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When Andrew Carter and Adam DeMartino started their Smallhold business in 2017, they set out with a simple vision that they thought could have a big impact: feeding people mushrooms.
“Mushrooms are one of the most sustainable calories on the planet, across the board,” Carter said, whether it’s water, waste, plastic use or greenhouse gas emissions. “We just wanted more people to eat them.”
For the better part of seven years, Smallhold successfully did just that, bringing specialty mushrooms like shiitake, blue oyster, and trumpet mushrooms to grocery stores and American plates. And while they did it, they created a cult-favorite brand, a feat highlighted by how much harder it is to achieve with produce than, say, processed snacks. (Think about how different it is to shop for chips or ice cream, looking for a specific brand you like, compared to peaches or tomatoes, whose brands you may not even notice.)
As mushrooms became emblematic of a new vision of sustainability at the start of pandemic lockdowns, achieving zeitgeist star status, Smallhold found itself riding that wave and helping to fuel it, garnering extensive media coverage and being valued at 90 million dollars. at its peak. Just six years after starting out in a shipping container in Brooklyn, the brand had built farms in New York, Texas and California, and had begun selling in 1,400 stores nationwide, including Whole Foods.
“We gave others hope that a sustainable business could grow quickly, become popular and change an entire category for the better,” DeMartino said. Smallhold was just one of a series of food startups that emerged with the promise of growing food more sustainably or reducing waste.
So it came as a disappointing surprise to many when the founders resigned this spring and Smallhold announced it would file for bankruptcy shortly after.
Although the company was taken over by investors who restructured it and brought it out of bankruptcy in late August, Smallhold emerged as a “shadow” of the company DeMartino once envisioned; closed its farms and laid off much of its staff without layoffs, to the dismay of founders and customers who had come to associate the brand with the ethical treatment of its employees and farmers, as well as the land. (The brand’s current leadership declined to comment for this article.)
What does the brand’s track record mean for the prospects of using entrepreneurship to right the wrongs of traditional farming? In the example of Smallhold and other similar produce-focused startups, there are lessons to be learned about the role businesses can (and can’t) play in fixing our food system.
Yes: find a niche and sell more than sustainability
Elly Truesdell worked at Whole Foods as a “food picker” and helped the grocery chain identify new local suppliers when Smallhold started, and she remembers being impressed by its unique offering. While most buyers had only encountered the most common varieties of mushrooms, Smallhold was introducing varieties with more interesting and varied flavor profiles, such as lion’s mane and blue oyster.
“I traveled around the country and visited a lot of local food stores and other grocery stores and very, very rarely could I see specialty mushrooms of the varieties they grew in the grocery stores,” he said. That’s something he convinced her of, once she left Whole Foods to go into venture capital focused on food businesses, of invest in Smallhold.
For a world that increasingly thinks about personal and planetary health, mushrooms have great appeal as an easy and nutritious alternative to meat. And Smallhold was paying farmers a living wage to grow them from waste material, using minimal water and electricity, composting leftover materials, and selling their product in compostable retail packaging (an industry first).
But new companies gaining a foothold in the produce sector have to offer customers more than that to be successful, Truesdell said. “You cannot rely solely on sustainability. Product quality, cost – all the things that matter in a typical food business still matter.”
In some ways, Smallhold excelled at that: in addition to the unique taste and high quality of its products, it also built a strong brand through a combination of the charming aesthetic of the mushrooms themselves, a clever social media presence, and relations with its founders. built with tastemakers who helped cement Smallhold as part of the zeitgeist.
Smallhold isn’t the only produce company that has benefited from creating a unique visual identity. Bowery Agriculturean indoor farming company that sells vegetables and berries, and Gotham Greenswhich sells salad greens, dressings and herbs, are two others that have invested in top-notch design and branding.
While all three companies have claimed to grow food more sustainably than peers in their categories, their unique approach to promoting their products is part of what attracts new customers, Truesdell said.
Don’t: take on too much money
Entrepreneurs who want their business to be sustainable according to environmental standards also have to be sustainable in the financial sense of the word.
Although what Smallhold set out to do was sell mushrooms that would help people “reconnect with their food, the environment and farmers,” the technology it used to do so was often what got funders excited. “Over time, we were really leaders in that,” DeMartino said. “The discourse became more and more elaborated around technology.” I often felt like they were adding interesting technology, but it over-complicated things: “You don’t have to press a button to open a window. “You can just open the window,” he said.
Additionally, creating and maintaining technological infrastructure was expensive, making it more expensive to build new farms. That, in turn, made it harder to become profitable, and when venture capitalists are quickly seeking a return on their investment, a slow path to profitability can be a death sentence.
“Venture capitalists need their money back,” said Ari Greensburg, professor of entrepreneurship and management at NYU Stern. “They need you to get there in five, six years, seven at the most… If you can’t do that, they abandon you.”
That’s, in a sense, what happened to Smallhold: After years of abundant venture capital funding, investors decided they weren’t making enough progress toward profitability, stopped writing checks, and the company was left without a cash flow. suitable cash register.
Smallhold was not the only lively agricultural company to go bankrupt under these circumstances. AeroFarms and AppHarvest, two other indoor farming companies that had attracted large venture capital investments in the past, also declared bankruptcy last year, when the venture capital landscape began to shift away from its former optimism about tech-based food startups.
Lessons for other entrepreneurs
It’s easy to tell an entrepreneur that it’s dangerous to accept venture capital funding, but it’s often harder to offer viable alternatives for startups in need of cash. But those options exist, Truesdell insisted, especially for agricultural businesses. she pointed out Ark Foodsa produce startup founded in 2013 that helped create the U.S. market for shishito peppers, for example. Although the company has taken on some modest equity investments from funds like Truesdell’s, these have not made up the bulk of the company’s financing.
“They rely heavily on farm credit and Farm Bureau loans, rather than venture dollars,” he said. “They are almost always break-even or slightly profitable, so they are not in this difficult situation that companies like Smallhold find themselves in.” He called the family salad and vegetable business Taylor Farmswhich has chosen to grow slowly over time rather than making large investments in the hopes of growing quickly, as another example of doing things differently.
There is no single way to build or manage a produce startup to ensure it exists for the long term, and the most effective strategy for improving the food system will not rely solely on entrepreneurship. , but will also incorporate policy and regulatory changes.
But there are some lessons worth trying to draw from the successes and failures of startups that have tried to do so in recent years: Build a strong brand, even in a category like produce that historically hasn’t been known for shoeing. . Offer sustainability, but combine it with other values, such as new flavors or higher quality to attract customers. And take financial responsibility as seriously as planetary and social responsibility.
“No matter how much you love it, this business runs on money, not love,” DeMartino said. “We needed to make really key decisions on this to maintain the vision of a circular economy company.”
Finally, learn to define success on your own terms.
Despite its eventual bankruptcy, Smallhold helped create a nationwide market for specialty mushrooms, and getting more people hooked on what could be the “most sustainable calories on the planet” is a legacy the company’s founders They think it’s worth celebrating.
