Deal focus: Proterra’s alternative take on incubation

Tai Lin, Asia managing partner at Proterra Investment Partners, doesn’t care for the term incubation. While Proterra’s activities are increasingly early stage – most recently, it signed off on the business plan for Oatside, a Singapore-headquartered oat milk brand, when there were zero employees – the firm does not believe it is taking on classic venture capital-style risk.

“When we incubate, we are trying to eliminate all the risks around technology and market adoption, everything apart from the execution risk,” said Lin. “Other brands have done a good job building a market for oat milk, we know it is there. So, I wouldn’t call what we do incubation – it is the recreation of existing business models and markets and making improvements to many aspects.”

Proterra, which focuses exclusively on food and agriculture in Asia, has provided the bulk of Oatside’s USD 22m in funding to date, including a pre-Series A round. This capital was used to create a full-stack operation – said to be the first of its kind for oat milk in the region – comprising in-house manufacturing capabilities and end-to-end control over all aspects of sourcing and production.

The private equity firm supported management's efforts to import equipment, establish an oat procurement channel, and secure factory space. The goal is to create a clean, ethical, and traceable supply chain and ensure high operating and safety standards.

Oatside has introduced three oat milk variants – a general barista blend, chocolate, and chocolate hazelnut – created without the use of artificial flavours, gums, emulsifiers, preservatives, or colouring. They are said to help reduce cholesterol, boost immunity, and be suitable for the lactose intolerant.

According to Lin, every product contains less sugar than comparable offerings from other brands and the recipes have been devised with Asian tastes in mind. Oatside’s target audience is the young, health-conscious populations of Singapore and Indonesia, with Taiwan, Malaysia, and other parts of Asia. China is not on the agenda right now, despite Oatly’s success there.

“China is a competitive and difficult market. We have resources, but we’re still a start-up with a single-digit number of employees,” said Lin.

China opportunities

Proterra’s approach to incubation is evident in China through other brands. In recent weeks, Fengji Food Group, an egg producer established by the private equity firm in 2019, raised CNY 600m (USD 95m) for its edible raw egg brand, Yellow Swan. Meanwhile, Proterra led a pre-Series A round for No Ordinary Drinks (NOD), which produces healthy drinks using plant-based sugar substitute stevia.

NOD was launched by Chris Tay, an experienced food and beverage operator and managing partner of consumer-focused private equity firm C2 Partners. When fundraising efforts were thwarted by COVID-19, Tay returned to his entrepreneurial roots. “If the fund had taken off, I would have invested and got someone else to run it,” he said.

Within 12 months Tay had a team in place and secured seed funding from Asian investors such as Hsien Yang Lee, brother of Singapore’s prime minister. He first spoke to Lin in October 2020, a couple of months after NOD was founded. Proterra tracked the company as it grew and raised more money – from the CEO of NBA China, among others – and then proposed an investment.

“I had term sheets from traditional VC investors, and I told them they could wait until the Series A. I wanted Proterra’s resources as well as the money. They are more like an operational investor,” said Tay. “They usually go into growth rounds, unless they really like a project from an early stage, so having them involved is a big endorsement for a young company.”

NOD released its first product last July and is piloting a second. Having signed up 7Eleven, Lawsons, and FamilyMart as distributors in China, Tay hopes to hit CNY 100m in sales by year-end. The target is CNY 1.2bn in three years, with China contributing 80%. An international push starting in Southeast Asia and Europe is expected to shift the revenue split to 60-40 in China’s favour by year five.

The Oatside, Fengji, and NOD investments arose from Proterra identifying a consumer need through top-down research, failing to find an appropriate existing company, and deciding to create or support one from scratch. Lin observed that on the rare occasions a business meets Proterra’s requirements, it is often only accessible on financially prohibitive terms.

He includes AustAsia, one of the firm’s most successful China investments, in the incubation bucket. In 2010, Proterra backed an experienced team that wanted to buy an existing but rundown dairy farm, gut it, and build a new facility from the ground up. By the time it exited to joint venture partner Japfa in 2018, AustAsia had 80,000 cows across seven farms plus an Indonesian offshoot.

Operational input

Jian’Ai, on the other hand, did meet Proterra’s criteria. It participated in a RMB 800m Series B for the six-year-old Chinese yoghurt brand in March 2021 alongside seven other investors, including Sequoia Capital China and Yunfeng Capital. Jian’Ai – also known as Simple Love – produces high-quality natural yoghurt with no additives and sells well in boutique supermarkets and online.

Though not an incubation investment, Proterra claims to have leveraged its sector expertise to secure a 10% entry valuation discount and a board seat. This was achieved by helping Jian’Ai overcome a supply chain problem.

“They were struggling to procure high-quality milk from dairy farms within 200 km of their factory. We brought in the AustAsia dairy farming team, and they designed, constructed, and agreed to operate a large-scale commercial dairy farm next to Jian’Ai’s factory,” said Lin. “That addresses many strategic and operational aspects across safety, controls, margins, and procurement.”

Proterra is currently deploying its second Asia fund, which closed on USD 700m in 2015. A successor vehicle is now in the market. It is unclear how much capital these nascent brands will require as they scale up, but Lin is not unduly concerned. Proterra abandoned the more rigid and programmatic investment approach that characterised its early years in Asia some time ago.

“We have learned that to be effective at our maximum capabilities we would like to back the most interesting operators and entrepreneurs in food in Asia,” he said. “We have invested in business plans, but we have also taken companies private. There are situations where we own 1-2% and others where we own 100%. We are narrow in that we focus on food in Asia only, but within that we are flexible.”

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• Topics
• Southeast Asia
• Consumer
• Early-stage
• Greater China
• Expansion
• Singapore
• Asia
• Proterra Investment Partners
• Food
• China