Why insect factories fail – a reality check for the insect industry

The collapse of major insect protein producers like Ÿnsect and Enorm, coupled with rumors of impending bankruptcies among other large players in the insect industry, has exposed deep cracks in the business models of industrial-scale insect farming. While the sector once promised a sustainable revolution in protein production, its struggles reveal a harsh truth: grand ambitions, investor-driven scaling, and flawed market assumptions are a recipe for failure.  

The investor trap: Chasing unrealistic returns

Large insect factories require massive capital expenditures (CapEx) – at minimum millions, often tens of millions of dollars – to build automated systems for breeding, processing and packaging. And this is just the building phase, then come the operational costs and go-to-market costs to market and sell the product!

Early stage funding in the developed countries typically comes from venture capitalists or private equity firms expecting exponential returns (10–30x). Yet even achieving breakeven is a distant milestone for most insect industry companies, especially the big players. Their profitability hinges on selling insect protein at premium prices, but market realities have shattered this illusion. Investors, impatient for exits, push companies to scale prematurely, leaving factories operating below capacity while drowning in debt. Listing on stock exchanges offers no lifeline either: without clear profitability (credible plans at least), IPOs flounder. 

Flawed business cases: Wishful thinking over market realities

Insect startups often justify their models with unrealistic assumptions:  

1. Soy apocalypse: Many claimed soy prices would skyrocket or supplies would collapse, making insect protein a cost-competitive alternative. Instead, soy prices have gone down a bit and seem to remain relatively affordable and abundant, with global production hitting record highs.

2. Edible insect hype: Despite marketing efforts, western consumers largely reject whole insects as food. The “trend” remains niche, confined to novelty snacks, not mainstream diets.

3. Pet food fantasies: While pet food companies experiment with insect protein, few pay premium at scale. The more you buy, the cheaper you expect to get it, right? Cost-conscious buyers prioritize conventional proteins like chicken or plant-based alternatives, but that said, there is a somewhat growing need for insect protein in the pet food industry, but with prices that can compete with traditional protein sources.

These assumptions ignore the resilience and efficiency of existing protein markets. Insect protein’s sustainability premium – often 2–3x the price of soy or fishmeal – fails to attract buyers in commodity-driven industries like agriculture or aquaculture. To make it, you need to be price competitive!

Operational challenges: The developing world paradox

Proponents argue small-scale, localized insect farms using organic waste could thrive in developing countries. The reality is not black and white:

Feedstock Scarcity: Quality organic waste is rarely free anywhere, and never so in the Western countries. Competing uses (e.g. biogas, animal feed) and strict regulations (e.g. EU bans making insect feed from catering waste) limit access or the final product use cases. In Africa and parts of Asia there is often organic waste up for grabs for free, but the quality varies, it may not be suitable for larvae consumption, there are logistic costs involved, and other hurdles – but nonetheless, there are possibilities to use even manure as a larvae substrate from the legislation point of view, which might just make the business case turn nicely profitable.

Hidden Costs: Labor, energy and logistics are in developed countries often more expensive than anticipated. In the developing countries permitting delays, corruption and unreliable infrastructure further inflate operating expenses (OpEx).

Market Barriers: In regions where insect consumption is culturally accepted, low purchasing power limits demand for premium products.

A path forward in insect industry? Scaling down, not up

The failure of industrial insect factories underscores a mismatch between investor-driven growth and market readiness. Smaller, decentralized operations, focused on local waste streams and direct sales, may offer a viable path. However, profitability will require more modest goals than (fantasy) premium prices, hybrid models (e.g. combining insect farming with waste processing), testing different substrate and production variables and patience. Before most insect farmers and companies planning to enter the insect industry realize that, the sector’s promise of “sustainable protein at scale” remains more fantasy than reality.

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Cover pictureby Peter H from Pixabay

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