due diligence in ag biotech

What’s Different About Due Diligence in Ag Biotech?

April 9, 2019

Ag Biotech is a category of agtech that applies to all technologies used on the farm involving biological or chemical processes. It has typically been the most active category of farmtech startups, reaching $1.5 billion of investment in 2018. This is unsurprising when the vast amount of innovation that’s taken place since the Green Revolution has been biotechnological, including breeding, genetics, microbiome research, synthetic chemistry, and animal health.

When agtech entered the venture capital scene, there was a focus on digital agtech tools, likely as a result of the sale of Climate Corp, a weather-based software tool for farmers, to Monsanto for nearly $1 billion. The deal was heralded as agtech’s first unicorn. However, what’s less known is that there was already another so-called “unicorn” in agtech, biological seed treatment company Becker Underwood, which sold to BASF for $1 billion a year earlier in 2012. Private equity firm Norwest Equity Partners was the seller meaning it wasn’t technically a venture capital exit. 

The focus on digital agtech makes sense as it’s more in the comfort zone of the venture capital industry at large—software is eating the world after all.

The due diligence process — a venture capitalist’s analysis and questioning of a company before investing — is in many ways no different in ag biotech than other categories: you still need a great team that is knowledgeable and communicates well; you still need to know there is a large accessible market ready to adopt the product; and you still need to understand the competitive landscape.

But biotech is inherently different than developing a piece of equipment or a digital application.


What Makes Biotech Different?

The “bio” in biotechnology means that genetic systems are involved in some way and that means that variation and unpredictability are involved. Not something you want to hear when you’re getting ready to write a big check.

How, as an investor can you feel confident about an inherently risky business?

The question is what, besides a great idea, a great team, a huge market and a clear path to the market should your diligence focus on?

The answer lies in risk reduction through evidence and facts. In Ag Biotech, evidence and facts take the form of scientific knowledge and data. Scientific knowledge and data form the basis of discovering a new biotech product as well as patent claims and successfully navigating the minefield of regulatory affairs.

How to Conduct Due Diligence in Ag Biotech

In an effort to help new investors in the space navigate this category, we’ve put together a list of questions you might want to ask during the due diligence process.

For this article, the focus will be on science, intellectual property and regulatory affairs…critical areas common to all Ag Biotech ventures. Competitive Landscape and Markets in Ag Biotech due diligence will be considered in separate articles.

Science Backed by Knowledge and Data

Why the variation in Ag Biotech products?

Consider that most crops have between 20,000 and 40,000 genes, livestock between 20,000 and 25,000, and microbes come in with a few thousand. Also, consider that most crop traits (the characteristics of a plant such as growth rate and the ability to cope with or without water) are not the result of a single gene change but rather a network of genes. Further, gene networks can sometimes act like traffic patterns…even if there’s a blockage on one pathway, there’s usually a way around it.

On top of the large number of interactive genes, science is showing that there are multiple levels where these genes can be controlled. Not only by the DNA sequence itself but also through external factors such as weather, exposure to chemical agents or to pests. This adds another layer of complexity. Now throw microbes into the mix, and you’ve got one variable organism interacting with another variable organism.

Fortunately, understanding all this biological variation is addressable through advanced methods in experimental design and data analysis including statistics, machine learning, and artificial intelligence. 

Good experimental design and data are critical in separating hype from legitimate products. The more you know about your product and how it works, the more confident you can be that it will perform well in a variety of locations and environmental conditions. In addition to data analysis techniques, it’s important for any AgBiotech products to show consistent and predictable performance in real-world environments.

  • Is the product based on known scientific principles or is it novel?
  • Is the mode of action understood in detail or is more experimentation required?
  • Is further experimentation likely to uncover derivative products?
  • Are performance claims based on well-designed experiments at all stages of R&D (lab, greenhouse and field trials)?
  • Is the data statistically significant over locations and growing seasons?
  • Has the product been tested with established farmers that are influential in their region?
  • For later product development stages have the trials been carried out by third parties?
  • Has the raw data been made available to the investor for independent testing?
Intellectual Property Is Critical

Biotech companies are built on intellectual property (IP): patents, trade secrets or trademarks. One estimate is that as much as 80% of a startup’s value comes from the value of its IP. It is also a highly complex area that requires input from IP professionals in crafting a strategy and diligence in implementing the plan.

IP considerations must consider both inward and outward facing strategies. Offensive and defensive. Policies and procedures that capture valuable ideas from within the company as well as a strategy to counteract the IP activities of the competition.

Not only are patents a large part of the valuation of a company, but they are also very expensive to pursue and acquire, so a procedure needs to be in place that is understood by all company employees and is treated as a critical operations procedure rather than an afterthought.

  • Does the company have Freedom-to-Operate (FTO) in core technologies?
  • Has the FTO analysis been done by a technologist skilled in IP or an IP professional?
  • Are patents granted or filed around the core technologies?
  • Is the IP of competitors being monitored?
  • Is there a strategic plan for identifying potential IP and filing patents?
  • Does the R&D strategy mesh with IP strategy?
  • Does the IP strategy include defensive patents?
  • Are bench scientists aware of the strategy?
  • There is a procedure in place for evaluating potential IP?
  • What technology has been licensed or needs to be licensed?
  • How will these licenses affect operations and valuation?
Regulatory Considerations

Keeping up with regulatory issues can sometimes feel like trying to hit a moving target, especially in emerging scientific areas. Sometimes, as with gene editing replacing traditional GMOs, the science moves so fast that regulatory issues don’t apply anymore. New regulations need to be drafted and may vary from country to country or even regionally.

Like any journey, a scientific endeavor needs to consider what the endpoint looks like and what is required to enter the promised land. When developing a regulated product, it is critical to be aware of the current regulations for each target jurisdiction…as well as the political and social issues that influence those regulations.

Being aware of any federal and/or local regulatory issues is critical and should be integrated into the product development scheme at every possible stage. Any selection criteria for product development must include the ability to cross regulatory bars. Keep in mind that difficult, lengthy or costly regulatory requirements can reduce the rate of product adoption and easily kill an exit plan.

    • Is a regulatory strategy in place?
    • Is the company keeping up with potential changes in regulations in all the target countries?
    • Is there one person responsible for communicating with all the relevant agencies?
    • Are regulatory bars integrated into the R&D process?
    • If there are no established regulatory statutes, is the company actively involved in the trade associations that are likely to influence potential regulations?
    • Is the company aware of public opinion for your product or target market?
    • What are the possible regulations that might arise that affect your product?
Looking Forward

Ag Biotech, while not a new industry, is certainly on the upswing with regard to the number of startups, number of investments and dollar amounts. In 2018, startups in the category raised $1.5 billion in a 59% year-over-year increase. Clearly, scientific complexity is not scaring people away.

The sector does require a good deal of technical expertise for success and attention to detail with regard to technology-market dynamics. The growing body of knowledge as well at the trends toward making biology more predictable through the emerging discipline of synthetic biology will continue to fuel excitement.

Obviously, success in Ag Biotech will require more than diligence in science, intellectual property, and regulatory affairs. Other factors come into play just like other investments: a great team, understanding the market, etc.

The savvy investor will look at the scary part of biotech – variation — as being an opportunity rather than a problem. Variation can be addressed through good practices and careful experimentation. The exciting part of variation is that, if captured and exploited, it can lead to new derivative products and, sometimes, entirely novel fields of opportunity.


Bob Kodrzycki, PhD, is the Principal at Encompass Biotech, a consultancy serving the AgBiotech and Renewables sectors. Encompass Biotech works with investors to provide due diligence and with growing biotech companies to become investment-ready.

Share on email
Share on twitter
Share on facebook
Share on linkedin
Share on reddit
Share on whatsapp
Share on skype

Sign up for AgFunderNews

Get the latest news and views on global food and agriculture technology startups and the investors behind them. Delivered to your inbox weekly.