By Noah Rothstein
Many ready-to-drink beverage startups are gearing up to take advantage of the uptick in venture funding in their sector in response to the economic downturn caused by the pandemic.
Three Spirit, a London-based nonalcoholic cocktail alternative company, is one of the latest examples.
Three Spirit raised a $3 million seed round in July to expand growth to the U.S. Its sales more than quadrupled from February to March following a viral TikTok video featuring one of its products.
CircleUp Growth Partners, an early-stage consumer investment fund, led the seed round. The investment was made from a $125 million fund raised in 2017.
“I think we’re seeing a ton of innovation in the beverage sector right now,” Karen Howland, a managing director at the fund, said. “[White Claw Hard Seltzer] led the way as far as ready-to-drink, convenient cocktails. Then we saw an absolute surge of additional brands going after that, recognizing that convenience is a real purchase [criterion] for that consumer.”
Last year marked the first decline in five years in the value of venture-capital deals in the global water and nonalcoholic beverages sector, according to PitchBook Data Inc.
Firms put all their eggs in one basket. They focused on their existing portfolios instead of investing in outside companies during the worst of the pandemic.
There were 58 deals in the first half of 2020 totaling $283.5 million. The first half of this year saw 59 deals attract $681.4 million, according to PitchBook.
The beverage industry has made strides and adapted to meet the needs of its customers and attract investors. Increased interests in sustainability and nutrition have informed these companies on the direction they should go.
Recent venture deal activity shows growing investor interest in categories like water-refill services, which provide a more sustainable alternative to bottled water.
Another highlight of interest in the beverage sector includes private-equity firm PAI Partners’ decision to buy Tropicana, Naked, and other juice brands from PepsiCo.
According to people familiar with the sector, venture-capital investments in beverage companies were also disrupted last year by the rise of special-purpose acquisition companies (SPACs).
According to The Wall Street Journal, SPACs are virtually big pools of cash listed on an exchange. Their purpose is to find a private company, buy it and take it public quickly. Some on Wall Street call them “blank-check companies” because the investors backing the SPAC put up their money months before an acquisition target is identified, trusting the people running the show to find a good deal.
Multiple SPACs reached out to food and beverage brands last year to give those companies an alternative to traditional venture funding. At the start of this year, nearly 300 SPACs with about $90 billion in cash were seeking deals, according to The Wall Street Journal.
According to PitchBook data, top venture-backed companies in the nonalcoholic beverage sector include Hint Inc., a fruit-infused water brand that raised $25 million for its Series D last year. Lemon Perfect Co., a lemon water brand creator, raised $6.6 million to boost expansion in 2020.
“[COVID-19] weeded out business ideas that weren’t really strong and didn’t resonate with the consumer,” said Zack Abbott, chief executive and co-founder of ZBiotics Inc., which makes a probiotic that aims to mitigate the unwanted effects of drinking alcohol.
