In 2016, AgFunder recorded 39 M&A deals in the agritech sphere. These deals provided exits for some venture capital firms including Serra Ventures, SoftTech VC, 500 Startups, and Monsanto Growth Ventures (albeit by its parent company).
Eleven of these deals were in the farm management software, sensing, & IoT category. Earlier this month, we had the first acquisition of the year in that space when water management and IoT platform Observant was acquired by Jain Irrigation, one of the largest irrigation companies in the world.
The Observant acquisition came about when the Australian startup was looking for partnerships and investment in the US to help with its expansion across the new market. Conversations with Jain soon developed into acquisition negotiations with the help of agricultural investment bank Fennebresque & Co, which is based out of North Carolina.
Founded in Australia in 2003 by Simon Holmes à Court, the majority investor until acquisition, and J Matthew Pryor, the company opened an office in California in 2014 as its first move into the global arena.
“Even though we chose the US as the first market to expand to, Simon and I always had global designs,” said J Matthew Pryor, co-founder of the company. “Being part of Jain’s international business strategy gives us an almost unprecedented opportunity to have products and services sold in many other markets, so it was very appealing to be part of that.”
“As founders and investors in a business expanding globally, we were always looking for ways to extend our reach to new customers – this is often a very challenging phase of growth. Jain is building a global agtech portfolio, and it made perfect sense for the next step in our evolution to become part of that global agtech platform.”
Pryor will stay on as Australian CEO and chief technology officer while Holmes à Court will become an advisor.
Observant was the second agritech startup acquisition for Jain, after it bought field monitoring and irrigation management company Puresense Environmental in February 2015. Puresense and Observant have similar business models and will likely combine in some way at Jain, according to Pryor.
While there has been M&A activity elsewhere in agri-food technology this year — two plant-based meat alternative companies achieved exits for their investors in the last two weeks — we need more exits to validate the young agritech venture capital market. And further activity from large agribusinesses like Jain is essential. We caught up with Pryor to find out what pieces of advice he would give to farm-based agritech startups hoping to turn their businesses into acquirable companies.
But firstly, what is Observant’s technology?
What is Observant?
Observant created one of the first-ever Internet of Things product for the agriculture sector, even before IoT was really a thing. The company sells bundles of hardware to track and control water usage in agriculture from the source to its final use. With sensors, it measures water in a well or tank, the water pressure as it passes through a pump, filter stations or canal, as well as soil moisture. With actuators, the technology automates turning a pump on or off. It also connects to weather stations, and any other data capturing device on the farm.
While Observant sells third party sensors, its proprietary technology is in wirelessly connecting the sensors and actuators, and powering them. The devices are usually solar-powered and communicate with the sensors and actuators through radio frequencies in a similar concept to a wifi network. One central gateway device has a cellular connection to upload the data into the cloud and a farmer’s software platform for further analysis.
Holmes à Court came up with the idea for Observant after looking at how to increase the stocking rates on some of his family’s cattle ranching operations in North and Western Australia. Water management was the biggest concern, and with such vast distances to manage, he thought tech was the solution to help monitor and control water usage across the operations.
“Simon expected just to go and find this technology somewhere and make it work for his family business,” said Pryor, who met Holmes à Court when they were both working for tech companies in Silicon Valley. “But there weren’t really any products designed for agriculture, and the more we looked into it, the more apparent it became that there were huge productivity benefits to be made via tech that hadn’t been delivered.”
The co-founders concluded this was due to the unique physical challenges presented by the agricultural environment: dirt, dust, hot, dry, wet, remoteness, no connectivity, no power, and so on.
“We had to overcome these challenges to make a reliable and simple solution that would work in places that aren’t nice to electronics,” said Pryor.
This is where the first key lesson from Observant comes in.
4 Lessons for Agritech Startups
1. Zero in on Reliability, Serviceability, and Simplicity
“Agriculture was not like the tech industry we’d come from where people tend to put up with stuff if it doesn’t work perfectly in the beginning,” said Pryor. “In ag, you really have to zero in on reliability; ultimately people are most worried about their livestock or crops and whether they have enough hours in the day to get the job done. So, we set about designing products specifically for agriculture, as we felt that was important.”
Physically, Observant had to create rugged devices that could withstand all climates and weather events. The information they gather also needed to get back to the farmer easily; if he’s managing several thousand acres, he can’t be worrying about checking all the devices regularly, particularly across such large expanses of land.
The remoteness of much agricultural land in Australia, and globally, meant the technology could not rely on cellular connectivity, so the devices communicate with each other via radio frequency. Reliance on the cloud is where some agritech startups have fallen down.
“Some people took tech to farming too early and in a way that wasn’t right for farming, and then when people had a bad experience, it tainted the experience for other technology companies.”
Automation was a natural feature of the product from the early days. “It was in our earliest implementations, even in the outback where turning on a pump was a big part of it. The distances are so large that telling farmers they need water on a certain piece of land is not that helpful; you need to turn it on for them.”
2. Go-to-Market One Step at a Time
“Get one thing done, make it work and then expand. This is easier for marketing products.”
Observant focused on creating easy-to-use products that include all of the necessary equipment needed to deploy the technology in the field. Pryor likened it to IKEA. This includes a mounting bracket for a sensor, for example. It also includes a 15-minutes video explaining how to set up the equipment.
“It’s a challenge for farmers to know which sensor works and suits their needs, so we help farmers and their advisors to work out which to use,” says Pryor. “Farmers have a really high bar for performance; it’s not that they don’t understand tech. So this means the services and after sales support needs to be really good. But once you get traction, there’s a steep S-curve.”
Pryor argues that there are challenges in trying to do too much at the same time. But he recognizes that the route to market can also depend on a startup’s plans for the future. Are they building a business to stay independent or hoping to consolidate? If it’s the former, building a complete suite of products might make sense.
3. Work with Agronomists
“One thing we realized quite early — and that could be a reason that the adoption of IoT in farming was slow — was that you have to acknowledge that farmers have multi-generational relationships with their trusted advisors. This means you have to create products and services that suit those relationships and work with them.”
Through the easy set-up, Pryor argues that Observant is accessible to people that aren’t experts in IoT or technology, including advisors and agronomists.
“It’s important to make products that suit that channel, and keep that channel open.”
4. Be Open to All Outcomes
When Observant reached the US, it knew it had a great product market fit, but now it was about scaling the business. The company knew it would need some local partners to help with distribution, and it also wanted to raise funding for the effort.
“Unless you want to be a business with hundreds of employees and Observant-branded vehicles seeing customers coast-to-coast, you have to find partnerships. And as those discussions develop, especially if they’re simultaneous with fundraising conversations, what started an investment discussion could end up a discussion about an acquisition.”
“The reality for most companies, especially in the growth phase, is that you can’t categorically say that institutional funding or an M&A is or isn’t going to be on the table,” he said. “I think entrepreneurs are going to be aware of that, particularly in agriculture where the mega-mergers are reorganizing the whole industry.”
Where agritech acquisitions will come from is anyone’s guess, argues Pryor, although private equity firms could play an increasing role, particularly is the time frame of a startup’s success is longer than venture capital firms are used to. “One model that might work would be private equity firms forcing the hand of consolidation in the market,” said Pryor.
“In Observant’s case, our ability to get to the point we did was entirely up to the patience of our founding investor. Without that sort of vision and persistence, we wouldn’t exist today. Agriculture is quite unique in that way. The timeframes are so long, that success will require a combination of traditional capital markets and true visionary, venture investing of the sort we were lucky to enjoy.”
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