Agriculture is suffering from a massive investment deficit. “At least $200 billion a year,” says Rob Leclerc, AgFunder. “It’s an industry hungry for capital.”
At the same time, ag lacks the proper financial infrastructure necessary to make it work. “There is no natural link to the capital because these ag tech companies and opportunities are not in places like California or New York. They’re typically in rural areas,” he explains.
As an entrepreneur looking to launch an ag start-up with partner Michael Dean, Leclerc experienced the disconnect firsthand. “I really saw how difficult it was to attract investors while at a global ag investment conference in 2010. The industry needed a lot of education and hand holding,” he says.
To bridge the gap, the pair founded California-based AgFunder in 2013. “We think food and agriculture is a place to literally put your money where your mouth is,” Leclerc says. “We all eat. It’s not going to go away, but we need to do ag smarter. To help get us there, we believe the future of agriculture is going to be driven by technology.”
Once seen as a long shot, a deal worth over $900 million that same year drew the attention of investors who had never given an industry steeped in tradition a second glance.
“In late 2013, there was a flood of Silicon Valley and venture capitalists (VC) trying to get into ag tech after Monsanto acquired Climate Corporation. It was a frantic, ‘You better get in before it’s too late mentality,’ ” says Aaron Magenheim, founder of Ag Tech Insight.
“Investors assumed there must be 100 more Climate Corporations out there and you needed to get on the bandwagon and start investing to find the next one,” says Brian Jones, COO, Iowa Corn Growers Association.
In reality, Jones continues, Climate Corporation wasn’t purchased for its earnings or short-term revenue potential.
“It was bought to integrate with the other tools Monsanto is developing, and the strategy is to offer it as a package with other valuable tools to the farmer, which is still evolving. It’s still too early to say whether they’ve got it figured out yet,” Jones says.
PICKING A FAVORITE
According to the AgFunder AgTech Investing Report for 2015, investment in food and ag tech start-ups reached $2.36 billion in 2014. The following year, investments soared to an impressive $4.6 billion. The categories that drove growth were food e-commerce, precision agriculture and irrigation, and water technology.
Although money was now pouring into agriculture, that didn’t necessarily mean investors were making the right wager.
“The ag tech market will be the next worldwide, multibillion-dollar industry, but if you don’t bet on the right horse, you won’t win,” says Magenheim. “Many jumped on the ag tech train, but its direction was running opposite from what farmers actually needed.”
Silicon Valley, he says, has led a technology revolution for years and has the technology and investment infrastructure to do the same in agriculture.
“The issue is that it doesn’t have the most important part: people who have the experience and truly know the needs of farmers and production farming,” says Magenheim.
Venture capitalists, on the other hand, tend to look to education for subject experts.
“Ag science and research are significantly different than production farming. We end up with products built for researchers, technologists, and analytical people – not farmers,” Magenheim says.
The other downside, he adds, is that many will leave or run out of money before they see success, since they often spin their wheels or go in the wrong direction from what farmers need.
“We started our Salinas Valley company to bring it back on track and to foster innovation that would truly benefit farmers,” says Magenheim.
Over the last few years, Leclerc says they have seen a confluence of new technology, including mobile computing, machine learning, drones, digital imagery, robots, and automation mature all at once.
“Oftentimes, however, these technologies were a solution looking for a problem. A start-up had a really cool technology and was looking for a market,” he says.
Start-ups that gain the most traction, Leclerc adds, are those that take the opposite approach.
“In order for a technology to take hold in agriculture, an ag tech start-up has to find the real pain points and focus on a solution for the grower or someone else in the ag value chain,” he says.
“What farmers want are genuine insight and the ability to take that information and make a realistic recommendation for what is going on in their operation,” Leclerc cays.
Jones says there are probably over 1,000 companies right now with a widget, some interesting analytics, or technology they think is valuable. Yet, less than 5% will make it to the market or to the farmer.
“The tough economic environment agriculture is currently in will really weed out the good from the not-so-good ideas,” he explains. “To be successful, ag entrepreneurs need to focus on creating companies that reduce costs, increase yields or improve efficiencies, and deliver benefits that farmers can actually measure. If the benefits are not clear, farmers will not invest. It’s that simple.”
THE SLOW BET
The other issue, believes Douglas Hackney, is the time line expectations of investors.
“Traditional technology VC is built on 10-year funds. VC-funded companies must exit via an initial public offering (IPO) or acquisition within that 10-year life to deliver a financial return to the VC’s limited partners (LP) who provide the money for the fund,” says the president of Enterprise Group, Ltd. “It takes a few years to identify suitable start-ups and to deploy the capital from the 10-year fund. For the VCs to deliver their promised financial returns to LPs, the start-up must IPO or get acquired for 10 to 100 times the VC investment within as little as five to seven years.”
Those time lines, he says, do not work in ag because adoption rates are slow.
“It can take five to seven years just to gain market traction in ag tech,” continues Hackney. “This means VC-funded ag tech companies will be under extreme pressure to sell out early or to get shut down by the VCs who control their boards.”
That said, Jones believes traditional VCs can work in ag. “They have to be prepared to understand the market they are playing in, though,” he says. “I think too few in the past have done that and that’s why I think they struggle.”
“There are problems in agriculture that are not easy to solve because you are working in a dynamic environment, which makes it hard to come out with a solution that demonstrates a return on investment,” says Leclerc. “It’s not that it can’t be done. It will just take a number of years of development to get there.”
Jones agrees and says, “It takes a long time for this technology to get to the market. It’s complicated and must be integrated carefully within the appropriate ag value chain. I think that is underappreciated by VCs who are unfamiliar with ag.”
Ultimately, Leclerc believes the innovations that emerge over the next five to 10 years will make this sector more investable to investors.
ALTERING THE ANTE
This past year saw a pullback in venture dollars.
“Investments dropped 20% year over year for the first half of 2016,” says Leclerc. “We expect that total investment levels for 2016 will come in lower than 2015, as continued caution – and perhaps discipline – is exercised in some of the subsectors that were growth drivers in 2015.”
“We saw high investment in ag tech in 2015, but investors are starting to realize this is a marathon and not a sprint,” says Magenheim. “Investments are trending more toward smaller and earlier stage investments without the expectation of everyone being a billion-dollar company but rather a profitable $100 million company that provides great solutions for farmers and is sustainable.”
The ag opportunities may not be big by traditional VC standards, but they are big for agriculture, says Jones. “There is still plenty of room to play for those who really want to understand ag.”
Mergers, Magenheim believes, will also drive the industry forward. “There will be a lot of consolidation of ag tech solutions in the next few years, so there will be many opportunities to accelerate success,” he says.
5 THINGS SILICON VALLEY SHOULD KNOW ABOUT FARMERS
Looking to disrupt agriculture as we know it, Silicon Valley start-ups are focusing much of their attention on technology and big data in the ag sector.
Todd Janzen, an attorney in Indiana who specializes in agricultural law, offers his insight on the mistakes these firms are making in assuming farming is just like any other business.
- Farms are a business. “New companies entering the ag market should treat their potential farm customers as sophisticated business owners, not relatively uneducated consumers who make split-second purchasing decisions,” he says.
- Farming is relationship driven. “Even before cell phones, email, and the internet connected everyone, farmers were tightly knit into their local communities,” says Janzen. “This is because the local community provides so much for the farm – from the local church, grain elevator, and café to the hardware store. Farming is built on these relationships, and farmers are loyal to the people they know. If you want to sell your product to farmers, you need to develop those relationships.”
- Farmers are experimenters. “I think farmers have always been tinkerers, willing to experiment here and there to see if they can squeeze a few more dollars out of their production costs,” he says. “If farmers seem really interested in your new start-up product, it may be a sign you’ve got something. Or it may be a sign that farmers like to experiment. If you cannot deliver a consistent return on investment, year after year, farmers will move on to experimenting with something else.”
- There are no shortcuts to results. Janzen firmly believes big data will revolutionize farming. However, he says new companies entering the market should not overpromise results. “Show farmers how your product or program will increase yields by 3% but only cost an additional 1% per acre, and they will come. Promise them a 10% increase and only deliver 3%, and they will quickly leave,” he says. “The digital revolution in farming, like all technological progress over the past century, is going to come in small increments.”
- There is no prize for collecting the most junk data. “We are in the midst of a digital land grab,” says Janzen. “If I added up all of the data start-up companies’ claims about how many acres they have in their databases, I would probably get a land mass of three times the size of the United States. Having acres of data in your database means nothing if it is junk.” It’s also where he sees a lot of companies going wrong. “In an effort to prove they have more acres of data than competitors, they are uploading data without determining whether it has any value or if it is accurate,” he says. “Eventually, this junk data will come home to roost, skewing big data analytics and causing farmers to doubt company promises.”
(Based on – http://www.agriculture.com/technology/silicon-valley-and-venture-capital-firms-bet-on-ag-start-ups)