“A lot of it is a DIY hobby industry right now.”
David Farquhar, CEO of technology provider Intelligent Growth Solutions (IGS), is talking to AFN about the primary industry his company serves: vertical farming. [Disclosure: AgFunder, AFN’s parent company, is an investor in IGS.]
But his comment isn’t meant to write off an entire industry. He goes on to say that “this always happens in new tech categories,” suggesting vertical farming is actually just beginning rather than facing the end of the line.
Still, one might be forgiven for thinking the latter is true right now with a small but growing amount of negative news coming out of the industry.
Once the stuff of science fiction, vertical farming has become more familiar to consumers and investors alike in recent years — with venture capital funding for it climbing sky-high in the process.
Vertical farming involves growing plants, usually for food but also for medicinal and ornamental plants, in vertically-stacked layers indoors. Technologies like artificial intelligence help growers monitor and manage temperature, light amounts, humidity and other environmental elements. Many companies now also employ robotics to physically move or harvest plants within the farm.
The reality of being able to grow food anytime and anywhere thanks to technology is compelling, especially in light of increasingly adverse weather conditions, war, supply chain disruptions, and other factors currently threatening global food security.
The other reality is that vertical farming remains expensive and largely unprofitable. Its role in the food system remains ambiguous and recent setbacks have some questioning the industry’s long-term viability.
‘Little room for adjustment’
As with many other tech sectors today, with the economy slowing and venture investors taking their feet off the gas, funding to vertical farming momentum has slowed down considerably. Around this time last year, companies like Bowery and Plenty were raising multi-million rounds, breaking records in the process. Now the industry faces layoffs and shutdowns as funding dries up and questions around costs, profitability, and what farms can realistically produce intensify.
“The economics for vertical farming [were] improving steadily (lower capex and higher efficiency), but in the face of high energy rates, inflation, and supply chain issues with equipment, these operations have faced significant challenges,” Agritecture founder and CEO Henry Gordon Smith tells AFN.
Smith predicted a market correction at the tail-end of 2021, when he wrote on AFN that vertical farming was “headed for the trough of disillusionment” — that is, the low point in a typical technology emergence and commercialization pattern called the Gartner Hype Cycle where hype turns to depression and correction before technologies reach longer-term viability.
“The problem is that they overpromised and left little room for adjustment,” Smith says of vertical farming companies in general. “I do not think most of the most funded vertical farming companies today will reach demonstrable profitability for several years. In my opinion, the fundamental changes to the way vertical farms are planned, developed, and marketed need to change, and that will not happen before we get passed the bottom of the ‘trough of disillusionment.'”
Despite all this, Smith, like many others, is a firm believer in controlled environment agriculture (CEA), the umbrella term under which vertical farming falls. However, that won’t come without “an honest discussion about what is and isn’t working in CEA.”
Another tech bubble?
“What we’ve got at the moment is an awful lot of people doing what I would describe as DIY,” says Farquhar. “It is not efficient. It is not environmentally sound. It doesn’t grow particularly great food. And it tends to be massive monocultures growing, say 50,000 square feet of kale. The world can eat only so much kale.”
Darren Thompson, CFO of Bowery, has a more optimistic take on the current industry. “At Bowery, it’s anything other than DIY,” he tells AFN. “It is a substantial investment in hardware and software, and a tremendous integration exercise of a bunch of disparate pieces of technology, but also operating at an industrial scale that’s really required to make this work.”
Bowery operates two large-scale vertical farms that grow leafy greens and supply food retailers on the eastern side of the US. In the past, the company has described its growth as “thoughtful scaling,” which has protected it from some of the sector’s hype.
Professor Paul Gauthier of the Queensland Alliance for Agriculture and Food Innovation (QAAFI) says calling vertical farming a “DIY hobby” is going a little too far.
But he does compare the industry to the dot-com bubble of the late-1990s, where abundant capital coupled with the sudden popularity of the internet sent startup valuations through the ceiling despite many companies lacking a clear path to profitability.
Certain elements of the vertical farming industry are similar. Demand for organic, chemical-free, and locally-grown greens has been steadily rising for years — though inflation looks set to dampen that growth — with supply chain issues in the wake of Covid-19 certainly playing a role.
With this and growing demand on the agriculture industry to be more sustainable, hundreds of millions of dollars have flowed into the sector on the promise of locally grown food that uses less water, produces less waste and ultimately puts a more flavorful, nutritious product on store shelves. That includes Plenty’s $400 million from last year and Bowery’s $300 million Series C from the year before, among many other blockbuster rounds.
The dot-com bubble, of course, imploded. Right now, that’s perhaps too strong a sentiment for what’s happening in vertical farming, though signs of a market correction are everywhere. AeroFarms scrapped its plans to go public last year. And more recently, companies have closed their doors or laid off staff in the face of a difficult economy. Germany’s Infarm, for example, announced recently it would lay off half its workforce.
While there are other factors likely at play in those pullbacks and total implosion is highly unlikely to be in vertical farming’s destiny given the challenges it aims to solve for and the overall passion we see for the space, the individuals interviewed for this piece agree that without big changes, the industry will fail spectacularly in its primary job of helping to feed people.
“We are going to be 10 billion people on this planet by 2050,” says Gauthier. “Climate change is threatening 95% of our production of food. FAO is giving us the challenge of increasing production 70%. Right now we are not meeting this challenge at all. If we don’t find ways in other places to grow food, we will have 2 billion people starving.”
So how does the industry move forward to better meet this challenge?
More crop diversity, better economics
Commentators have argued for more diversity in vertical farms beyond leafy greens; the world can’t feed itself on salad.
This is more complex than it might first seem. See this epic LinkedIn thread as an example of how nuanced the discussion can get.
The advantage of leafy greens is that they require relatively little space to grow, so giant spaces a la AeroFarms, Plenty or Bowery can pack quite a lot of yield into a single harvest. Because lettuce is a delicate crop with a short lifespan, it also makes sense to grow it closer to the consumer as opposed to shipping it across the country.
Other crops might require more room between plants, more water, different light requirements and all manner of environmental changes that cost money to execute. And some, like wheat and other commodities, still make economic sense to keep outside.
“You get a very low value from a revenue per pound on commodities,” says Thompson. “If I’m trying to solve a problem for the consumer, that’s not the problem I would go after. I would go after products that are difficult to grow and highly variable, where we’ve seen the quality of them deteriorate in an outdoor grown environment.”
On the other hand, “Solving the challenge of strawberries at scale in our industry unlocks the ability to do all kinds of berries, tomatoes, and peppers, and a whole set of fruiting crops that we think are squarely within our strike zone here over the next few years,” he adds.
Gauthier takes a longer-term view of the situation. “Very soon, the Salinas Valley [in California] will not be able to produce strawberries,” he says. “By 2050, what kinds of crops will we need to grow indoors because we can’t grow them outdoors anymore? Coffee? Cocoa? These will make sense at some point.”
Experimenting with crop diversity, he says, needs to happen, but in the right setting. Academia is one such place.
IGS, for example, already has relationships with a number of crop research institutions and agricultural universities, says Farquhar.
“We are working in partnership with them to enable commercial research, academic research, and teaching, and also to get research done for us and for our customers. There are certainly crops, and a wide range of them in certain geographies, where IGS-powered farms can be economically very competitive.”
Thompson says it’s a balance for companies. “I certainly can’t fault a competitor for doing their own independent research around products that are not likely to be commercialized in vertical farming for a very long period of time,” he says.
“But as a company, you have to balance between things that are closer in and things that are further out. For the things that are further out, that’s where partnerships with the academic world can be highly beneficial.”
“It makes sense for academia to look into this but not companies,” adds Gauthier. “Companies need to focus on making [vertical farming] profitable, not trying to find what is the next crop.”
Developments in crop diversity might be aided by more vertical farming companies picking which they want to be: a tech company or a farming company.
“Can you name me a farmer that built their own tractor?” Farquhar (rhetorically) asks. “We need a separation between the users of the technology and the vendors. Only then will the sector ‘Cross the Chasm.’ That’s why we are strongly styled as an infrastructure vendor to the global agricultural industry.”
He likens IGS to the suppliers of picks and shovels sold to gold miners during the nineteenth-century Gold Rush. “If you pointed them in the right direction and gave them good tools, some of them managed to make some money.” However, “the guys who made the most money were probably the ones selling the picks and shovels.”
Gauthier says companies originally took on both tech and farming because 10 years ago, the industry still had to prove it could work.
“But as you move to expansion, you invest less in tech and more into farming. These companies are supposed to be switching from tech to farming.”
Bowery, on the other hand, believes it must do both, and not to prove it can be both technologist and grower.
“Neither of those things fully describe what the problem is we’re trying to solve,” says Thompson. “At the end of the day, what we’re trying to solve is a supply chain problem about consistently providing food locally or regionally, and supplying what is inherently a volatile product in a safer way to grocers and consumers.”
“This is not a zero-sum game,” he adds of vertical farming’s future growth. “The problem we’re trying to collectively solve is enormous. You need to approach this as if you’re trying to solve a big problem. And you also need to approach it from the perspective of customers. My customers are these big, very sophisticated, very demanding grocers. We need to figure out ways to supply and support them.”
The next wave is rising
As noted above, vertical farming isn’t about to go the way of internet startups from the ’90s. Yes, there will be more layoffs and company closures, and probably some M&A activity over the next several months as the industry consolidates. But as Henry Gordon Smith notes, “there will still be many investments made by those looking to get in on the inevitability of a more protected agricultural system.”
But, he says, we haven’t yet seen the bottom of that trough of disillusionment: that will continue through 2024, at least. Ditto for companies reaching actual profitability and proving out the economics of these novel farming systems.
We might also expect a wave of companies rising out of stealth mode.
“Beyond emerging markets, the biggest opportunities this coming year will be in the companies and farms you don’t know the name of yet,” says Smith, who also suggests there will be no one savior to this global crisis of food security. “Longer term, we should all invest in a diversified approach to climate-smart agriculture, one that sees vertical farming, CEA, and other low and high-tech solutions as tools in the toolbox to adapt to volatile climate and market conditions.”
Vertical farming should be one instrument in a farmer’s toolbox, not the whole operation or the farmer’s competition