March 11 carbonated the startup announced that it had raised $67 million at a valuation of $1.4 billion and had sales of $263 million in 2023. Did you guess that this startup is Liquid Death, a canned water company?

Liquid Death has now raised over $267 million in enterprise funding, despite being in a category that does not interest many investors. Beverages is a difficult industry for VCs since it is capital-intensive; requires a knack for choosing firms that may sell well on retail shelves or otherwise directly to the consumer; and inspires regular customers, not just once.

Science Ventures managing director Michael Jones told TechCrunch that his company is not focused on venturing into the beverage sector but supports Liquid Death because of its potential to disrupt legacy players like Pepsi and Coca-Cola.

“We were in the market for culturally relevant companies with better-for-you products that were redefining a tired and old category,” Jones said. His investment team hailed Liquid Death as an “extremely disruptive brand.”

Cutting the mousse

Some of these recent venture-backed beverage startups are hoping to upend the industry by creating recent beverage categories. This is often reminiscent of what tech firms do, said Dan Buckstaff, chief marketing officer at retail data firm Spins.

“You might think you can’t squeeze another category in here, and instead you approach it differently,” Buckstaff said. “You take inspiration from others, or maybe there’s new technology that allows you to do that, or data that actually leads to companies that can generate hundreds of millions in ARR.”

He said Liquid Death drew on beer marketing and shelf placement to achieve success not only on food market shelves, but additionally at events, in bars and restaurants and even at conferences. (Liquid Death declined to comment). In fact, at the recent Expo West consumer goods conference, Buckstaff hosted the Liquid Death event and his room looked like “we were at a real party.”

He took part in an off-the-cuff survey that asked participants how often they ordered beer or wine to appear sociable. Half of them said yes. This made him realize how huge the market may very well be for firms like Liquid Death, whose brand names and packaging are inspired by alcohol but provide a healthier alternative.

“For these people, non-alcoholic brands are well positioned for this and have great potential,” Buckstaff said. “And not only at social events, but just at home – people relax and drink beer. Instead, there are now many alternatives that contain mood-enhancing or relaxing agents.”

Not Beer is one of those taking a nod from these early firms. Founder Dillon Dandurand is launching a brand new company that may launch a brand of premium sparkling water on April 9. He said his brand was created with consumers selecting to drink less alcohol in mind.

“Gen Z is drinking less than any generation before them,” he said. “These people still want to have an excellent time, but they realize they haven’t got to drink alcohol to have an excellent time, and they haven’t got to drink that much alcohol to have an excellent time. In fact, getting a pleasant buzz but not getting wasted is probably more enjoyable.

However, resisting the noise could be difficult. Consumers care about two features that, according to Dandurand, give a brand a likelihood to stand out from the competition: taste and brand.

With so many options, brands need to communicate why their drink is higher than an identical drink in a given category, in addition to explain why a specific drink is higher than a drink in one other category.

“It’s an uphill battle,” Dandurand said.

Who else jumps out?

Water is not the only category attracting startups and VC funds, often from celebrity angel investors. Drinks containing vitamins, minerals, supplements and plant ingredients are also extremely popular.

For example, firms like Odyssey, which raised $6 million in enterprise capital in February from a bunch of investors that features Richard Laver of Rocket Beverage Group. The company adds lion’s mane and cordyceps mushrooms, known for his or her cognitive clarity and increased energy effects, to their drinks.

Other beverage startups attracting VC dollars include better-for-you soda startups like Olipop (backed by Finn Capital Partners, Melitas Ventures and celebrity angels like Camila Cabello) and Poppi, backed by Electric Feel Ventures, partners and Rocana Ventures angels. Each has raised greater than $50 million in enterprise funding. Healthy lemonade alternative Lemon Perfect has raised greater than $70 million in money from an extended list of VC firms, athletes and celebrities like Beyoncé.

Poppi – which has CAVU Consumer Partners and a roster of celebrity investors corresponding to Chainsmokers’ Russell Westbrook, Olivia Munn and Nicole Scherzinger – has captured about 19% of the drinks market since launching about 4 years ago. Forbes reports i.e. 1.5x greater than Coca-Cola. It also became the eleventh fastest-growing beverage brand last month, beating out brands corresponding to Monster Energy, Gatorade and Liquid Death.

The brand is successful by “marketing strategically to become part of the culture, with an active and loyal following” and “filling a gap in the industry by providing a delicious, better-for-you option,” Poppi CEO Chris Hall told TechCrunch via email.

VCs are chasing some of the category’s hit phrases. Coca-Cola bought celebrity-sponsored coconut water BodyArmor for $5.6 billion in 2021. BodyArmor raised $36 million in enterprise capital. In 2016, Bai, a maker of antioxidant drinks, sold the company to Dr Pepper Snapple Group for $1.7 billion after raising just over $10 million in enterprise capital. There are also smaller transactions. In April 2023, NextFoods acquired tart cherry drink Cheribundi for an undisclosed amount following a $15 million investment round in 2020 led by Emil Capital Partners, Food diving reported.

While these startups make great acquisition targets because legacy firms often prefer to buy somewhat than develop their very own recent products, some can do well in the public market, said Alex Malamatinas, founder and managing partner at food and beverage-focused Melitas Ventures.

“Of course, what is happening in technology and artificial intelligence is amazing, (but) at the end of the day everyone has to eat and drink every day, these are very large markets with significant TAM,” Malamatinas said. “Despite everything that’s going on, Monster beverage stocks are the best performers, not technology stocks.”

That’s a bit of hyperbole. Over the last 12 months, Monster is up about 16% to reach a good market capitalization of $63 billion, while the most respected firms in the world are Microsoft, Apple and Nvidia, each price multi-trillions of dollars. However, the statement that its market capitalization is higher than many tech firms is correct. For example, only 7 out of 100 firms on Bessemer Cloud Index are more beneficial.

A brand new innovation cycle for beverages

Buckstaff also noted that the largest food industry trade show, Expo West, is booming with more recent exhibitors. “This leads me to believe that we may have entered a new cycle of innovation,” he said.

Jeff Klineman, editor-in-chief of food and beverage media company BevNET, definitely thinks so. Beverage startups remain resilient despite a tougher fundraising market is a story of “haves and have-nots,” Klineman told TechCrunch by email.

“Over the past few years, funds have had more difficulty raising funds, strategic departments have put acquisition plans on hold and lending has been tighter,” Klineman said. “CPG funds are being implemented more slowly, and there is more competition for brands that are actually growing and doing well.”

However, beverage startups are also struggling to raise funds in the VC touch environment. For those that have not hit the “sweet spot” of repeat purchasers, who don’t see the channel growing or who show a path to profitability, the market is tough, Klineman said.

For investors, determining which brands will endure and that are simply fads is difficult, Malamatinas said. He cited the CBD drink trend from a number of years ago, which briefly flared up but has since been much quieter. The company avoided them, he said, probably fortunately, as did studies on the effectiveness of low-dose CBD drinks mixed.

“There will be some important events in the coming years,” Malamatinas said. “I think the main reason people are afraid of this space is that it requires a certain level of expertise. We have experienced operators. There is a certain level of knowledge and skill that allows these businesses to scale.”

For investors willing to put in the work and time to find brands that last, this category is likely to yield strong returns. It worked with Bai. Olipop and Liquid Death seem to be on the right track. Now let’s examine who will likely be next.