Before Steve Case co-founded America Online 30 years ago and became a billionaire, his second job out of college was helping develop new styles of slices in Wichita, Kansas, for Pizza Hut. The food business, he quickly found, was packed with risks and surprises, making it a minefield for entrepreneurs.
“It’s one thing to create one product in one particular restaurant,” Case said. “It’s another thing to roll it out to 5,000 restaurants, where the chefs are 16-year-old kids who have worked there for a few hours.”
Yet even as a big name venture capitalist, the 56-year-old Case hasn’t shied away from food. Speaking Thursday at Changing the Menu, part of the America Answers event series hosted by the Washington Post, Case said the $1 trillion food business is “ripe for disruption” and one of America’s most promising growth industries.
Case’s Washington venture-capital firm Revolution has made several high-profile bets on food, including Sweetgreen, a fast-casual salad shop;OrderUp, a food-delivery service focused outside the biggest cities; and Revolution Foods, a school-lunch startup serving 1.5 million meals to students in 1,000 schools every week. And that, Case said, could only be the beginning.
“There are opportunities to improve the way things are done at every level: How food is produced, exported, processed, consumed,” Case said in an interview this week. “Our focus … is on investing in people and ideas that can change the world, and it’s harder to imagine anything that changes the world as much as food.”
Part of what makes the food industry so appetizing, Case said, are the fundamentals. The barriers to entry, and costs, to start a food enterprise are so low, considering cheap bulk ingredients and the modest wages of servers, cooks and other workers.
But the profit margins for everything from food trucks to farm-to-table cafes like Sweetgreen, what he called “the next Chipotle,” can stretch incredibly high, especially as eaters prove themselves increasingly amenable to paying extra for fresh cuisine.
That helps explain why Case thinks so many successful food companies have rested on their laurels, and given their competition a chance to use tech to come out ahead. Restaurants, he adds, can be some of the best places to try out pilot concepts that can be rolled out quicker, in specific markets and with a smaller footprint than a broader nationwide launch.
Sweetgreen, which started in Washington in 2007, has proven to be one of the early stars of the fast-casual movement, a trend popularized particularly by millennial eaters with what Case called a “growing desire for healthy options.” More than 20 percent of the salad shop’s orders came through the chain’s mobile app, and Case expects most will start that way within three years.
Far from super-saturated Silicon Valley, successful food startups can often bloom in smaller, less-watched markets: Chipotle launched in Denver; Panera Bread in St. Louis; Zoe’s Kitchen, a fast-casual upstart that went public last year, in Plano, Texas.
That’s partly why Case will embark on a 1,200-mile road trip in May, called “Rise of the Rest,” during which he will invest $100,000 at a time with entrepreneurs in cities like Richmond, Atlanta and New Orleans.
He cited several cities in middle America as “great startup meccas,” largely because they’ve been overlooked by investors focused on the coasts. “The middle of the country understands agriculture,” he said, “therefore they understand the beginnings of this revolution in food culture.”
Mammoth stock debuts over the last year, including the initial public offerings of Shake Shack, Potbelly and Zoe’s Kitchen, have piqued investors’ interest and heated up competition. Venture capitalists poured $1.1 billion into food and beverage companies worldwide in the first half of 2014, up from $1.6 billion in all of 2013, Dow Jones VentureSource data show.
But even with the rivalries, many investors have pushed ahead because, as investor and tech entrepreneur Ali Partovi told the Wall Street Journalin July, “the gains available to the winners are so large.”
Case’s early-stage investments are already going head-to-head with some of this competition, as with the Baltimore-based OrderUp, which in August raised $7 million in early Revolution-led venture funding. The delivery service focused on second- and third-tier cities, like Phoenix and Denver, is already competing with a raft of similar services like Caviar, DoorDash and SpoonRocket.
But not all cater to busy markets or what he called the “elite foodie community.” Revolution Foods, which was started by two mothers and is a growing player in the $20 billion school-lunch industry, intends to compete with mega-competitors like Lunchables in serving the growing need for cheap, healthy meals.
Food is only one focus of Revolution’s several dozen investments, including car-sharing startup Zipcar, fitness app RunKeeper and coupon site LivingSocial. But he said it was one the firm’s most important sectors, and one that had massive effects on the company’s other investments: Even health care, he said, “begins at the end of your fork.”
“We’re in the first days, the early innings of this food revolution,” he said. “Nothing’s more important than what you put in your mouth three, four, five times a day.”
Drew Harwell is a national business reporter at The Washington Post.