Agri-foodtech VCs assess Covid-19’s impact on the sector and portfolios

As we all “shelter in place” and “socially distance” ourselves, we are learning a lot about what we can live without. And what we can’t.

Agri-foodtech investors seem to be collectively counting their blessings in that respect.

“We probably have it better than many of our generalist VC peers because the only thing people are buying right now is food. The one thing they’re allowed to go out and do is go to the grocery store,” Mark Kahn, co-founder of Mumbai-based venture capital firm Omnivore, tells AFN.

AFN has been hearing similar versions of that line from agri-foodtech VCs worldwide amid the Covid-19 pandemic, where day-to-day businesses are shuttering, startups and small businesses are rapidly laying off workers, and individuals, communities, and markets prepare for an ensuing economic downturn. 

Adam Anders of Amsterdam-based Anterra Capital describes agri-foodtech VCs as “comparatively lucky” in the difficult market circumstances because the agri-food sector is “traditionally resilient in a downturn.” In Chicago, Sanjeev Krishnan from S2G Ventures tells agri-foodtech VCs to “keep calm and carry on – long term, this is one of the best sectors to be invested in; we all still need to eat.” From Paris, Niccolò Manzoni of Five Seasons Ventures notes that business across the firm’s portfolio companies is going “almost as usual” with some increasing sales, both online and in retail, thanks to the resilience of the food sector. “We are reassured that food is going to be the last sector to stop.” In Singapore, Isabelle Decitre of ID Capital observes that the perception of the critical role that food and agriculture plays globally is “second only to the health sector” amid the immediate crisis.

“Operationally, foodtech and agtech companies will be less impacted than many other sectors as they fall under the “essential industry” category, and in some cases, we’re seeing a spike in demand,” said Rob Leclerc of AgFunder, “but with what may be the greatest destruction of wealth in human history, capital is evacuating the market and a flat round may be the new 3x up-round for those companies lucky enough to thrive.”

Of course, VCs will claim confidence in the sectors that are relevant to them; even with rumors of startup valuations dipping as much as 40% across industries, many VCs are telling the world they’re open for business-as-usual in order to avoid mass panic among investors and startups. But to be fair, deemed an essential business by governments across the globe, they do have a point.

Business as (un)usual

However, even in arguably the most essential global market category right now (next to healthcare, perhaps), business is and will continue to be disrupted by the coronavirus pandemic. The agri-foodtech innovation sector is no exception.

Growers and agri-processors are stripping down operations to essential functions and products to shore up capital for a potential squeeze, and government relief funds may not be forthcoming. (AFN‘s peers at Food Tank passionately criticized the US’s $2 trillion stimulus bill for favoring large-scale growers this week.)

Supply chains and logistics are also starting to struggle as many key workers are either sick or choosing to stay at home, so will likely function erratically at best—or stall. Tech startups in the space lacking adequate capital or contingency plans will struggle.

New venture capital deal-making will undoubtedly take a hit as a result, as will portfolio valuations. In the VC world broadly, the number of deals will drop, as a “lack of in-person meetings slows down sourcing and due diligence, even if most VCs still publicly express a desire to execute deals,” PitchBook notes in its Q2 analyst note on venture capital in the US.

That could happen in part because investors will first prioritize support for existing portfolio companies, rather than capital deployment. Andrew Chung of 1955 Capital says his firm has term sheet discussions in progress with three companies and intends to move forward with those.

“We are focused in the immediate term on providing useful advice and support to entrepreneurs,” he notes. In the next nine to 12 months, he expects to see that VCs “will get defensive, triaging their bulging portfolios.” (Check out Chung’s useful advice for startups here.)

Others agree that a deal volume dip is likely to show up in a few months, rather than immediately. Like 1955, most investors who spoke with AFN say they intend to follow through on signed term sheets and deals that have been in diligence for months. (This was not the case for restaurant tech Allset, which recently closed a downsized round after investors backed out at the last minute.)

“We think VCs with active funds (including ourselves) will continue to make new investments and deploy capital,” Dan Phillips of Cultivian Sandbox says, couching that “it’s likely that some firms raising new funds now will have a harder time raising capital (or hitting targets).”

Seana Day at Better Food Ventures paints a less rosy picture: the next three to six months will be “bad,” she tells AFN. “We’re deeply worried about logistics and labor availability and the impact that is going to have on agriculture, as well as tech companies trying to sell into an inherently risk-adverse customer base,” particularly as farmers and midstream players reserve cash, sideline non-essential food production activities, and pause innovation efforts.

Hierarchy of needs

In the venture capital world generally, PitchBook predicts an “overall increase in deal quality, as VCs reserve capital for the most promising portfolio companies and as new deals receive more scrutiny.” Agri-foodtech VCs tell AFN that the sector will see a lot more prioritization of the types of companies getting funded.

“We will probably see a shakeout among nice-to-haves versus need-to-haves,” in terms of how investors prioritize the types of tech they are investing in, predicts Day.

New investment firm Agroecology Capital, which mostly focuses on sustainable upstream technologies and closed its first deal in January with another in the works, is among those firms scrutinizing its pipeline for future deals in light of the pandemic.

“We’re refocusing a little on projects around the Maslow pyramid,” says partner Nicolas Denjoy, referring to the “hierarchy of needs,” which prioritizes basic human needs above “nice to haves” like comfort and luxuries. “We have to go back to really useful projects—not just the ones that make money, but which are needed in times of crisis.”

Agroecology has been engaging scientists to understand what future investment priorities should be in that respect. Anders at Anterra hopes that defaulting to hard science becomes more entrenched in the agri-foodtech sector more broadly.

“I both hope and expect that we will see a significant increase in respect for the role of science in providing solutions to human, plant and animal health–a change from a world where science and food were not always considered to fit well on a plate together or at least were not always discussed in a rational way,” he says. 

Losing steam on progress

One concern is that advancements in more environmentally-sustainable food production will stall or be altogether abandoned as cost becomes consumers’ prevailing consideration.

“I think industrialized agriculture will remain,” acknowledges Kahn, whose investment firm Omnivore focuses on high-impact technologies. He cites processed food companies like Campbell’s and those making frozen foods that have experienced a surge in sales in recent weeks.

Denjoy of Agroecology Capital expresses similar concerns. “I see people at [retail giant] Costco looking at a box of 12 organic eggs and a box of 50 [conventional] eggs and they buy the 50 eggs. Those are people who want to buy organic, but they’ll eat non-organic if it’s necessary,” he recalls. “I think that’s a good summary of where we stand in terms of the crisis. If there’s a lasting economic crisis, people will go back to what matters most, and that’s cost.”

The lesson in that warning sign is that agri-foodtech VCs focused on mission, impact and sustainability can’t count on “premium” offerings. Instead, they have to refocus efforts on bringing the cost of sustainable production in line with broad commodities and cost-led production.

Creative inspiration

On a positive note, agri-foodtech VCs tell AFN that they’re excited to see what new innovations ultimately emerge from startups confronting current market challenges, and trying to help the agri-food sector boost its resilience to future crises.

Day tells AFN that she anticipates “new paradigms” in the digitalization of the agriculture sector, particularly around automation. “Given the disruption to logistics and labor, we could see tech addressing those segments garner even more interest and actual commitments by users. Operators will have tested their organization’s human resource limits and see the value in digital tools that increase productivity and reduce dependence on manual labor.”

Weeks and months of social distancing measures and lockdowns could inspire new innovations in shelf-life enhancing technologies and new uses for food traceability platforms that “no one thought about two months ago,” adds Omnivore’s Kahn. “People will want to know their food hasn’t gone through too many hands.”

Duane Cantrell, co-founder of Fulcrum Global Capital, a new agri-foodtech fund based in the US Midwest, says the crisis elevates the importance and urgency of technologies that increase food production, reduce waste and improve safety and transparency.

There is a risk that with much of the innovation happening in shuttered city-based labs and university settings, that the pace of innovation will slow in the near-term. But the collective sentiment is that times of disruption and scarcity breed creativity.

Adds Chung of 1955: “I remain optimistic that there will be no slowdown of great ideas and an increasing number of entrepreneurs, both borne of necessity in this difficult time.”

Additional reporting by Jack Ellis in Singapore.

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