The Opportunities and Challenges of Building a Rural Agtech Startup

Startup activity in the US is typically concentrated on the two coasts, particularly in California, New York, and Massachusetts, and agtech startups are no different. In 2016, agtech startups in those three states raised 73% of all investment dollars during the year. There are, however, several startups cropping up in America’s rural regions, which can make a lot of sense considering where many of their customers will be. And there are some leading investors moving away from Silicon Valley to find investments, such as AOL founder Steve Case who’s staking a claim on rural entrepreneurs with a new $525 million fund focused on investing outside of New York and San Francisco.

Lisa Benson from the Farm Bureau introduced me to three rural agtech startup entrepreneurs that took part in the Farm Bureau’s Rural Entrepreneurship Challenge last year: Dan Perpich of Vertical Harvest Hydroponics, which is an indoor agricultural startup based in Anchorage, Alaska; Martin Bremmer from Windcall Manufacturing in Venango, Nebraska, who has developed a miniaturized grain combine called the Grain Goat; and Albert Wilde, from Wild Valley Farms in Croyden, Utah, who is producing sheep wool fertilizer from waste wool.

Applications are now open for the 2018 Challenge with a deadline of June 30, 2017, and the opportunity to win $145,000 worth of prizes. You can find out more and apply here.

In this week’s podcast, I speak to the three rural agtech startup entrepreneurs to find out more about the challenges they face launching agtech products from their respective rural bases.

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Here’s an abridged transcription of the podcast.

Dan Perpich: I am the founder of Vertical Harvest, and we are based in Anchorage, Alaska. We started two and a half years ago, and we started designing and producing and marketing commercial hydroponic systems installed in 40-foot shipping containers, and the reason we did that is because food prices in Alaska and Canada and the North, the Arctic, are out of control. And we thought there was an opportunity to give people the means to farm locally and produce their own food locally and that would be a good market and a valuable product to people. And here we are two and a half years later, and we’re just happy to still be here.

Albert Wilde: I live in Croydon, Utah, and the company that I’ve started is called Wild Valley Farms. We do all sorts of compost, soils, landscaping materials and that, but the product we’ve developed is a natural organic fertilizer that will fertilize for a whole season, and it’ll retain water, reducing the amount of watering by about 25%, and it’s made from waste wool from sheep.

I’m a sheep rancher, and we have 2,800 sheep and 300 head of cows, which is why we started with doing the compost to be able to manage animal waste and make a value-added product for consumers for their gardening and what not. And then when we found that wool was so high in nitrogen that we started working towards trying to make the wool a useable product for an end consumer. So we pelletized it, and we’ve been selling the wool pellets to nurseries and greenhouses and for commercial use. They take the wool pellets and mix it in with their hanging baskets or potted plants that they’re selling to consumers. And then we also bag up the wool pellets and sell directly to consumers and through distribution channels.

Martin Bremmer: I’m in Southwestern Nebraska, and our company’s called Windcall Manufacturing and our first product is called the Grain Goat. It’s essentially a grain combine that’s handheld because it’s very tiny. The purpose of this combine is so that you can sample small amounts of grain, small varieties, rapidly, and then use the onboard moisture meter to tell you what the moisture content of the grain is, enabling you to determine whether or not that field that you just sampled is ready to harvest.

LBT: Thinking about all the startup activity that’s taking place in agtech in San Francisco and New York that you’re all aware of, how do you think building a startup in a rural region compares?

Bremmer: That’s a tough question, but what I’m familiar with in terms of raising raising capital is that there’s always more zeroes attached to the project [on the coasts]. And so there’s different [investor] groups that seem to be targeted by the startups, and the VC groups are pretty well established and have great reputations. They do some incredible due diligence, and when I think about my own personal experience, when we’re doing fundraising for Wind Call Manufacturing, it’s scaled back quite a little bit.

The same process goes on it’s just scaled back in the scope of expectations, which is a huge advantage for us because early stage funding is a little more easily accomplished because there’s more understanding of the dynamic with small companies like ours: our investors understand that the zeroes are going to be smaller, the growth is going to be slower, and they don’t have these rapid slingshot unicorn dreams of what’s going to happen with your company, they get that this is, I don’t want to call it a niche market, but it’s an ag market, so it’s not a mainstream US market. And so I’m not having to redirect their focus and expectations, they already understand that.

Wilde: Most ag startups are building more of a legacy business. They’re focusing on, “I’m gonna build something that helps with the industry that I know and love, and I’m gonna keep this,” more. Whereas a lot of I think the tech side of things, people get into it and there’s not a homegrown part of it. So I guess it’s just, I came up with this technology, and I’m putting it out there, and I don’t care who buys it or how fast and it can go. It can go away from me.

And I think from what I’ve seen with a lot of ag startups is they feel more like they’re building this because they saw a need for something that they love and they want to grow and keep it that way.

And so with different investors, they have to know what your end goal is before they invest in you, and as Martin said, the expectation with a legacy company is much, much lower. The profit, returns… because you’re not looking to come up with an idea and just sell it. You’re looking to come up with an idea and build it.

LBT: Are your investor bases generally local investors, or have you attracted investment from across the country or even the globe?

Wilde: We have a huge potential for growth, and we have some very large companies that are looking to license our product that’ll put it out to a wide distribution for consumers, but all of the investment came from myself or family or partners. And the reason is, I’ve got two partners that have put in $2 million worth of assets, and then for myself I’ve got a ranch and farm, so I’ve received an ag loan from this lender at a 3.8% interest, which I mean is really cheap, but that’s because I have some ag assets that they’re willing to loan that sort of money on. Most investors like a venture capitalist, you tell them that you’ve got funding at 3.8% or 5% or whatever, they know that you’re not interested.

LBT: Dan, how have you funded Vertical Harvest?

Perpich: We’re self-funded, so we put our own money in to start our company, and as we’ve started growing revenue we’ve been able to reinvest and continue development. We’ve been very lucky in that regard. Going back to your first question Louisa, it’s important to remember that farmers are by definition entrepreneurs; a farmer owns and operates his own business, and they may start by getting family loans or owner-funded farms by younger farmers, but I think it’s quite important to remember that. Up here in Alaska, I’d say we’re probably one of the more rural places in the US — some would argue quite remote — and I think it does complicate fundraising a little bit, but there’s still money in the system and I think we’ve got a lot of benefits from the connectivity of today’s world. I may not be able to go down to the row of offices if I’m fundraising but we’ve got email, we’ve got Skype, we’ve got conference calls. I think that stuff has value to us and also has value to our customers.

LBT: If you were to seek external capital where do you think you’d go first? Would you look for local Alaskan investors as the first point of call?

Perpich: My thoughts are that we need to get a strategic benefit out of any investment that we take. If we want just money, we can go to a lot of different places just for money, but we look at what our goals are that we’re trying to accomplish; operationally how do they fit in, can they connect with customers, can they lead a round and bring people to the table?

Just to frame it, we’re in the process of putting together what we’re calling a Series A to grow our workforce, so all those questions are really near to us right now. When we talk to investors we ask them, are you going to bring us sales people, are you gonna bring us customers, are you going to bring us other investors?

I think it’s important that we don’t just go and take the first guy that’s got money because from my experience the geography isn’t just limited to the West Coast, the geography is North America, the world. And there are quite a few people out there, and so if we just go to the guy down the street and he connects me to more people in Alaska, what value does that bring to me?

Bremmer: I’ve got a question for you Dan, just because where you live you could attract Canadian investors just as easily as US investors, so does that throw an added layer of complexity if you pulled in some Canadian interest?

Perpich: You know it does, but that’s all a solvable problem. If a guy from Canada wants to invest in my business, there are some questions such as are we gonna open an office there? Are we gonna do the investment in Canadian dollars or US dollars? You know, he’d have to answer some questions about mitigating currency risk because the Canadian dollar goes up and down against the US dollar. So there are questions but I think those are all solvable problems and quite frankly, if you know a guy who’s Canadian and wants to invest in me, I mean, you want to shoot us an email and connect us? [laughs]

Bremmer: I’ll send him your way. [laughs]

LBT: So, what would you say have been the main challenges that you’ve faced in launching your businesses and getting them to where they are today? And, what do you foresee as being the challenges going forward, if those challenges shift and change?

Wilde: So I think the most difficult part of being an ag startup is actually developing the product itself. I mean, I think each of us has a product that has to be manufactured, a physical thing that you’re actually building, and for myself, like I said my partners had invested $2 million, which is all in the equipment to be able to produce the product that I have. That’s a little different than, like, other tech things, startups, where it’s more of a technology and not just a physical product itself.

And so trying to get people to believe in you, or to believe in your product or even to know why it’s better or why it’s going to help before you have a real prototype, makes it very challenging that way. And I think that’s probably one of the most challenging for an early, early stage ag startup. Then, once you get your prototype and you start to build those prototypes, it’s being able to put it into more of a mass production and then like Dan mentioned, the salesforce; trying to get a salesforce out there to be able to sell your product so you can take in the materials you need to build you product but also have someone out there selling it so that your inventory doesn’t eat you alive.

LBT: What would you say are the benefits to you being based in Croydon, Utah? Are you near your customer base, or is it near the source of your product?

Wilde: I don’t know if there’s all that much advantage to it, [except] being connected through agriculture. As a sheep producer, I’ve been invited to a number of the different wool grower conventions around the country to inform them, the other sheep producers, about my product and what I’m doing in actually buying waste wool from them and entering a value added product. And that’s a huge benefit over anyone else [that might produce this product], the greenhouses or whatever, they’re like, “Oh, we really like this product, maybe we could do it,” and I’m like, well, okay, but for them they’re gonna have to go to a wool warehouse where the cost is going to be much more expensive, and I can go directly to buy the materials. So that’s a huge advantage just being in ag in that way.

Bremmer: There are two main challenges that jump into my forethoughts. One is because we’re a new product with a new market, we really have to push hard and shovel a lot of coal into the fire for what we call educational outreach – most folks would just call it flat-out marketing – we need to get our product in the mind of all our potential customers just because we don’t have competing products, and so we’ve spent a lot of our time educating farmers as to the advantage and the asset of purchasing our product to make their world a little bit easier and make some savings actually happen on their balance sheet. And so the huge challenge there is just because of the time, the energy, and the dollars it takes to execute that effort.

And then our number two challenge is keeping our cost of goods down. Because we’re manufacturing a mechanical device, the cost of goods can always come down a little bit. And it’s nice where we live; we’re in Nebraska so we can take advantage of the multitude of manufacturers in Nebraska, Kansas, and Colorado, where we can actually make them compete against each other to keep our cost of goods down when we’re subbing out a lot of parts. So that’s a huge asset to us because we live in a low cost of living part of the US and so the manufacturers in a 500-mile circle from our home base actually turn out quality products for much, much less than if we were on either coast and using the same skill set manufacturers. So huge advantage there but still driving that cost of goods down in a big deal for us; being a startup, we cannot make purchases in volumes that would really make a difference, not yet at least. And so as soon as we drive some sales further and faster, then maybe we can take advantage of that.

LBT: To go back to your first point Martin — the bit about the adoption rate — this is something that I think a lot of investors look at as being particularly challenging in agriculture, because with a lot of products you’ve only got one growing season a year, so one time for the farmers to test the product or even for you to iterate on the development of your product.

I’m also wondering how much behavioral change is required for them to adopt your technology and use that in the field, before harvest. What is your sense on that and how quickly that could happen?

Bremmer: Behavioral change is paramount for what we’re trying to sell, because we’re actually asking grain farmers to change their harvesting habits and I have to kind of draw out farmers in general, but especially grain farmers because that’s who I’m familiar with; that’s an unusual market on a good day.

Because we’ve got a group of smart people, sometimes they’re highly educated, sometimes they’re not, but they’re very traditional, and they’re very family-based businesses, and so we have lot of customers who run multi-million dollar family corporations with very little marketing education and business marketing education or just overall most farmers aren’t MBAs. And they like it that way, so they do everything by the gut, or they do everything traditionally. And so it’s a bit of a bullish kind of audience, where we have to show up at the trade show and get these folks to open their minds a bit and say, “You need to change a habit that you’ve had for the last 30 years, to improve your balance sheet.” And I can watch their eyes glaze over for a minute, and then once I get past that, they start thinking a little bit and then their business mind, their common-sense mind, kicks in, and then I have them because they start to realize oh, there is a change.

But it’s funny how you can split that demographic down into age, because anybody 55 and older, they’re pretty resistant to it. But between 30-55, they’re open to it, and they think about it, but younger than that they haven’t really had enough experience on the family farm to really understand the impact of a tool like what we are selling.

LBT: What is it that suddenly gets through to them? Are you throwing figures at them and saying that you’ll actually help them increase their revenues by x percent, or whatever?

Bremmer: The way I crack through that force field that they’ve got is by using their Achilles heel. The one thing that you can appeal to a farmer with is, what are their expenses, and is there a way that you can minimize their expense?. So that’s our biggest asset from a marketing point of view; we’re able to get the farmer to actually recount to us a story where they wasted a lot of time or a lot of money on a particular season, and by using our tool they would have eliminated that entire scenario, and that’s what gets me in the front door of their mind so that they can realize, oh my gosh yeah, maybe this is kind of an arcane method that we’ve been doing for years. Maybe there’s a new tool like the Grain Goat that avoids that risk. And so now we’ve got the cost savings that makes them go okay, I can see the value of this.

LBT: Dan, tell me about your challenges in getting Vertical Harvest Hydroponics set up?

Perpich: Oh, man, Louisa, I don’t even know where to start on that question [laughs]. You know I’ve got to say I figure if you google, “Basic entrepreneur mistakes,” we’ll probably put a checkmark next to just about every single one of them.

There a lot of pitfalls that you can just jump into, a lot of black holes and time wasting. I think our biggest challenge is that our product is sort of in a lot of ways a new paradigm shift. A lot of people are used to the idea of food being grown outside of Alaska, far away, and so to have technology that can do it at places where – I mean we’ve got the first hydroponic farm above the Arctic Circle, and it was growing food successfully for the market at 50 below zero this year. Kudos to our customers for being the first people to bring the technology out there because it’s a risky and daunting task. And I think the challenges show the customers that not only is it possible, it’s not only something you read about in a science publication or a science magazine, but it’s actually real and you can do it.

The challenge I guess is showing people to the point where they don’t just see it and think, “Wow that’s a cool thing,” but to the point where they see it, and they say, “That’s a cool thing, and I want it, and I want to do that, and that’s how I want to support my family.”

It’s definitely one of our challenges for sure. And going back to what I think Martin had mentioned about when you hit a certain age demographic, a lot of the farmers are maybe not as interested. We’ve definitely seen that as well, sort of the older farmers that we’ve dealt with, the guys in their 50s and 60s, their sort of note is, “That’s very cool, and I think it is the future, but at my age, I’m not up for an adventure.” And so we’ve definitely seen most interest from the younger farmers, the next generation of farmers. And if there was anything that I could make a very brash pitch about, I’d say what would be helpful for those guys is if they had access to cheaper money, because what we’ve seen with our technologies is that they’re very new, and the low-risk institutions like banks, traditional financing sources, don’t want to finance them yet, so they’re left with more expensive sources of money. And that’s gonna change, we hope, but we’d like it to change faster of course.

LBT: So who are your main customers?

Perpich: Right now they’re either current farmers and people that want to be farmers. And a lot of what we’ve found in Alaska anyway is the people that want to be farmers are corporations that have employees in these communities and want to grow their revenue streams, or they have a local interest in the community, and they’re willing to take the risk because of the benefits to the communities. Definitely, people are on the lower edge of the age demographic; I’d say 20s-40s in that range.

LBT: And is the fact that how you’re growing the produce indoors, organically, or non-GMO or pesticide free, etc: is that a big draw do you think for some of the farmers? To be able to get some of those price premiums?

Perpich: You know, it’s very attractive to farmers in the lower 48 – just as a side note lower 48 is what we call all of you guys. But what you’ve gotta understand is that a lot of these guys, they’re seeing just lettuce, for example, that’s three weeks old, it’s four weeks old, it’s well on its way to spoilage, and it gets sold in these communities, and it’s all they have. I mean they don’t have anything else.

So, for them, they like the idea that it’s organic or that it’s non-GMO or that it’s hydroponic, but they really care that it’s fresh and that they know the farmer personally. I mean these are communities of a couple of thousand people, and it’s not uncommon for them to knock on the door and ask for a tour and normally the farmer will give them a tour because he’s known them for 20 years.

I’d say that’s more of the big selling point for the customers in Alaska anyway.

LBT: How many of your containers are out there now?

Perpich: We’ve sold six, so, we’re young. We’re early stage.

Listen to the rest of the podcast to find out what these entrepreneurs’ goals are over the next few years, and for more insights from the conversation.