The Protein Revolution - Part 2
“He thought that it was all over, finished, done with. Andrew had never yet had reason to observe the first tiny bubble of fermenting yeast, in which was contained an inevitable, alchemical transformation.” J.K. Rowling
In “The Protein Revolution – Part 1”, we talked about plant-based protein and cell-based protein, for “Part 2”, we are going to zoom in on microbial-based protein, the third pillar of alternative protein, and in our opinion, the most interesting investment opportunity. Despite being considered as an emerging technology in the alternative protein industry, microbial fermentation has been around for thousands of years. Think kimchi, soya sauce, cheese, beer, and yogurt – they are all products of fermentation. The process is simple: microbes (such as yeast or fungi) break down a compound (such as sugar) to generate energy and produce a by-product (such as alcohol) in the process.
Over the past century, scientists have discovered a much broader range of applications to fermentation and utilize it in industrial chemistry, biomaterials, therapeutics and medicine, and fuels. And finally, the scientists decided that it is a brilliant idea to produce protein through microbial fermentation.
Why is microbial fermentation a superior process?
The beauty of microbes is that they grow FAST. It takes about three years to raise a cow and 5 months for a pig. Even soybeans (the most common plant-based protein source) take about 3 months to harvest. But microbes, they can double their biomass in a matter of hours and there is no harvest season, they can grow 24/7. Furthermore, fermenters take up much lesser resources (land and water) than farms. This makes them incredibly efficient as a protein source.
In addition, scientists are experimenting to use food waste or low-value agricultural side streams as feedstock for the microbes. This potentially means that the fermentation process could even help to reduce waste and promote circular economy in the future.
Types of Fermentation
In the alternative protein industry, microbial-based protein companies are utilizing biomass fermentation and precision fermentation to produce protein.
What is biomass fermentation?
Biomass fermentation grows naturally high-protein content microbes through fermentation process and extract the protein from the microbes to use as the whole food ingredient. An example would be Fusarium Venenatum, which can produce protein mass equivalent to a cow per hour. Quorn, the alternative protein company, uses Fusarium Venenatum to create meat substitutes. The problem, however, is that some people are severely allergic to Fusarium Venenatum. Another start-up, Nature’s Fynd uses Fusarium Yellowstonesis, another microbe found in the nature and can be grown very quickly using biomass fermentation.
What is precision fermentation?
Unlike biomass fermentation that the microbes are the protein, precision fermentation treats the microbes as factories to produce the protein. In essence, scientists genetically engineer the microbes such that they produce desired molecules during the fermentation process, so instead of converting glucose into ethanol, the microbes now convert glucose into, in our case, protein.
There are many food tech start-ups utilizing precision fermentation. Popular names include Perfect Day and The EVERY Company (formerly known as Clara Foods) which produce dairy protein and albumen protein through precision fermentation respectively.
Example: Perfect Day
Perfect Day was founded by two vegan bioengineers that were on the search for animal-free dairy. Their search ended when they added the milk-making genetic blueprint from a cow to the microbe – microflora. Microflora feeds on plant sugars and with the genetic modification, microflora can efficiently convert plant sugars into milk protein. Voila, the result is an animal-free milk protein that is identical to cow milk protein and can be utilised in the same way. Perfect Day’s animal free ice cream Brave Robot is now available in more than 5,000 stores across the United States in 8 different flavours. The company has also expanded into animal-free whey protein powder.
How about China?
Ah, you really paid attention to The Protein Revolution Part 1, didn’t you? Yes, we mentioned in Part 1 that we believe investors are underestimating the fermentation opportunity in China. The reason is threefold:
China has a long history in traditional fermentation, and this has translated into strong production knowhows. In 2014, China produced 24 million tons of fermented product, making it the largest fermented product manufacturer in the world. According to our expert interview, China houses 70% of the world’s fermenters, which gives China an immense edge in production capacity and production cost.
Given the prevalence of fermentation in Chinese food, consumer acceptance towards fermentation is very high, making it a much easier sale compared to cell-based protein.
China, for the first time, included alternative protein into its five-year agricultural plan in 2022. The state’s strategic support for future foods can be a major accelerator for the development and adoption of precision fermentation.
Chinese start-ups such as ChangingBio （昌进生物） and Mojia Biotech are examples of Chinese companies utilizing precision fermentation. We believe more and more promising precision technology companies will emerge from China as she progresses in its zero-emission journey.
Challenges for Fermentation
There are, of course, challenges that come with the opportunity.
Feedstock: Feedstocks are the major cost driver for most fermentation processes. Industrial-scale production of protein from fermentation requires a lot of sugar that is not only costly, but also still coming from traditional agriculture (think about the Scope 3 carbon emissions).
Regulations: Precision fermentation requires genetic modification and regulations governing this vary by jurisdiction. Genetically modified food has been controversial in many countries. China, for instance, is known to be strict on genetic modified food, only very few foods and microorganisms have been granted the safety certificate issued by the Ministry of Agriculture.
However, we believe the above are mitigated as (1) scientists are exploring use of alternative feedstock such as side-streams, waste streams, or even C1 (CO2 or methane) and (2) China is increasingly open to genetic modified foods given food security and sustainability concerns.
As a final remark, we encourage investors to stay attuned to innovations in the alternative protein industry. We believe that we should not restrict ourselves to segment each application as more likely than not that we will see a hybrid of application for alternative protein going forward. Think of a piece of meat made of a mix of plant-based and fermented protein with cultivated fats. This is probably the future.
We look forward to sharing more of our research with you in our next publication.
The Present Value of the Future is a series of thought pieces written by Star Magnolia Capital’s analysts based on our long-term thematic research projects. Although our company-level investment activities are executed by our external managers, we believe we become better and patient investors by conducting our own thematic research. In this way, we can stay relevant and build our own knowledge base. Our thematic research is often inspired by insights shared by our external managers and then produced with publicly available or proprietary sourced information. We share our own research because communication is an often-underappreciated tool to gain trust. We want to help our readers understand the dynamic changes and opportunities we see in the world today.
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