The Bill Gates-backed company that’s reinventing meat

October 3, 2013, 1:00 PM UTC

The pizza is real but the chicken is not.

FORTUNE — Most people consume protein in what vegetarians call “the secondhand form,” that is, after it has been digested and converted into meat by chickens, cows, and pigs. This is inefficient, as Winston Churchill noted In “Fifty Years Hence,” an essay published in 1931. Churchill wrote: “We shall escape the absurdity of growing a whole chicken in order to eat the breast or wing, by growing these parts separately under a suitable medium. Synthetic food will … from the outset be practically indistinguishable from natural products, and any changes will be so gradual as to escape observation.”

Then again, predictions are hard — especially about the future. Food scientists and entrepreneurs have tried to reinvent meat for decades, with little to show for it. Last summer, Dr. Mark Post, a Dutch scientist and medical doctor, unveiled a five-ounce hamburger that was grown in a laboratory from cow muscle, at a cost of $325,000. (Google (GOOG) founder Sergey Brin picked up the tab.) Closer to home, mock meats from companies like Kellogg (K) and Kraft (KRFT) can be found in supermarket freezers, branded as “Chik’n Nuggets,” an “All-American Flame Grilled Meatless Burger,” and “Classic Meatless Meatballs.” Soy-based, mushy, and more expensive than the real thing, they remain niche products.

And yet, the need for alternatives to meat has never been greater. Global demand for meat has tripled in the last 40 years, driven by population growth and a doubling of per-capita meat consumption, according to the Worldwatch Insitute. That has intensified pressures on land, water, feed, fertilizer, and fuel. Meat is a climate change problem, too: Animal agriculture is said to be responsible for about 14.5% of human-induced greenhouse gas emissions, more than the transportation sector.

This presents a big opportunity for someone who can devise a tasty and affordable plant-based substitute for meat. That is exactly what Ethan Brown, the founder and chief executive of a California-based startup called Beyond Meat, aims to do, and he has persuaded some smart people to put their money behind him. Beyond Meat makes vegan “chicken-free” strips that it says are better for people’s health (low-fat, no cholesterol), better for the environment (requiring less land and water), and better for animals (obviously) than real chicken; most important, if all goes according to plan, they will cost less to produce than chicken. Fortune has learned that Bill Gates is an investor; he sampled the product and said he couldn’t tell the difference between Beyond Meat and real chicken. “The meat market is ripe for invention,” Gates wrote in a blog post about the future of food. Kleiner Perkins, the Silicon Valley venture capital firm, made Beyond Meat its first investment in a food startup. “KP is looking for big ideas, and this qualifies as a big idea,” says Amol Deshpande, a former Cargill executive and a partner at the venture firm. “The single biggest inefficiency in agriculture is how we get our protein.” Other investors include Evan Williams and Biz Stone, the founders of Twitter; Morgan Creek Capital Management; and the Humane Society of the United States, an animal-welfare group.

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Beyond Meat, which is being rolled out nationally this fall, aims to be better for you and, eventually, cheaper than real chicken. “If our product is higher quality than meat at a much lower cost, imagine how much can we disrupt the market,” Brown says. It’s delivered in boxes of rough-edged, rectangular, chicken-free strips that are made from soy protein isolate, pea protein isolate, and amaranth, with plant-derived chicken flavoring by Givaudan (GVDNY), the world’s largest manufacturer of fragrances. Beyond Meat has been precisely engineered to look like chicken, taste like chicken, and especially to feel like chicken when you take a bite. “We are obsessed,” Brown says. “We call it OCD. Obsessive Chicken Disorder. It has to be exactly like chicken.”

For Brown, 41, an animal lover who was influenced as a child by his father’s dairy farm in western Maryland, Beyond Meat is a cause as well as a business; he’s a vegan who supports animal welfare groups like Farm Sanctuary, which rescues chickens, pigs, and cows from farms and zoos. “Why do you have to eat protein from animals when you can get it from plants?” he asks. His father, Peter G. Brown, a philosopher who taught environmental ethics, encouraged his kids to question everything. So Ethan did. He once took a close interest in a Guernsey cow that was put to death after breaking a hip. “We’d never do that to our dog,” Brown says. “To me it was a fascinating philosophical question. You’re taught at school not to discriminate against people based on the way they look. And yet all the differences between the animals that we love and the animals we destroy are superficial.”

Brown, who has a master’s degree in public policy and a Columbia MBA, spent about a decade with Ballard Power Systems (BLDP), a fuel-cell company, before getting into the food business. He began to think about meat substitutes after investing in a couple of vegetarian restaurants in Washington, D.C. He dug into the academic literature and discovered the work of Fu-Hung Hsieh, a professor of biological engineering and food science at the University of Missouri. Hsieh’s research isn’t accessible to the layman — his most-cited academic article is “Extrusion Process Parameters, Sensory Characteristics, and Structural Properties of a High Moisture Soy Protein Meat Analog” — but Brown was intrigued enough to visit his lab.

A soft-spoken immigrant from Taiwan, Hsieh has been thinking about meat analogs since writing his Ph.D. thesis on textured vegetable protein in the 1970s. He spent seven years at Quaker Oats, developing a patented technology to keep the raisins in granola soft and moist, before returning to academia because of his concern about the global food supply. Food made from soy proteins, Hsieh says, is healthier than meat and better for the environment. “It is not efficient to feed people with animal proteins,” Hsieh says. “You need lots more land, lots more water, lots more energy to get a pound of chicken.” With funding from the soy industry and the U.S. Department of Agriculture, Hsieh teamed up with Howard Huff, a burly Missouri farmboy and self-taught engineer, to see whether they could produce a chicken-like product from soybeans.

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Hsieh and Huff toiled for more than 15 years to come up with the recipe for what is now Beyond Meat. They fed various ingredients into a contraption called an extruder, which was invented in the 1870s to make sausage and now is used to churn out breakfast cereals, pastas, snacks, candy, and pet food. “Basically it’s a machine that when you feed in dry ingredients, and one or two liquids, it will mix it, it will knead it, apply heat, shape it, and cut it,” Huff explains. “You’re only limited by your imagination when it comes to extrusion.” Turning soy protein into something that looks and tastes like chicken isn’t all that hard, they say, but it is extremely difficult to replicate the chewy, fibrous texture that meat-eaters enjoy. “Mouthfeel is everything,” Huff likes to say. Hsieh and Huff agreed in 2010 to license their technology to Savage River Inc., Beyond Meat’s parent company. The university and the inventors get royalties tied to revenues of Beyond Meat, and Mizzou owns a small stake in the firm. As a gesture of his appreciation to the university, Brown decided to locate Beyond Meat’s first factory in Columbia, not far from campus.

Today, about 35 people work at the plant, which is clean and modern and generates very little waste. (By contrast, poultry farms, which house as many as 20,000 birds in a single broiler shed, generate lots of air and water pollution. And don’t even think about how the chickens are treated.) Dry ingredients are measured and mixed with water at one end of the extruder, which is about four feet wide and 22 feet long, and a few minutes later, four-inch long chicken-like strips emerge from the other end. “This is the modern factory farm,” says Brown. “We want to put up a webcam up to show people just how their food is being made, and invite Tyson (TSN) and Perdue to do the same. There’s something wrong when you can’t see how your food is made.”

The Columbia factory can produce the equivalent of about 18 million chickens a year. In the grand scheme of things, that’s not very many — about 8.6 billion chickens will be raised and slaughtered this year in the U.S., most in the so-called Broiler Belt, which stretches from Texas across the South and north to Pennsylvania. (In Georgia, the No. 1 chicken-producing state, chickens outnumber people by nearly 25 to 1.) This may be why the chicken industry isn’t paying much attention to its plant-based rivals. “Chicken-flavored protein has been around for 25 years,” says Bill Roenigk, senior vice president of the National Chicken Council. “It has found a niche and stayed pretty much a niche.” Meantime, chicken, which once lagged beef and pork, has become the most popular protein in the U.S. Americans consume 84 pounds of chicken per person per year, twice as much as they ate in the mid-1970s, and the wholesale value of chickens raised for meat tops $65 billion a year.

For the moment, the scale disadvantages facing Beyond Meat are daunting. Big, vertically-integrated chicken producers like Tyson Foods, Perdue Farms, and Pilgrim’s Pride (PPC) can grow and process chicken for less than costs Beyond Meat to produce its chicken-free strips. But as his business grows, Brown says, his extruders should be able to out-compete chickens because they use less feed. It takes four-tenths of a pound of feed, mostly soy and pea protein, to make a pound of Beyond Meat. (A chicken breast is more than 60% water.) By comparison, even after decades of selective breeding and production efficiencies, broilers require nearly three pounds of feed, mostly corn and soy, to yield a pound of ready-to-cook chicken. Feed accounts for about 35% of the costs of chicken, so when corn prices spiked last year, the prices for whole chickens rose by 21%. As the costs of feed increase over time — and they likely will, as the costs of energy and fertilizer rise — Beyond Meat’s competitive advantage should emerge. “A chicken is just a bioreactor raised for the purpose of delivering protein to humans,” says Kleiner’s Amol Deshpande. “If you can do that more efficiently another way, that’s good for everyone.” Besides, he adds wryly, “you can’t choke on Beyond Meat.”

But to scale the business, Brown and his colleagues need to figure out how to market Beyond Meat, and to whom. That’s their tough challenge. The Beyond Meat brand highlights what the product is not, rather than what it is. (It’s as if Henry Ford had decided to market the automobile as a “horseless carriage.”) Vegans and vegetarians, who make up about 4% of the U.S. population, won’t take the company where it wants to go. Right now, Beyond Meat is aiming at health-conscious consumers. Its chicken-free strips have fewer calories than chicken and are cholesterol-free, hormone-free, and antibiotic free. “It’s the cleanest delivery of fuel you can get,” Brown says. On its package, Beyond Meat also says that it is dedicated to “positively impacting climate change, conserving natural resources, and respecting animal welfare.” All true, but that’s a lot for busy shoppers to swallow.

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Like many new products in the so-called natural food category, Beyond Meat was introduced exclusively in Whole Foods (WFM) last spring. The suggested retail price of $5.29 for a 12-oz package of cooked strips is less than Perdue Short Cuts, the ready-to-eat equivalent. To win over Whole Foods shoppers, though, Brown has to overcome the romantic belief, held by some customers, that all food should be “natural,” whatever that means. The reality is that almost nothing about modern agriculture is natural. Brown can’t deny that Beyond Meat is a processed food, but so, he says, is a loaf of bread: “If you’re willing to eat bread, you should be willing to eat our product. It goes through heating, cooling, and pressure, and that’s it.”

Brown would like to build the brand with consumers, but he’s also exploring the business-to-business market, where a cost advantage could be decisive. He says the company could “absolutely undercut pricing where it matters, whether it’s selling into Subway, or Chick-fil-A or McDonald’s (MCD).” Another potential market: School districts that could sell Beyond Meat in tacos or chicken burgers. Beyond Meat is now offered as an alternative to chicken in Tropical Smoothie Cafes, a chain of more than 300 stores that sells sandwiches and wraps as well as smoothies. Brown has also talked with Hillshire Brands, a unit of Sara Lee that makes Jimmy Dean sausage and BallPark franks, about incorporating Beyond Meat into its products. “I think my No. 1 problem is culture,” Brown says. Brown doesn’t have to look far to be reminded of that: His philosopher-environmentalist dad eats meat (albeit rarely), as do his son and daughter. “They actually sing the McDonald’s commercials,” he says.

Undaunted, Brown and his colleagues have developed a Beyond Meat substitute for ground beef that can be worked into tacos, lasagna, or that school lunch classic, sloppy joes. They’re raising additional funds, including a strategic investment from a big food company that he can’t name. The Twitter guys, meantime, have volunteered to help with social media. “The joke at Twitter for many years was, ‘Who cares what you’re having for lunch?’” says Evan Williams. “Maybe Beyond Meat will be the answer to that.”