VANCOUVER — Conor Power wasn’t a vegan when it dawned on him about a year ago to create a meal-kit service centred around plant-based meals. Though he still isn’t—he calls himself a flexitarian who eats mostly animal-product-free meals— the company he now helms, Vegano, has raised more than $4 million in an oversubscribed Series A funding round. 

That Power continues to eat the occasional filet of salmon is kind of the point. His company targets a demographic that wants to consume more plant-based foods, but needs help with recipes and techniques along the way. “The way that our platform is set up, [it] teaches you how to cook and create new meals in a space that a lot of people haven’t had the chance to learn how to cook in yet,” said Power.

With ambitious expansion plans, Vancouver-based Vegano is riding a pandemic-fuelled boom that’s changed the outlook for a meal-kit industry that had struggled to find a sustainable long-term business model. Power—and Vegano’s investors—are betting the legion of new COVID-inspired home cooks will be enough to overcome the structural problems that have plagued the industry.

In June, Vegano did what’s known as a minimum-viable-product (MVP) launch. Power hoped to reach $100,000 in sales to see if his idea could work. A little over a week later, he said, the company nearly reached $300,000. It’s since been onboarding customers in Vancouver, Squamish and Whistler, and aims to have 2,000 active members by the end of the year. Next month, it plans to start selling vegan goods, some under an in-house brand, globally via an online marketplace. Its products will include a protein powder, as well as a variety of sauces and soups. The company also plans to start offering its meal kits in Toronto, Montreal and Los Angeles by the end of this year.

Vegano’s roughly $4.2-million Series A will fund that growth. Power said the company initially planned to raise $2 million, but demand more than doubled expectations. He declined to identify the investors, but said Vegano’s post-money valuation falls at just over $14 million. The round brings Vegano’s total raised to $6 million, and the company plans to put the new money toward marketing, supply-chain optimization and other business development.

Plans for the next raise are already underway. “This is a go-public financing,” Power said. The company plans to list in the latter half of this year with a non-offering prospectus on either the TSX Venture Exchange or Canadian Securities Exchange. “We’ll do another raise once we’re public.” It wants to be in a position to start acquiring other plant-based protein companies in a few years, and maybe even sell itself to a bigger competitor looking for a specialty offering, such as Goodfood, another Canadian meal-kit provider.

It’s a bet that, as Power said, the meal-kit industry is “here for the long term.” He believes the pandemic prompted more customers to try meal-kit services, and thus develop new habits.

If so, it would be a boost for a sector that, before COVID-19, had seen some of its highest-profile companies start to lose their shine in the eyes of both consumers and investors.

Venture capital interest in the industry peaked several years ago and then started to wane. The global meal-kit industry saw a high of US$408 million invested across 20 deals in 2015, according to PitchBook. In 2019, venture capitalists invested US$150 million in 13 deals. Last year, amid the pandemic, the amount invested in the industry grew for the first time in years, with US$182.4 million across 23 deals.

The share prices of public meal-kit companies followed a similar trajectory. Stock in Germany-based HelloFresh, which went public in November 2017, sat below €20 for much of its trading life before starting to rise in 2020. Last month it reached a 52-week high of nearly €77. U.S.-based Blue Apron, meanwhile, started off trading close to US$150 after its debut in June 2017 before falling to single-digits in 2019. In March 2020, shares climbed from below US$3 to around US$10, where they’ve hovered near since.

“There are a few challenges to the business model that really have caused the declining interest,” said Alex Frederick, senior emerging-tech analyst at PitchBook. Along with managing complex supply chains and shipping logistics, paying high startup and operational costs, and asking consumers to pay a premium above grocery store prices, meal-kit businesses have struggled with high churn. Many clients sign up, try the services and then after a short period of time stop using them. 

People abandon the meal-kit model for a number of reasons, Frederick said, including lack of variety, the price premium, the inability to customize meals and the fact they don’t offer total convenience, since customers are still cooking and cleaning up. “It’s not solving all of the pain points of the cooking experience.” Additionally, there’s a subset of people who use these services to learn how to cook. Once they have some confidence in the kitchen and a repertoire of recipes at their disposal, they may opt out of the service. “The training wheels are off and you don’t need that solution anymore,” said Frederick. While the pandemic accelerated online-grocery adoption rates by five to 10 years, he said, these same factors may continue to contribute to churn after restrictions ease. Though Frederick doesn’t believe meal kits will disappear he is “pessimistic about … big growth in the industry” and expects more consolidation. In 2019, for example, Purple Carrot, a U.S. plant-based meal-kit company, announced it was being acquired by a Japanese organic-food delivery service. 

Some companies believe they’re starting to crack the puzzle of stopping churn and fuelling growth. Fresh Prep, a Vegano competitor in Vancouver, claims to have industry-leading churn rates, and co-founder and chief operating officer Husein Rahemtulla said that hasn’t changed much during the pandemic. He attributes much of the low turnover to the company’s customer experience, lower price point and a lack of spend on acquiring customers and offering incentives or discounts to stay, like its competitors tend to do. The company’s faith in its model means it, too, is looking to expand operations. It currently serves some 20 municipalities in British Columbia, but wants to move into Alberta next and Ontario soon after, he said, adding “we would be looking at raising fairly soon for that” large, upfront capital investment either through going public or turning to venture capital.

HelloFresh, meanwhile, saw massive growth over the last year. For the three months ended Dec. 31, 2020, the company had 5.29 million active customers, according to its 2020 annual report released in early March, up 78.3 per cent from 2.97 million for the same time the previous year. By the end of 2020, it had 74.3 million orders. That’s up 98.4 per cent from 37.45 million at the end of 2019. 

“They really seem like they’ve been on a rocket ship and I think they’re kind of a bellwether for the industry,” said Frederick. And if they can keep … continuing to grow, I think they’ve unlocked something in the business model that allows them to operate profitably [and] that can be replicated by other players in the space.”

One strategy that may help companies break through is catering to a particular diet, he said.

That’s precisely where Vegano sees its advantage. Traditional meal kits only offer convenience, said Power. For people who want to eat more plant-based meals, but don’t know where to start, he said, “What we’re offering is an education into a new world.”