Food and AgTech investors will be on the lookout for Ag Biotech, Innovative Food and Farm Software startups in 2020, according to a new investor sentiment survey that also places emphasis on Asia as a region of opportunity for investment.
In a new report released today by Idea2Scale and AgFunder, 50 Food & AgTech investors across the globe were surveyed on the categories and geographies they’re most excited about, as well as the key challenges of investing in the space internationally and at home.
Ag Biotech is in, meal kits are out
Over half the Food & AgTech investors surveyed (58%) named Ag Biotech as a category they are most excited about for 2020. This includes on-farm inputs for crop and animal ag including genetics, microbiome, breeding, and animal health.
“With consumer preferences shifting very sharply towards fresher and more nutritious food, biologicals, inputs and seed genetics will really help to modify plants for better yield and higher nutrition,” SVG THRIVE Accelerator director Jonathan Hua writes in the report.
“Furthermore, ag biotech solutions can have a significant upside to farmers from an environment/climate change standpoint. Right now, there’s a significant movement around carbon sequestration and putting carbon back into our soils. A lot of the innovation that will help achieve this will come from the biotech side with new fertilizers, pesticide alternatives, soil health and plant growth solutions.”
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The second most popular sector is innovative food at 56%, which includes the burgeoning alternative protein segment. Within that, plant-based meat options are particularly popular in the wake of Beyond Meat’s stellar IPO over the summer. The segment is predicted to increase from $4.6 billion in 2018 to $85 billion in 2030, encouraging many investors to start staking their claims early. Nearly 34 million US adults already describe themselves as flexitarians, meaning they don’t eat meat at every meal, according to the report.
Farm management software, sensing, and IoT is still catching investor attention with roughly 45% of VCs excited about the category.
Surprisingly, when you look at Food & AgTech investment levels, those top three categories all raised less funding than downstream categories eGrocery, which 40% of investors said was an overhyped category. Ag Biotech was the most invested upstream category representing 9% of the total ($1.5 billion) in 2018, which Innovative Food accounted for just 4% or $516 million while Farm Management Software startups received $945 million of funding in 2018, 6% of total funding.
It seems investors are finally getting bored of some of those downstream categories that have dominated the investment landscape across the food supply chain for several years; investors surveyed said they felt Online Restaurants and Meal Kits (54%) and eGrocery (40%) were the two most overhyped categories. A number of companies in the space have struggled like Blue Apron and the graveyard of failed startups in the space continues to expand.
The report includes YouGov data on why US consumers who used to subscribe to Blue Apron stopped: the kits were too expensive (73%), they didn’t include enough food (21%) and it took too much time to prepare them (17%).
Idea2Scale’s Danny O’Brien, the report’s author, believes that Amazon’s big push into eGrocery with the acquisition of Whole Foods was a big reason behind investors’ lack of enthusiasm for eGrocery startups.
Where in the world?
The majority of the Food & AgTech investors surveyed said they invest overseas (60%) and they mostly did so in North America (67%) and Europe (65%). But looking into the future, the majority of investors (57%) said they were most excited about the potential for Asia.
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India was of particular interest gaining 12% of investor votes, the largest amount for any country. That’s perhaps unsurprising as the country boasts a massive amount of cultivable land and fertile soil on the one hand and serious inefficiencies in the agricultural supply chain on the other. This leaves entrepreneurs with countless pain points to address with existing or emerging technologies. Marketplaces have been an increasingly common innovation for the region due to their ability to connect smallholder farmers with cheaper inputs, better markets, and financial support.
“Over the years, as the demand for food is growing to feed the expected 10 billion global population by 2050, we believe India and the larger South Asia region will increasingly have an important role to play to ensure global food security,” Abhilash Sethi of Indian VC firm Omnivore said in the report. “Plus this is a sector where VC money has really never been put and we have been seeing that it can help create very sustainable and profitable business models.”
There are still challenges to investing in India for foreign investors and overseas more generally and investors cited a “lack of local due diligence” as the number one factor holding them back from more international deals.
AgFunder’s Rob Leclerc writes that investing in the US can be easier for venture firms because the greater availability of capital makes it easier to attract founders that might otherwise be working in the industry at large existing corporations that pay well.
“When you go abroad, it is much riskier for talented founders and so overall you see fewer high-quality founders to invest in—in that they don’t have the same level of technical skill or business acumen,” he wrote. This wealth of available capital in the US can also be a challenge for VCs in that they need to differentiate themselves, he added. “At AgFunder, we’re constantly selling ourselves and the AgFunder platform to prospective companies.”
European investors were less likely to invest overseas than their US counterparts (56% vs 66%) and were less interested in investing in Africa too (8% vs 23%) but transatlantic investing was strong; 71% of European investors that chose to invest abroad, focus on the US and 93% of US investors investing overseas focus on Europe.
Networking and team
On average, investors said they make one investment for every 78 deals they look at, which means the stakes are high for hopeful startups. The report offered helpful insight regarding how they can improve their chances.
Sometimes making the right introductions can make all the difference. The majority of investors (66%) said that their most valuable source of dealflow was through warm intros from investors in the space. Entrepreneurs and companies seeking investment should focus on network building among the investor crowd. Credibility is essential to making the right connections, with cold calls to investors only panning out 6.4% of the time. Although some startups may think that accelerators and incubators are a surefire way to speed up their investment process, only 6% of investors said demo days were their most valuable source of deals.
But scoring a venture capital investment is more than just getting your foot in the right door; 53% of investors said that the number one reason they pass on a deal is the team or their lack of certain skills.
And even if your team has the chops to back up your value proposition, 66% of investors have identified route to market as the primary area where companies struggle. This often comes down to connecting with farmers and being able to communicate the value proposition quickly and effectively.
“Farmers are smart operators who wear a number of hats every day. There is a bombardment of new technologies targeting them and it’s tough to find time to understand which ones can truly add value,” Jonathan Quigley of SparkLabs Cultiv8 commented in the report. “Plus timing is key; innovative solutions are being held back because the underlying infrastructure isn’t there. A lack of connectivity is a classic example of this.”