Can Crowdfunding Bridge the Investment Gap in Agriculture?

Can Crowdfunding Bridge the Investment Gap in Agriculture?

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To meet the demand for food, fuel, and other agricultural products, scientists estimate that we’ll need to double—perhaps even triple—production by the year 2050 [1]. Not only will this require trillions of dollars of investment capital throughout the existing the value chain, but also we’ll need to make significant investment into technologies that make more efficient use of our existing resources and limit agricultural waste.

In the developing world alone, the FAO estimates that cumulative investment of $9.2 Trillion will be needed by year 2050[2]. That’s over $230 billion per year.

If you’re lucky enough to be a John Deere or a Monsanto, there are abundant opportunities to access capital. But if you fall outside of the Fortune 5,000, which most agriculture companies do, it can be much harder to find investors interested in agriculture investing.

Fortunately, two milestone changes were signed into law last year that promise to level the playing field for small and medium sized companies which could open a golden age for agriculture investing.

JOBS Act: Leveling the playing field for small companies
On April 2012, the President signed in to law the JOBS Act [3] to make it easier for small and medium companies to access capital. Prior to the JOBS Act, companies needed to (i) have a substantial pre-existing relationship with their investor. Or put another way, companies could not generally solicit or advertise; and (ii) companies had to limit their offerings to Accredited Investors, which are individuals making over $200,000 annually or who had over $1M net worth excluding their primary residence.

With the passing of the JOBS Act, the President tore down two pillars that have shaped the US financial industry and for the first time in the last 80 years, this allows investment marketplaces to emerge, breaking the monopoly on access to capital by large public companies. This can introduce investors to opportunities and for once, non-accredited investors are permitted to discover and invest in private investment opportunities.

Title II of the JOBS Act removes the first pillar: the prohibition on General Advertising and Solicitation, and explicitly permits the formation of open and transparent online marketplaces for Accredited Investors. This allows Accredited Investors to easily discover and due diligence investment opportunities across geo-political boundaries without the need to have a pre-existing relationship with the company.

Title III of the JOBS Act remove the second pillar, and allows non-accredited investors to invest in companies seeking to raise up to $1 million annually from an unlimited number of investors through online funding portals.

How much investment capital is available?
The SEC estimates that nearly $1 trillion dollars was raised over 18,187 private offerings in 2012 [4]. When compared to the $118 billion raised globally through IPOs [5], it becomes self-evident how big the opportunity is for private investment marketplaces.

We at AgFunder expect private capital investing to grow significantly under the new Title II rules. Unfortunately for the agriculture sector, it only captured $3.5 billion of all capital raised in private offerings compared to $49 billion for technology [4]. If Facebook disappeared tomorrow, we’d all be fine. But if we ran out of food, it would be Armageddon.

For Title III of the JOBS Act, we’ve estimated that this could add $400 billion in potential investment capital for private investment. If we factor capital available from factor in capital from Title II and Title III, we estimate that, there could be up to $1.4 trillion dollars of capital available for private companies from US investors. If agriculture companies could capture just 3% of this capital through the new JOBS Act legislation, this would multiply current investment levels by a factor of twelve.

Five things that Companies need to Know About Crowdfunding

1. Start Credibilizing Now
Credibility and having a base audience will be critical for a successful crowdfunding campaign. Building both will take time, so it’s important that you start early. Start by filling in the details on your on your LinkedIn profile. Build credibility by blogging about critical issues in your area of expertise and submit them as editorials to reputed publications. This will demonstrate your intelligence and thought leadership, and it may also help you build relationships with reporters you will want to follow up with when you’re campaign officially starts.

Whether you’re a startup or a mature company, find advisors who can help fill your experience gap and introduce you to industry people.

Finally, build a landing page where you can start collecting emails from interested individuals.

2. Engage in Social Media
Create company accounts for Twitter, Facebook, and LinkedIn. Even if you don’t have anything to write about, start posting industry news on a frequent basis. You can subscribe to Google News alerts and use tools such as Buffer or HootSuite to manage the submission process. We also found that Facebook marketing is proving to be a great tool to drive traffic to your site and your blog. You can run a test campaign for as little as $5.00.

Unsurprisingly, the size of your network will also be important in running a successful campaign and so you need to build it. Ethan Mollick, Professor at Wharton School at the University of Pennsylvania analyzed Kickstarter campaigns [6] and found that for every order of magnitude increase in Facebook friends (from 10 to 100, and 100 to 1,000) the chance of a project succeeding would increase linearly. So that for a $10k project with 10 Facebook friends you would have a 9% chance of success. For 100 friends, you chance jumps to 20%, and if you have 1,000 friends your chance of success jumps to 40%. And while the number of Facebook friends may not translate to investment Crowdfunding, building up your LinkedIn network can help you identify potential investors or others who can help champion your story. From our own personal experience, we found that over 50% of people will add you on LinkedIn if you have a compelling profile and you target individuals with overlap in profession or interest.

3. Create a Pitch Video
While we don’t have any data yet from investment-crowdfunding sites, donation-based crowdfunding sites such as Kickstarter have provided overwhelming evidence that video plays an important role in bridging the gap between donor and the project owners. Kickstarter reports that a project without a video only has a 15% chance of success, while a project with a video has 37% chance of success [6]. You should be able to get a good professional pitch video made for as little as $2,500 – $5,000. Wistia has put together a nice list of video producers that they work with.

4. Select the right site
Sites like AngelList have thousands of opportunities listed, but for all practical purposes, they cater to tech companies raising $500,000 – $5,000,000. So unless you fall within that category and you’re also cozy with the AngelList staff, it is going to be hard to get profiled. If you have a consumer facing product look to a site like CircleUp, which was founded by consumer product investors and market themselves to investors that are interested in this sector. If you’re an agriculture production, processing company, or you are an agtech company that has a product that would be of interest to farmers, you can look to a site like AgFunder, which was founded by agriculture professionals and focuses its marketing effort on connecting with agriculture investors. (Full disclosure: I’m the CEO and Founder of AgFunder, and you can email me if you want to chat).

5. Crowdfunding is hard work
Crowdfunding should be approached like you’re doing a mini pre-IPO roadshow, and entrepreneurs should use this as an opportunity to broadcast and manage their fundraising campaign. Because you’ll be competing in a market place for capital, you’ll also need to have highly polished presentation materials. This will include a video, website, full biographies on the management team and advisors. Even if you don’t have much of a budget for your aesthetic presentation, you can use services like 99Designs to crowdsource a presentation template for a couple hundred dollars. Finally, use the new rules in Title II to market this opportunity to your social network and to reporters. If you can get media coverage, this not only increases your audience, but it also provides validation flags for investors.

Five things that Investors need to Know About Crowdfunding

1. Due your own diligence
While most investment platforms will vet the companies before starting a fundraising campaign, it is important that individuals do their own due diligence on companies and their management team. The wisdom of the crowd only works if different individuals are independently evaluating an opportunity. Start by looking at the LinkedIn profiles of the founders. Do you know anyone in common? If so, give them a call. Read the subscription document and the investor rights agreements. Ask about the current capitalization structure to determine who will be most incented, and look at the use of proceeds to see if they have a sensible execution plan. If you don’t know where to start do a Google search for ‘due diligence checklist’ and this should help you start asking the right questions.

2. Read the platform’s FAQ
Some donation based platforms such as Indiegogo allow projects to receive their donations regardless of whether the funding target is reached. Find out if this is the case for investment platform because if a company does not reach its investment target, it may not be sufficient capitalized to execute on its plan and the investor may loose her month. Failing to reach the goal may also be a signal from the rest of the investment community that this is not a great investment.

3. Find out what you will own
Platforms such as CircleUp, SeedInvest offer direct investment access to a company, while other platforms such as FundersClub or AngelList create single purpose funds in which they syndicate investors into the fund, which then invests into the company. From a company’s perspective it may not be desirable to deal with a large number of small investors in which case a fund vehicle is more advantageous, while in other case institutional investors will likely want direct access to investments so they would rather invest directly. To address these different needs from different investors, AgFunder offers both direct investment opportunities and syndication fund opportunities and will structure the investment based on initial interest from different classes of investors.

In addition you need to understand what kind of security is being offered. The company may be offering common stock, preferred shares, or a convertible note, which offers the right (but not the obligation) to convert at the investment from debt to equity at the next qualified investment round. Typically, the founders of the company receive common shares and so investors should seek preferred shares because common shares will be subordinate to preferred shares in the event of a liquidity event or dissolution. Convertible notes are useful in that they defer the issue of valuation and may often be used as a bridge financing ahead of an institutional round that will be priced by the lead investor.

4. Don’t put all your eggs in one basket
Online investment marketplaces and crowdfunding platforms allow small investors to develop a diversified portfolio of private investment opportunities. For inexperienced investors investing in early stage companies, it’s important to realize that 9/10 of startups will fail and so if you only have $250,000 to invest, it is more advisable to invest $25,000 across 10 companies rather than $250,000 in a single company.

5. Ask about the exit strategy
As an investor in a company you ultimately want to see a return on your investment, so it is important to understand what liquidity options might be available for a company. Is the company likely to be sold to a strategic investor? Will they grow enough to get to an IPO? If a company does not offer a compelling explanation, stay clear!


[6] Venture Beat: The untold story behind kickstarter stats
We’d like to thank Larta Institute, who featured this post in VOX, Voices on the Global Innovation Economy.
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