your vision in presentations/conversations. The earlier the stage of business you are at, the more important it is to confidently and convincingly convey your vision.
• Disclosure/Due Diligence Process – Companies should consider the format of any disclosure and whether a data room will be required. Early preparation will help prevent unnecessary delays. Some exercise of document/information gathering will be essential, so that you can quickly convey information to those considering investment.
• Term Sheet – Agreed form term sheets can be circulated to avoid unnecessary discussions/negotiations. Often the form of the term sheet will follow the form of the prior funding round. At an early stage, the term sheet discussions will be a little more iterative, with investors and the company seeking to set out a base position, to ensure that their rights are enshrined in shareholders’ agreements and constitutional documentation in preparation for rapid growth. All this, while acknowledging that success may take time and that failure may occur.
  An agreed term sheet can, for example, include some of the following: potential warranties that investors may require from the company/founders, company valuations, founder rights, investor rights, key governance considerations, IP assignment provisions, restrictive covenants, information rights, etc. The BVCA forms are a good starting point for UK investment/English law transactions. They largely follow the terms of the NVCA, with a few key differences.

• Know Your Customer (“KYC”) – Before issuing shares, companies should ensure that adequate KYC information is obtained regarding all potential shareholders and any other key individuals who may control or bind the company. Beneficial owners of corporate shareholders can sometimes be harder to identify, so the KYC process should be prepared early on.

2. ESG Considerations

ESG considerations have become increasingly relevant for all market players, including investors. Organisations such as the CFA Institute and the Principles for Responsible Investment have even provided guidance for investors on ESG integration within investment decisions. More generally, we have seen a rise in ESG-related regulations, especially concerning corporate disclosures. For instance, new climate-related financial disclosure obligations apply to certain UK companies and LLPs. ESG-related disclosure is increasingly becoming best practice for all companies, including those in the alternative protein space.

Alternative protein companies (and businesses in the food tech/agtech space generally) will find it easier to prove to investors that they have a positive impact on the environment than companies in other industries would – especially as investors become more aware of “greenwashing” and the harm that it can do. At a very high level (and ignoring for the purposes of comparison the impact/emissions directly attributable to that company) a company in the alternative protein space, for example, will be contributing to a reduction in the consumption of animal products. That in itself is likely to have a positive environmental impact because the meat industry is known to contribute significantly to greenhouse gas emissions and use vast quantities of limited natural resources, not only on livestock farms and in animal processing, but significantly, through animal feed – which is often grown in place of indigenous forests (most notably, in the Amazon) and/or requires huge quantities of water to produce the feed crop.

ESG credentials will not only interest impact investors, but will also attract traditional investors, growth investors and corporate investors alike, as they will all be seeking to reduce their overall impact on the environment to bolster their own ESG credentials.

To increase marketability to investors, companies should have a thorough understanding of how ESG is or can be integrated into their own practices and strategies, and they should be able to demonstrate their commitment to ESG. Businesses may wish to participate in the UN Global Compact, which requires companies to be transparent about their ESG commitments in their annual reports. Companies are increasingly taking on ESG-related financing, particularly during the later stages of funding. For instance, Oatly entered into a sustainability-linked revolving credit facility in which the interest rate was linked to sustainability outcomes and Yara International successfully closed a green bond offering of $600 million 7.378% Green Notes.

For more information about sustainability-linked financing, you may wish to read our article published on Reorg, discussing green and sustainability-linked bonds.

3. Operating an Early-Stage Company – Practical Considerations

Finally, below is a checklist of key practical steps that early-stage companies may wish to follow:

• Make sure that payroll for employees has been appropriately set up and check that employees have a right to work in the UK;
• Protect IP rights: IP should be registered and there should be protections in a company’s employment contracts and firm policies;
• Institute adequate data privacy policies and notices to cover the company’s data privacy obligations;
• Adopt other important policies, including anti-bribery and corruption, modern slavery and include these and others in a well-constructed employee handbook; and
• Take out insurance to cover the key risks and liabilities that the company may face. A list of some key insurance policies that a company may require is provided below:
• Employer’s liability insurance – this is compulsory for companies with one or more employees and the policy must cover at least £5m – it covers health and safety matters for employees (if they are involved in an accident) as well as employee claims after they are no longer employed by the company;
• Product liability insurance – this covers claims brought against a product;
• Cyber insurance – this offers protection against digital threats such as data breaches or cyberattacks;
• Public liability insurance – this covers claims by clients, contractors or members of the public regarding accidental injury or property damage; and
• Commercial property insurance – this offers commercial building protection for incidents such as theft, fire and storms.

4. Conclusion

While there are many things for an early-stage company to consider, those operating in the alternative protein space are well positioned for success. These companies benefit from macro factors at play, meaning that they can benefit from a variety of funding options. Further, the nature of the industry means that with relatively little forethought and planning, they can showcase a high level of commitment to ESG goals and objectives from their very early stages and beyond – attracting institutional capital looking to fulfil investment criteria. With the proposed changes to the regulatory environment in the UK, alternative protein companies are well positioned for success.

Angela Utubor, London trainee solicitor, contributed to the drafting of this alert.