There’s a real risk that the biggest agricultural companies in the world right now might not be the same in 10 years’ time. That doesn’t have to be the case, but if you look at the data, it’s not hard to imagine it happening.
While a number of forward-thinking agricultural corporates are investing big money in technology, there’s a significant majority who are not. They are waiting on the sidelines, perhaps understandably thinking that it makes sense to follow a “wait-and-see” strategy.
“Wait-and-see” almost never works in technology. The big agricultural corporates need to start taking genuine risks in agtech, which means making acquisitions that move the needle. Buying up smaller players alone won’t cut it. Neither will in-house innovation. Only bold moves and visionary tech acquisitions will help the big agricultural firms avoid disruption, and in some cases even become the disrupters themselves.
Agtech is where fintech was a few years ago
As an investment banker, I believe the agtech industry is where the financial technology sector was five or six years ago. Smaller and less developed, yes, but potentially on the same brink of a financial and value-creation explosion.
AgFunder Co-Investment Fund III is now open for investment. Closing June 15, Spots are limited.
TechCrunch reported last week that investment into agtech tripled over the start of this year, compared to the same time last year. Most of this investment was at pre-seed, seed, and other early investment levels.
This is exactly what we saw before the fintech sector took off a few years ago: a period of intense, heightened early-stage investment in fintech startups; startups that grew over the next five to six years into companies with multi-billion dollar valuations.
There haven’t been many billion-dollar valuations in the agtech sector; Climate Corporation is the most famous one that may have just tipped over the $1bn point, according to some sources. However, if the agtech sector continues to track fintech’s rise, then we should expect to see perhaps 20 or more over the next decade, especially as agtech taps deeper into fast-growing markets like China and India.
Why “wait-and-see” is not a strategy in tech
With a few notable exceptions, like Monsanto and Syngenta, many of the biggest agricultural firms have been waiting out this agtech investment boom on the sidelines – or have only been dipping their toes in the water. Some of the biggest investors in agtech is, instead, a roll-call of well-known Silicon Valley names: Y Combinator, Khosla Ventures, Andreessen Horowitz, Google Ventures, and Techstars.
“Wait-and-see” in technology can be fatal because it’s an abdication of a strategy. Technology is incredibly fast-moving, growing exponentially, and industries – like agriculture now – that are going through a period of rapid, choppy, tech-driven disruption are impossible to predict properly. The only thing that is certain, is that traditional ways of doing things and traditional business models will be overthrown. One month can be a long time in an industry that is undergoing disruption; one year is an age.
This means that speed out of the gate is essential. It’s the one quality that can give a company a real advantage. The companies who are in the second, third or even later waves of investment and acquisitions might find it difficult, if not impossible, to catch up. After declining to invest in Netflix, Blockbuster was never able to catch up despite later investing huge sums in an on-demand strategy
This difficulty to catch up stems from the fact that the first-movers will have acquired the best startups with the most promising technology, often at the lowest prices. Just to keep up will be a big ask, and to overtake, near impossible.
Why small acquisitions won’t cut it on their own
A number of agricultural CEOs and CFOs reading this article may remind themselves of a few smaller investments they’ve made. That’s a good start, and shows the right type of thinking, but dabbling in investment and acquisitions is often not enough to stave off disruption or realise the opportunity of becoming the disrupter
That’s because small investments may reveal a potentially losing strategy: buying tech startups with promising technologies to simply ‘bolt-on’ to the business. For example, it may be that the emergence of precision agriculture might convince an agricultural company to buy an agtech startup to answer its concerns about the impact it will have on the industry. But the agtech target’s absorption doesn’t necessarily lead to any lasting change in the acquirer – because so often it is left to operate independently.
When making an acquisition, if you want it to pay off, you ideally want that startup ultimately to transform the core of your business. The acquisition should not just become an arm’s length subsidiary; to be truly successful, the acquisition needs to lead to a total integration of the startup’s technology, team, and innovative mindset into your business. Over time it must become a core part of your organisational DNA.
In the banking sector, Michael Corbat, CEO of Citigroup, demonstrates the mindset required. Speaking at Mobile World Congress in 2014, he said he doesn’t consider Citi a bank, but “a technology company with a banking license”. So, it is no surprise to see that Citi has been one of the most active investors in fintech. Their venture arm’s portfolio currently comprises around 30 investments, and they are consistently making 5-10 deals every year. Corbat clearly knows the type of capital investment it takes to remain committed to a long-term strategy of truly transforming your core.
In-house innovation is not enough
One response I hear a lot from executives is that they feel it would be better to invest $1bn in in-house innovation rather than acquire an outside company. I understand the rationale for that.
But, we also have to be honest with ourselves. Many agricultural companies are just not set up and organised to drive through tech-enabled innovation; that’s simply not our expertise or strength. Instead, agricultural companies are experts in, among other things, supply chains, yields, and the longer-term planning that’s required to run a successful seasons-based business.
There’s no shame in saying that “our organisations aren’t the natural developers of the latest big data technology, aerial monitoring devices, and AI-powered agtech. Our companies are usually too large for that, and our headquarters are also often located too far away from the tech talent pool of Silicon Valley.”
So why gamble vast sums developing in-house technology when it can be acquired off-the-shelf by acquiring a successful tech startup that you, as a company, could take to the next level?
It’s time for agricultural companies to significantly increase their venture capital and M&A funding pools. Not only to see off disruption, but to get ahead of their competitors in buying the technology that will power the future of the industry. It’s time to act because another 12 or even six months could be too late for many.
What do you think? How should large corporates act in the face of new innovation? Email [email protected].
*For more analysis on this topic, check out AgFunder’s report with Boston Consulting Group, which surveys the large agribusinesses and how they’re approaching new technologies.