ChewsWise Blog

ChewsWise Blog

What's Behind Whole Food's VC Fund?

By Samuel Fromartz

Whole Food's CEO John Mackey this week let drop another news nugget in his discussion with Michael Pollan - a new $30 million venture fund to back "artisanal" food companies.

So what's the thinking behind this money? Is Whole Foods just trying to nurture the Slow Foodies of the world?

If you step back, you can see a couple of things. First off, Whole Foods is facing increasing competition in organic foods from mainstream retailers. Sales growth has slowed. (That's why the stock took a hit this year - not because of the unflattering things Pollan had to say about them in his book). Secondly, those competing retailers are getting into this business by stocking many products that initially got their start at natural food retailers like Whole Foods.

Think of how this works from Whole Foods point of view: Hundreds of entrpreneurs are constantly knocking on your door, trying to get their products on your store shelf. You like some of them. You give them a shot in the store. Customers like them too - and start buying them.

Suddenly, the little start-up that got its first leg up from Whole Foods isn't so little anymore. Now, the start-up says, "Let's go for the bigger opportunity - in Target, Wal-Mart, Safeway." Start-ups have to do that because they are usually backed by investors who are looking to cash out, and they can only cash out if the company gets large enough to generate a sufficient return.

Essentially, what Whole Foods has done is offered that first crucial distribution pipeline for these young companies, in a sense, legitimizing them, and then they move on.

Well, guess what? Whole Foods is pissed about that. "We feel like we're being used," one insider said.

That's why you see some Whole Foods stores removing products from their shelves that are also appearing in Wal-Mart.

This dynamic could change, though, if Whole Foods actually had a stake in its suppliers. Not only would they be providing capital to money-starved entrepreneurs and artisans but they would also keep them in the tribe. It's like the Japanese kieretsu model of business that links companies with their suppliers in long-term relationships.

Unlke a traditional venture capitalist, Whole Foods wouldn't need to cash out to get a return. The "return" is measured in having a pipeline to great products.

Plus, Whole Foods can afford to do it: they generate $500 million or so in cash a year.

Whether it will give them enough of edge, well, that's the big question down the road.