Pet Tech Has Venture Capitalists Wagging Their Tails
By Nidhi Madhavan and Emily Fasold, with additional reporting by Heather West
Technology-focused companies in the US pet sector are receiving strong venture capital interest as pet ownership demographics change, according to several industry sources.
“The millennial customer is really driving a number of these categories that didn’t exist five years ago,” says William Allen, an investment banker with Auctus Group.
Millennials now represent 35% of all pet owners, giving them the greatest share of purchasing power, according to a report from Capstone Headwaters. Furthermore, as young adults delay marriage and childbearing, pets have been elevated to the status of family members, encouraging spending in the category.
In addition to steady investment capital, the pet tech space has seen several notable acquisitions, and corporate venture capital funds and relationship building activities from Nestle’s Purina and Mars’ petcare unit. One of the most notable acquisitions was Mars’ $117 million deal for Whistle, a maker of smart dog collars, in 2015. More recently, Softbank Capital invested $300 million into mobile application-based dog walking service Wag in January. Smaller pet tech companies, including Rover.com, Petnet and Wagz, are also attracting venture capital.
“Investors are valuing these companies really high,” Allen says, noting that some companies double their valuations with each successive equity round.
The outlook for health-related companies and services, such as diagnostics apps and pet health insurance, is strong. On the other hand, the future of connected consumer devices, such as pet activity monitoring hardware, remains cloudy as relatively young companies work to develop marketable pricing and provide proof of concept.
Allen says health-focused services and pet insurance are the most attractive subsectors for investment. “Health is a necessity, whereas some of this other stuff is just about convenience.” Allen advised Figo on its $4 million funding round led by HCS Capital Partners in March.
Capital Value Advisors Managing Director Chris Younger, who advised pet toy business Outward Hound on its sale to private equity firm JW Childs Associates last year, says companies that can offer diagnostics for pet-related issues could become very attractive.
Allen pointed to Mars’ acquisition of OptiGen, a genetic testing and diagnostics company, as evidence of the confectionary focused business’ diversification into pet health. It also purchased animal hospital chain VCA for $93 per share, representing a deal value of $9.1 billion.
Speaking on the sidelines of the Milken Institute’s 2018 Global Conference last week, Jean-Christophe Flatin, Global President of Mars Edge, a new entrepreneurial unit of Mars, told Mergermarket that it will continue to evaluate acquisitions in diagnostics.
Petco has emerged as another prominent acquirer in pet tech. In 2017, the CVC Capital Partners-backed company acquired online vet advice platform PetCoach; and in January, the retailer acquired pet insurance marketplace PetInsuranceQuotes.com.
Online and mobile-based platforms for pet sitters, dog walkers and other labor providers is another promising subsector, bankers and investors say.
“One-third of millennials are pet owners, and they are typically busy and on the go,” Allen says.
Venky Ganesan, managing partner at Menlo Ventures, says he invested in Rover.com, an online network of pet caregivers, as demand for dog sitting and boarding wasn’t being met by existing services.
“Nine out of 10 times, people don’t use kennels,” Ganesan says.
Rover.com has raised $155 million to date from investors also including Spark Capital and Foundry Group. Fellow pet sitter network DogVacay raised $47 million before merging with Rover.com last year. Chris Gonzalez, CEO of dog walking startup Barkly Pet, says the Softbank Vision Fund’s investment into Wag serves to further validate the space to investors.
Investment bankers have less confidence in smart devices, noting that aside from Whistle, no one company has showed meaningful commercial success.
“A lot of these companies are in the single million digits in revenue. It’s child’s play,” says one investment banker; however, he notes “AI companies that are driving actual consumer transactions” – such as Petnet, which alerts pet owners running low on food and offers direct-to-consumer delivery – could see long-term success.
Another issue with smart tech devices is the cost, according to Carol Frank, managing director at MHT Partners, who says millennials are quick to adopt new technologies but the price point needs to drop before mainstream use can occur.
Still, among wearable and hardware makers, investment has been steady.
“I think a lot of companies that have received funding are a result of (the Whistle deal),” says Paul Asel, managing partner at Nokia Growth Partners. The venture arm of Nokia led a $15 million Series B round for Whistle in 2015 prior to its acquisition.
Petnet has raised $14.9 million to date and PetCube has raised $14.1 million. Both companies specialize in connected hardware and were founded in 2012. Wagz, a connected pet device startup, has raised $6 million to date from investors including MedScience Ventures.
Large consumer packaged goods (CPG) manufacturers and pet retailers are sniffing around for early stage investments in the pet tech category as well.
Asel says that Mars became involved with Whistle earlier than previously disclosed, serving as a co-investor with Nokia Growth during the company’s Series B raise. “[Mars] did such a good job developing it on the outside that they wanted to take it internally.”
In March, Mars launched a pet tech and innovation venture arm called the Companion Fund. Led by former Whistle CEO Ben Jacobs, it will make seed and Series A investments of $2-5 million. In tandem, it launched a startup accelerator program for pet tech founders in partnership with a nonprofit group and R/GA Ventures. Nestle-Purina recently launched its own corporate VC arm, 9-Square Ventures, to make investments outside its typical segments, according to a blog post on the company’s website. Nestle-Purina is also running a yearly Pet Care Innovation Contest in partnership with 9-Square Ventures as well as early stage venture firms Active Capital and Cultivation Capital. This year’s finalists included Barkly Pets and Fetch Labs.
“The companies with these prizes aren’t taking equity but they’re building their network and having a dialogue with startups. It’s like they’re claiming their territory,” says Greg Tariff, CEO of Fetch Labs, which produces a pet management mobile application for pet owners.
But Asel isn’t convinced the industry as a whole will see many exits worth “hundreds of millions.” Instead, executives should look to “grow organically with modest capital” in anticipation of a more reasonable exit.
Allen says pet tech companies attract buyout interest once they’ve reached $10-15 million in revenue and break even. Profitability is less of an issue because acquirers can easily scale up distribution and make revenue “pop.”
The services subsector may also see consolidation. Gonzalez says Rover.com may continue to snap up smaller, more local players to expand its reach.
Large dog walking and boarding services such as Rover.com and Wag have IPO potential and are more likely to take that route than sell to strategics themselves, Ganesan says, adding that the hardware space will be “much more an acquisition play.” Allen says that he could see monthly subscription services such as Ollie Pet acquiring hardware and connected device companies. Ollie Pet, which makes and delivers customized dog food, could command greater than the typical 10x-11x EBTIDA multiples seen in the pet industry if it went to market, given its direct-to-consumer business model, Younger says.
Younger says selling services at the correct price point and bypassing Amazon and the traditional retail channel will be paramount in determining their success in full exits.
“The big question is how do you develop [services] at the right price point and with the right technology? And there is certainly white space for these companies to figure that out,” Younger adds.
However, Frank says she has yet to see comparable deals in smart tech since the Whistle deal. “[The technology] still scares a lot of people in the industry.”