Last week, greenhouse operator BrightFarms announced it had raised $30 million in Series C funding, the largest US-based controlled environment agriculture investment round on record.
It’s certainly a feat. Indoor agriculture startups raised a total of just $21 million in venture funding during the first half of 2016, according to AgFunder, despite there being a multitude of indoor farming startups struggling to raise funding, according to insiders.
The round also scored investment from venture capital firm Catalyst Investors at a time when the suitability of indoor farming for VC investors is being called into question. Can indoor farming operations scale at a rate that’s attractive to VCs? How long will it take them to turn a profit? How big are the input costs of this asset-heavy business?
It’s all in the business model
Like other indoor farming operations, BrightFarms produces locally-grown fresh food to densely populated urban communities. Operating at or near supermarkets in Pennsylvania, Illinois, and Virginia, BrightFarms cultivates varieties of tomatoes, leafy greens, and basil.
But it’s the business model that sets BrightFarms apart from others in the space — greenhouse operations and vertical farms alike, according to Neal Parikh, vice president of finance at BrightFarms and other industry insiders. Namely, the company’s forward purchase agreements with clients, but also its proximity to its customers.
“Our business model remains pretty unique,” says Parikh. “We use long-term, fixed price purchase agreements. It allows us to give retailers a steady supply and pricing as well as year-round access to fresh produce.” As of 2015, BrightFarms reported holding over $100 million in contracted commitments from supermarket clients.
The model certainly poses its challenges. The upfront legal costs of drafting these contracts and convincing supermarket retailers to deviate from their usual buying patterns can prove difficult, especially when it comes to securing a long-term purchasing commitment. But with clients like Kroger, Wegmans, and ShopRite on their accounts list, BrightFarms is clearly doing something right.
“These folks now understand who we are, our model, and as a result, the partnerships are getting bigger.”
Greg Oberholtzer, senior managing director at WP Global Partners, a BrightFarms investor since 2014, also highlights the company’s business model as an important feature in its ability to scale. He also draws parallels with other industries that investors might be more familiar with.
“The BrightFarms model is similar to a distributed energy model, in this case generating food production near consumption. Additionally, Bright Farms enters into forward purchase agreements, similar to power purchase agreements, guaranteeing the producer and consumer an efficient product,” he tells AgFunderNews.
“Local, greenhouse producers are also efficient in reducing two of agriculture’s main costs: weather and transportation,” he added. “We also like high-tech high tech greenhouses because they allow you to manufacture food in the same consistent way that you manufacture other goods such as shoes — specifying size, flavor and so on.”
Selling locally-grown produce yields another benefit for BrightFarms, and other local producers; premium pricing. While BrightFarms is exploring organic certification, it’s not something retail clients or consumers have demanded, according to Parikh.
“Local is the new organic,” says Oberholtzer.
Being local has other advantages, says Parikh. Transporting fresh produce over long distances can reduce its quality. Cultivating locally allows the freshest, highest-quality produce to hit shelves more quickly. Based on his experience, most large commercial greenhouses rely on heavy trucking and/or air freight to ship their produce to urban centers.
Staying close to urban centers also allows BrightFarms to optimize their produce for taste and quality as opposed to shelf life, and it allows them to grow a more diverse range of crops.
BrightFarms sticks with the sun
Growing produce in a greenhouse (rather than a fully indoor vertical farm) is another key part of BrightFarms’ model. The company’s farms consist of a hydroponic system utilizing a deep pond raft system. BrightFarms delivers nutrients in water like some vertical farming operations, but unlike other indoor ag schemes, it uses natural sunlight primarily, as well as supplemental artificial lighting, particularly in the winter months.
“We think our systems are more environmentally sustainable because we are taking advantage of sunlight,” says Parikh. “Electricity may or may not be coming from renewable sources. Also, from a financial perspective, we think we are more cost efficient. It’s difficult to think how indoor, artificial-light based systems could be as efficient.”
WP Global’s Oberholtzer agrees that vertical farming is a less attractive investment proposition.
“We are not convinced that the energy and labor costs are low enough for indoor, vertical farming at this time,” he tells AgFunderNews. “You are paying for light that you can get for free. The rationale to go indoors is the lack of strategically located arable land…but a high tech greenhouse can also be located near the city, or even on a roof top,” said Oberholtzer.
Who’s who in greenhouse tech?
Greenhouse technology isn’t exactly novel compared to other forms of indoor agriculture. You only need to Google the phrase “greenhouse companies” to see a long list of companies providing greenhouse components and ancillary services.
But there are a number of new startups using and adapting greenhouse technology for different uses that are attracting investment from venture capital and other types of investors.
Canada’s Supreme Pharmaceuticals is growing medical cannabis in a hybrid greenhouse and recently raised $3.6 million in a private placement through its listing on the Canadian Securities Exchange and the US OTC exchange. Virginia-based Shenandoah Growers is cultivating organic herbs in a greenhouse and has received funding from a range of investors including S2G Ventures, Middleland Capital, and USDA-backed Advantage Capital Agribusiness Partners.
In Qatar, Zulal Oasis has developed a greenhouse technology it calls New Growing Systems to cultivate produce in some of the toughest climates in the world. And over in Australia, SunDrop Farms’ has constructed a 20-acre greenhouse-based facility that can cultivate tomatoes year-round in a harsh and parched part of the country with renewable energy.
German researchers have even dabbled in launching self-sustaining greenhouses into outer space.
Who’s the real competitor?
Parikh is noticing an increasing number of indoor ag operators, and while they do present competition, BrightFarms is focused on competing with larger-scale producers.
“We focus on other controlled environment producers, but because we want to make a large impact we really think about field-grown competitors more than anything,” he says.
He also believes that many indoor ag startups have not mastered a scalable business model that can reach commercial size — having a clear plan for accessing new markets is key to BrightFarms’ future – and this might be a reason for startups’ struggle to attract funding.
He also admits that the sector overall is challenging.
“I’d say raising capital has been difficult. It’s not like certain segments of food and ag like e-commerce where it’s incredibly competitive,” he says. “On the flipside, it hasn’t been difficult to convince people that we are in a segment that is attractive economically and that has a lot of potential for companies to be impactful in terms of changing people’s eating habits and where they get their produce.”
If there’s anything to be learned from BrightFarms’ funding success, it’s that raising capital in the greenhouse game means you’ve got to put your baby greens where your mouth is.
What do you think about BrightFarms’ business model? Can it go the distance? Email Media@AgFunderNews.com.