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The role of impact investors in early stage agtech investing

February 26, 2020

Humans have deployed technology to defy nature’s limitations on the cultivation of food – often to nature’s detriment. Now, a growing number of venture capitalists are doubling down on technology to harmonize agriculture and nature. 

Mission-driven investment firms are writing early stage checks to companies making biological crop treatments, food preservation techniques and tech-controlled farms that replicate, improve, and restore natural growing environments.

“I think the food system is where the internet was in 1996 or 1997,” says Chuck Templeton of agri-foodtech investor S2G Ventures, “The pieces are falling into place to create the next wave of food innovation.” Templeton founded restaurant discovery and booking platform OpenTable, which listed in 2009, and led Grubhub as CEO before joining S2G in 2015.

“When you think about leveraging Mother Nature for what she is good at,” he adds, “many companies are using machine learning to make evolution happen at a much faster pace, with much larger trials, at much cheaper costs with more predictable outcomes.”

A couple of investments in S2G Ventures’s portfolio that are working to do that include Terramera, a Canadian biotech company on a mission to reduce the use of chemicals in ag with its bio-crop protection products. S2G backed Terramera’s first venture round three years ago and has made follow-on investments including in its recent Series B. And Trace Genomics, a California-based soil testing and analytics startup, that’s helping growers “optimize costs, manage risk and protect their soil as a capital asset.” The company has raised over $22 million in a mix of equity, debt and grant funding since 2015. (Full disclosure: AgFunder is also an investor in Trace.)

Agrifoodtech is still nascent as a venture capital sector, representing only $20 billion or 7% of the nearly $300 billion global venture capital market, compared to over 15% of global GDP. Funding for high-tech impact ventures like Terramera and Trace Genomics represents an even smaller sliver of that venture capital pie. Most agrifood tech funding goes to startups providing consumer conveniences, like restaurant marketplaces and e-grocers, and retail and restaurant tech. 

But the pipeline of high-tech, impact-driven companies is growing. “Upstream” technologies that are closest to the land and food production claimed $563 million of the $860 million invested in seed-stage agrifood tech ventures in 2019, according to AgFunder’s recent Agri-FoodTech Investing Report. In 2016, when Terramera and Trace Genomics raised their first funding rounds, just $217 million was invested across all seed-stage agrifood tech ventures. 

Impact intentions

Dedicated agrifood tech investors like S2G tout technology’s potential to radically reshape the global food system for the better. In 2019, S2G invested in more than a half-dozen companies at the seed level, including alternative protein producer Shiru and on-farm robotics company Augean Robotics. In addition to Terramera, S2G’s Series B investments include Hazel Technologies, which is developing new food preservation technology. 

S2G has been the most active agrifoodtech investor for two years running now, according to AgFunder’s report, but the sector is attracting new sources of early-stage capital: environmentally-focused investor Ospraie Ag Science and self-described “mission-driven” investor Agroecology Capital are two examples of dedicated agtech investors.

Agroecology Capital closed its first deal in January, investing in Swiss food preservation tech startup AgroSustain. Ospraie Ag closed at least seven deals in 2019 and at least two so far in 2020. Ospraie Ag is an investor in Terramera, as well as in Charlottesville, Va.-based AgroSpheres, which makes bio-based crop applications and LA-based bee-breeding startup BeeFlow. Boston-based Freight Farms and Scotland-based Intelligent Growth Solutions are Ospraie investments in vertical farming.

None explicitly call themselves “impact investors,” yet they’re backing these early technologies in large part because of their positive impact potential. 

“We don’t call ourselves an impact fund, but we’re driven by impact,” says Agroecology’s Djalil Reghis. The firm targets purpose-driven tech companies but hasn’t committed to tracking impact metrics.

Agroecology is focused on driving positive behavior change in an industry that has seen little innovation in 30 to 40 years. “Consciousness is what we need [in order] to change the way we’re growing food,” Reghis says. “But if you provide technology, you make the behavioral transition easier.” 

Swimming upstream

Many of those technologies are capital intensive and as yet unproven at scale. The availability of follow-on funding remains a question mark. 

“Upstream” tech — working at the farm and supply chain production level — may dominate the earliest stage of funding. But from Series A onwards “downstream deals take the lead,” according to AgFunder’s report. Downstream deals, for delivery companies, e-grocers, restaurant checkout tech and “virtual kitchens” capitalizing from growing food delivery demand, attracted twice as much venture funding as upstream ventures at the Series A and B stages.

Trace Genomics, Intelligent Growth Solutions and AgroSpheres were among 194 upstream companies sharing $1.3 billion in Series A funding. That compares to 147 downstream companies that split $1.6 billion at the same stage. At the Series B stage, Terramera and Hazel Technologies were among 86 upstream companies divvying $1 billion compared to 81 downstream companies receiving $2.8 billion in venture investments. 

So while there were more upstream companies raising Series A and B funding, they were clearly raising smaller rounds than their downstream counterparts. That can be a challenge considering most upstream technologies are more capital intensive.

S2G’s Templeton says the high-tech and physical nature of the types of agriculture technologies S2G Ventures invests in requires more patient capital. Companies making products that are being applied to food, handling food, and are pioneering entirely new ways to grow and make food often have more intensive and costly infrastructure needs, than say a food delivery app, and often have regulatory hurdles to clear, adding time in their paths to market. 

It took Terramera, Trace Genomics and Hazel Technologies nearly three years to go from their first venture rounds to their second. By contrast, London-based delivery startup Deliveroo, which has raised more than $1.5 billion since launching in 2012, went from a roughly $4 million Series A to a $25 million Series B and a $70 million Series C within a year. Bangalore-based online grocery company BigBasket, which is also backed by more than $1 billion in venture funding, raised a $10 million Series A three months after its roughly $1 million seed round. 

“We all have to learn that a food venture and a software venture are two very different puzzles to solve,” Templeton explains. “The time horizon, growth patterns and other factors play a different role in food and agriculture.”

The food and agriculture sectors need venture capital that can “disrupt the status quo in ways that existing organizations have a hard time doing,” he says. “It is necessary to get the food and agriculture system to change as fast as we need it to.”

Reporting for this article was done in collaboration with ImpactAlpha.

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