Hours after an upbeat conversation on agri-tech investing featuring Vinod Khosla and Dave Friedberg on stage at the World Agri-Tech summit in San Francisco last Tuesday, delegates were brought back down to earth by investors on a later panel who presented a somewhat bleaker view.
“We’ve done a particularly poor job getting investors outside of our niche to pay attention. And so we’ve lost that series C through crossover round capital supply,” said Eric O’Brien, cofounder and managing partner at Fall Line Capital, about raising late stage capital in agritech. “Actually, we didn’t lose it, we never had it.
“I think we’ve done a poor job of marketing companies and showing enough progress within the agri-tech market to attract generalist capital, which is coming from bigger funds with deeper pockets that can help sustain some of these companies through the longer term.”
Stephan Dolezalek, managing partner at Grosvenor Food & Agtech, added: “I think we’ve defined a bunch of problems and we’ve built a bunch of companies that chase after the solutions for those problems. But I don’t think what we’ve really done has fundamentally changed the world.
“There are too many companies chasing what I call incremental improvement. Show me an industry where three players have figured out a really different way of doing something; that’s interesting. An industry that’s got 50 players where one’s a little bit better than another? Not very useful.”
He added: “The challenge for all of us is we’ve got to develop a couple of models of success so that people can look at them and say, Okay, that’s what it took. That’s what it looks like.”
‘The expectation of short-term returns, which is endemic in many venture models, is not consistent with agriculture’
While the venture capital model can work for agri-tech, said O’Brien, investors had “underestimated the timeframes involved and the capital involved” in getting businesses in this space off the ground. “Software in agtech, that fits the venture model very well. Hardware is kind of in between. The model itself can work, it’s just a matter of are we selecting the right companies and are they solving big enough problems?”
However, Vipula Shukla, senior program officer, agriculture R&D at The Bill & Melinda Gates Foundation, said she saw a “fundamental disconnect in timelines between expectations in the venture model versus the patience that’s required for both technology development and technology market penetration and scaling in agriculture.
“The expectation of short-term returns, which is endemic in many venture models, is not consistent with agriculture.”
Dolezalek at Grosvenor Food & Agtech added: “The truth is, the timelines, the capital intensity, just doesn’t lend itself well to the 10-year fund model. On the family office side, we’ve got the patience to say you know what, if it takes a little longer, we’ll stay in.
“We’ve taken AeroFarms through bankruptcy because we said ultimately, we think indoor farming is going to be incredibly valuable and important… and this is the only farm we’ve seen that is actually profitable in today’s environment… But would I want to start a brand new vertical farming company from scratch today? Not a chance.”
Spencer Swayze, managing director at ag private equity firm Paine Schwartz Partners said: “I do fundamentally think that agtech and the venture model can work. The challenge is that valuations went off the rails. Very early, a tremendous amount of capital was deployed into companies where when you look at it, you say, where did you put that funding? What did you achieve with that funding?”
Growth vs profitability: ‘People are scared shitless right now about their portfolios’
As for how to navigate the current funding winter (according to AgFunder data, investment fell 49.2% in 2023), O’Brien told founders in the audience, “You’ll hear from a lot of venture capitalists and your board members about the push for profitability. Just realize that that is code for surviving in a world where you can’t raise capital. It is not an end in itself for startups at that [series] A, B to C [funding] range because if you drive to profitability with no growth, there’s no value at the end of that tunnel.
“If you do not show growth, you will not attract additional capital. Put yourself in the shoes of your venture firms. People are scared shitless right now about their portfolios, and if they need to go on the road and raise capital from their LPs and they’ve shown a bunch of businesses that have gone out of business or have taken really bad marks, that’s really bad for business.
“So just think about the motivations behind the directives you’re getting from your directors and remember that in venture, the rewards go to those who are growing.”
‘It’s a reset, not a catastrophe…’
When it comes to corporate venture capital and agri-tech, said Kim Nicholson, VP ag technology and innovation at The Mosaic Company, “We haven’t taken advantage of many of the opportunities to work together. I think in the corporate world, we think we know what’s best and we get in our way sometimes.
“But I think the VC model does get in a hurry. They’re pushing companies with so much capital, forcing them to go in every possible direction, hoping that somewhere the spaghetti sticks, that one of us in the corporate world will grab onto that and go forward. And that’s not really fair to the companies and in some ways, it’s not very productive for us on the corporate side either.”
O’Brien at Fall Line Capital said the success of corporate venture capital was entirely “dependent on whether or not the mothership has a commitment to a corporate venturing arm.
“You have corporates who think long term and realize that there is opportunity that can come from early-stage companies if you’re patient… And then we’ve seen tourist CVCs who come in because it’s the flavor of the moment, and then when it doesn’t produce some outstanding return or acquisition or something interesting in a relatively short period of time, they abandon ship.”
Ending on a more positive note, however, Sebastien Pascual, director at Singapore sovereign wealth fund Temasek said that for all the soul-searching in the agrifoodtech industry right now, what we are seeing is “a reset, not a catastrophe… I think we will see a comeback from corporate venture investors.”
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