Grower or Tech Company? Indoor Farmers Must Make Up Their Minds

Editor’s Note: Pieter De Smedt is the US country manager for Urban Crop Solutions, a global indoor farming group building fully robotized vertical plant factories and containers with projects in Europe, North America, and South East Asia.

Last year marked another year where several of vertical farming’s big names raised millions of dollars for their future development. AeroFarms closed on its $40 million Series D, Bowery Farming secured $27.5 million for its Series A, and of course Plenty locked in a whopping $200 million as well.

What have these companies done with these types of funds to date and what are they planning on doing with them now? The answer is two-fold. First, they plan to allocate the funds into substantial engineering and biological R&D to come up with an indoor growing system and operational playbook to grow crops efficiently (or improve their current set up). Second, they will use the other part of the funding to build and operate said system to expand a brand, grow produce and sell it into the market. But does that make sense?

A young industry requires companies to do the work on technology themselves

Let us begin by saying that we understand why this approach arose. The indoor farming industry is young. Companies that wanted to get into vertical farming, until recently, had almost no integrated technologies available. They were for that reason forced to invest in doing all of that themselves. This meant that all these different companies had to reinvent the wheel as well as make the same mistakes as had been made previously by someone else – just to get started farming indoors.

As a result, each time millions were raised and spent on R&D just to arrive at that first operational vertical farm. As technology progressed, these companies were forced to again to raise and invest millions into the continued improvement of their R&D, then to build, and lastly to grow and sell.

So now the question arises whether they should continue this loop or at least for how long they should? This is really a matter of what they believe the future will look like.

A future with defined roles for growers and technology providers

If they continue in their vision, the future competition in the industry will consist of brands of indoor produce growers competing against each other based on (among other things) who has developed the best technology and horticultural know-how in-house. This obviously puts a huge strain on any ambition of profitability as the company must earn back not only the cap-ex of the construction of the system but also of the immense (and continued) R&D investments that preceded and follow it. With limited margins, we argue that that is not a realistic expectation.

If we compare with the more mature greenhouse growing industry, the future is likely to have technology providers on the one hand and growers on the other. Let us take the example of a greenhouse tomato grower. Each time this grower will want to open a new farm or update an old one, he looks at what is available in the market and asks the approximately 10 leading technology providers to present an offer that meets his needs. After careful consideration, he will proceed with the partner with which he feels most comfortable.

If two years later he wants to open another farm, the process is reiterated and perhaps a different technology provider wins that time. In this model, R&D capital investment in engineering and horticulture remain with the technology supply companies – as we argue they rationally should.

Translate this to the maturing vertical farming industry. What will the companies mentioned above do when they see their technology surpassed by that of a third-party technology provider or when a technology provider starts offering new crops? Will they then continue to put venture capital funds into R&D to keep their own system competitive in the (unrealistic) hopes of earning those ever-increasing investments back by selling produce? No. They will have to become technology agnostics and purchase whichever technology on the market best fits their growing needs for a given project at a given time.

In this more mature market, new types of entrants will change the playing field too. Whereas now we see primarily investor-backed entrepreneurs entering the vertical farming industry, it is reasonable to assume that the existing incumbent growers, produce processors, as well as produce sellers, will at one point also make their move. We predict that they will do so relying on technology providers – as they are doing now for their current precision ag and/or greenhouse production.

We are not saying that the grower will not be doing any R&D – of course they will. Every grower will have specific projects aimed at diversifying its portfolio of produce, improving process flow, cutting energy requirements, increasing yields, etc. and they should do this.

What we are saying though, is that in a gradually maturing industry, companies will necessarily need to focus on the primary scope of their business if they want to be successful. That means growers will grow and sell produce while their suppliers will develop and provide the required technology. This will be key to ensure that the future of vertical farming is one of efficient, profitable, diverse, and global operations.