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What Will 2017 Bring for Indoor Ag?

January 4, 2017

Editor’s Note: Nicola Kerslake is the founder of Newbean Capital, a registered investment adviser that manages early stage venture capital mandates and that has a particular interest in indoor agriculture. It owns the Indoor Ag-Con events business as well as an indoor agriculture alternate financing business Contain that is currently in pilot stage. The next Indoor Ag-Con event will be held in Singapore on January 24-25, 2017.

Here Kerslake offers some predictions for the indoor agriculture industry in 2017.

For all of the year’s many horrors, 2016 was a banner year for indoor agriculture, the practice of growing crops in hydroponic, aquaponic and aeroponic systems in greenhouses, warehouses, and containers. The fledgling industry saw record investment fueling a wave of new indoor farm builds, innovative business models, and technology introductions.

Highlights included the launch of Square Roots, a Kimbal Musk-backed social-benefit endeavor to incubate new urban farmers utilizing Freight Farms’ container farms, and the inauguration of Aerofarms’s long-anticipated Camden, NJ vertical farm. The latter is notable because it uses aeroponics — misting plant roots with a nutrient-rich solution, rather than submerging them in water – and this is typically considered a trickier technology to implement commercially than the more common hydroponics. The upside is, in theory at least, more efficient growing. Both Freight Farms and AeroFarms raised equity from private investors during 2016, contributing to the $50m+ raised from private investors in the US last year.

We expect to see accelerating activity in 2017 thanks to better economics and more farm and technology launches. Here are six ‘big themes’ for the year ahead:

1. The First of the Mega Farms

Indoor farms run the gamut from a basic home-built set up using equipment bought at Home Depot to custom engineered 100,000 ft2 facilities. With a few notable exceptions – such as those growing for the pharmaceutical industry – the US market has mostly used vertical farms to date; mid-sized farms that stack growing racks to maximize space in a warehouse or repurposed building. 

Their cooler cousin is the ‘plant factory,’ a term coined in Japan to describe multi-layer growing in clean room conditions using increasingly sophisticated monitoring and control systems to optimize growing conditions. These are large-scale operations, “farming as manufacturing.” The Japanese company, 808FACTORY, has its own data server running at its plant factory, for example. Plant factories are commonplace in the more advanced Asia market – Japan has more than 200, China more than 80 – and we expect them to become a feature of the US one in 2017.  For instance, Japanese plant factory company Spread has publicly discussed its search for US partners, while Middle Eastern greenhouse company Pegasus Agriculture leased a large parcel of land in Florida in 2016, though the latter will more likely be used for next-gen greenhouses than for plant factories.

Funded by low-key rounds or by overseas parent companies, new mega-farmers are typically shyer than the likes of BrightFarms or AeroFarms.  A few will eventually discuss their work in public, but the majority will stay on the downlow, focused on the complex business of adapting new crops to indoor systems or applying machine learning techniques to improve yields.

2. Indoor Ag goes Mainstream

When we first got involved with the indoor agriculture industry nearly six years’ ago, we spent a good deal of our time explaining the sector to other investors. The vast majority saw it as too small, too niche and too risky to be of interest. A combination of time, technology advances, and a halving of the price of the LED lights — they make up around half of a farm’s capex — has made a big difference. The attention paid to legal cannabis has also helped; its newfound respectability has a halo effect for other crops grown in indoor farms. Now, we receive a couple of inbound calls a week from new investors looking to get into the sector, one of the reasons that we have authored five white papers on various aspects of the industry.

In turn, this influences the kinds of companies that become involved in the sector. Recently, big box retailer Target announced its plans to test in-store vertical farms in the spring, and telecoms major Ericsson demoed an aquaponics project utilizing its IOT-based controls. We expect to see more “big names” announcing their involvement in indoor agriculture this year, whether that’s large produce buyers, technology providers, or long-established farming majors diversifying their growing techniques.

3. IoT Everything

Given the controlled environment in which they operate, indoor farms are well suited to the application of ‘big data’ techniques and a range of startups are joining established industry players in introducing these. Agriculture control majors – Argus Controls, Hortimax, Priva – benefit from long histories of working with customer data, and others are taking innovative approaches to pilot new products. For example, New Zealand-based Autogrow raised a sub-$5m round in 2016 to create an open platform for its controls products and TechCrunch Disrupt winner Agrilyst launched a greenhouse management platform. Up next, we expect to see machine learning-based approaches launching commercially.

4. In-Home Growing

Ubiquitous furniture retailer IKEA has been rolling out an in-home hydroponic range recently and is about to see competition from a wave of in-home growing startups. Some examples of the next generation include SkyDeck graduates Verdical and app-controlled Grobo. We expect that those that gain market traction will be looking for seed and A rounds in 2017, following in the footsteps of an earlier wave of strategic and VC-backed in home systems, such as Scott’s Miracle Grow’s AeroGardens and Upfront Ventures’ Grove Labs.

5. The Crickets are Coming

As alternative proteins – plant-based meat, insects – become commercially available, we anticipate that indoor agriculture will be a part of figuring out the supply chain for these approaches. For instance, cricket farmers, including equipment provider Bitwater Farms, super-angel backed Tiny Farms and Thailand’s Eco Insect Farming, are already adopting and adapting indoor farming techniques.

6. But It Won’t All Be Roses…

A high business failure rate is one of the characteristics of startups, and indoor agriculture is far from immune. This is especially true for the mid-sized vertical farms that make up the bulk of the US market, some of which have yet to hit a scale or figure out a business model that allows for a decent operating profit. If the trajectory of analogous industries – such as solar – is anything to go by, some will merge, others will pivot to new business models, and some will fail.  While wretched for the hard-working farmers involved, we view these failures as a necessary part of the industry’s rapid growth. Private and VC investor-backed indoor farmer PodPonics, for instance, shuttered its Atlanta, GA, farm this year to focus on its Middle East technology operations, and we expect to see more of the same as indoor agriculture matures.

By the end of 2017, we expect to see a larger, and stronger, US indoor agriculture industry, able to benefit from a wider variety of technologies and anchored by the beginnings of its own plant factory revolution.

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