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Investment Notes: Lyka - human grade pet food that helps puppers to live their best lives
Our Investment Notes deep dive into our investment decisions. We unpack what we loved, where we needed to build confidence, and how we ultimately gained conviction to invest.
In the 1970s, an average golden retriever lived to the age of seventeen.
In 2016, an average golden retriever lived to the age of just eleven.
It’s estimated that 60% of these puppers were impacted by cancer. Dogs have the highest rate of cancer out of any mammal in the world, at ten times the incidence rate of humans.
The evidence is mounting against highly processed, carcinogenic dog food - also known as kibble.
For decades, aggressive lobbying and marketing by Big Kibble has pulled wool over our eyes about the damaging health effects of kibble. Their efforts have grown the processed pet food industry to over $100 billion AUD globally, but at the expense of our pet’s lives.
Enter Lyka: an Australian startup driving a revolution in pet wellness, with its human-grade, lightly cooked pet food that helps puppers to live their best lives.
What we loved about the opportunity
Huge market, poised to double in size over the next decade
The global pet food market is currently $100 billion AUD, growing at a 6% CAGR. By 2030, the market will be more than $215 billion AUD. Australia’s $4 billion share of the market is disproportionately high, reflecting a high proportion of pet lovers in the Australian population.
Currently, it is estimated that 80% of pets eat a predominantly highly-processed, commercial diet; 15% eat a home-prepared fresh diet; and 5% eat a commercial fresh diet.
With just 2.5% of the current pet food market, Lyka would already represent a $100 million annual revenue business. However, we believe that demand for high quality fresh food will rise over the next decade, and are backing Lyka to capture this demand.
We are reaching an inflection point: pawrents want the best for their puppers
Today’s commercial pet food is optimised for the supply chain, and designed to sit on supermarket shelves for up to three years.
The most common form of commercial pet food is kibble: extremely processed, burnt brown balls. Made of grains, legumes, and poor quality meat and veg, kibble is scorched at up to 300°C, a process which releases two kinds of carcinogens: heterocyclic amines and acrylamide. Additionally, extended time on shelves and heavy use of corn produces a mould which produces aflatoxins - yet another carcinogen!
So-called “premium” diets are a little better, but still leave a lot wanting. The “veterinarian recommended” Hill’s Chicken and Barley recipe is misleadingly named in more than one way. Not only does the recipe contain less than 25% actual chicken, it’s packed with grains (53%) that have limited nutritional value, poor quality “edible meat factions” such as chicken meal and pork fat, and a slew of synthetic chemicals.
As for the reason it’s “veterinarian recommended”... could it have anything to do with Hill’s (owned by Colgate - Palmolive) longstanding sponsorship of the Australian Veterinary Association?
Just as consumers woke up to the lies peddled by Big Tobacco, we believe we’re at a similar inflection point with Big Kibble.
Lyka’s lightly cooked dog food puts the food back into pet food. Not only do Lyka’s recipes contain human-grade animal protein, it also includes superfoods that decrease inflammation, prevent or slow the development of cancers, and improve overall health.
We were initially skeptical of this ‘wonder drug’ for dogs, and so in our due diligence, we waded through all of Lyka’s customer reviews. We read testimonial after glowing testimonial about how a Lyka diet had arthritic dogs running again, restored a glowing coat to dogs plagued by dandruff and irritated skin, and given one pupper fully formed poos - for the very first time!
It certainly had us wondering whether we should be swapping out our ramen diets for some human-grade dog food…
The ambition doesn’t stop with dog food - Lyka is building a house of pet wellness brands
Historically, venture capitalists have been hesitant to invest in Australian direct-to-consumer companies, for fear that the Australian market is too small for a venture scale opportunity.
The hyper-growth of Eucalyptus (a family of digital healthcare brands, including Kin Fertility and Pilot) forced many investors to reconsider their direct-to-consumer thesis. With a ‘house of brands’ approach, Eucalyptus can realise backend efficiencies across its brands, and launch new brands at pace.
In future, we believe Lyka will be able to further grow their addressable market by launching a house of brands for pet wellness - this could include food for different animals, treats, nutritional boosters, enrichment activities, and even a holistic wellness service.
The challenges we saw
Managing supply chain, manufacturing, and distribution - sounds complicated!
In the early days, operating a software company is relatively straightforward: you need a bunch of software developers, some sales and marketing people, a few computers, some SaaS subscriptions, and a ping pong table.
Operating a direct-to-consumer business that does its manufacturing in-house is significantly more complex: you need manufacturing facilities and equipment, the ability to source fresh ingredients at scale, and the ability to distribute a perishable product across the country. To succeed, you need tight control on quality assurance, inventory management, and production forecasting. These hairy complexities would test the mettle of the most steely and seasoned founders.
Enter Gabriel Guedes (GG), COO and CFO at Lyka. Prior to joining Lyka full-time, GG was an Associate Partner at Bain, where he was a leader in the firm’s Transformation and Supply Chain practice, with a focus on last mile delivery.
For Lyka, GG designed and built a modular, de-bottlenecked, scalable kitchen, optimised to the nines for operational efficiency. Today, GG oversees Lyka’s kitchen in Western Sydney, which produces tonnes of dog food every day and ships these to thousands of homes across Australia.
Its in-house manufacturing capability represents a distinct advantage, allowing Lyka to rapidly develop and optimise recipes in response to customer demand and feedback, protect itself from supply chain disruption, and achieve higher gross margins compared to brands using contract manufacturers.
Competition from incumbent brands, jumping on the wellness trend
One might assume that a broad shift to natural pet diets would see incumbent players scrambling to get in on the action. However, it would be hugely complex for incumbent players to pivot to making human-grade, fresh food, as their entire supply chains are designed for dried products: from sourcing, to processing, to shipping, to retailing.
Additionally, the four companies that dominate the Australian market (Mars, Nestle, Colgate - Palmolive, and the Real Pet Food) are all multinational or owned by foreign conglomerates, making them even slower to react to local trends and pivot their operations accordingly.
Some indirect competitors offer ostensibly similar propositions - direct-to-consumer, subscription based, ‘healthier’ kibble. In contrast to Lyka, these competitors often use contract manufacturing to produce their products and third party logistics solutions to distribute it. Without in-house manufacturing capabilities, these companies would face similar logistical challenges if they were to launch a fresh product.
All in all, by the time competitors enter this space, we are backing Lyka to be able to outcompete on price, quality, and customer experience.
The questions we had for the team
Anna, you eat a plant-based diet and think deeply about the impact of meat consumption on the environment. How do you reconcile this with Lyka’s animal-protein based recipes?
Anna chooses to eat a plant-based diet primarily for health reasons. However, research shows that puppers thrive on a high-protein, meat-based diet. That being said, the Lyka team cares deeply about sustainability, and uses ingredients such as ugly bunch veggies, nutritious offcuts such as animal giblets, and sustainably caught seafood in their recipes. The team are also actively exploring how they can incorporate more sustainable protein sources and plants into future recipes.
Lyka also invests in technologies that reduce their carbon footprint, and is tracking well towards its goal of being carbon neutral by the end of 2021.
What’s it like working with your partner?
Anna and GG have been together for seven years.
There are some high-profile examples of ‘couple’ co-founding teams, including Canva’s Melanie Perkins and Cliff Obrecht. However, some investors get nervous about the added ‘risk’ represented by partnered co-founders. Any nerves we had were banished after seeing Anna and GG in action: we were wowed by their complementary skills, and moved by their unwavering support for one another.
How we gained conviction
As pictured above, Lyka is named after Anna and GG’s dog - a beautiful border collie cross. Dissatisfied with the commercial pet food offerings available, Anna and GG began cooking home-made meals for Lyka in 2015. After work, the team started making small batches of human-grade dog food.
Since Anna made ‘after work’ her life’s work, Lyka has served over 1.5 million cumulative meals, to thousands of loyal and happy puppers across Australia. Lyka are poised to add fuel to their growth engine following their massively oversubscribed $6.5million Series A.
We can’t wait for the revolution in pet wellness that Lyka is leading, and we’re excited to be along for the ride (Adrian has his inhaler ready!).
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