December 2, 2024

By Gerelyn Terzo, Global AgInvesting Media

Regenerative agriculture has become a topic du jour of late, capturing headlines and creating buzz around industry circles — understandably so. With the global population poised to increase by 2 billion people in the coming decades, food security is of the utmost importance. When it comes to food production at a massive scale, regenerative ag — the origin of which is soil health — holds the key to striking the right balance between quality and quantity while keeping the environment intact.

Meanwhile, the sector is ballooning at a double-digit percentage clip. As of 2023, global regenerative ag was estimated to be worth $10 billion, per industry research, and is projected to grow at a CAGR of 14.0 percent in the coming years to be worth $32 billion by 2032. North America comprises over one-third of that growth, which is being driven by consumer awareness. Despite the hype, the industry shift to regenerative agriculture practices won’t happen overnight, and in reality the transition to more sustainable ag practices is going to take time.

Trailhead Capital’s Tempered Approach

One firm that is taking a sober approach to regenerative ag is Trailhead Capital, a Denver, Colorado-based VC investor. Trailhead Capital said global food systems and nature are at a crossroads, pointing to threats such as deforestation, greenhouse gas emissions and species at risk of extinction, among other issues, owing largely to conventional ag and food practices.

In response, Trailhead backs entrepreneurs who are building the regenerative future of food and ag, specializing in regenerative ag practices aimed at securing the food supply chain. The firm has adopted a portfolio model focused on technology solutions for building healthier soil, creating better water retention and increasing biodiversity, among other subsectors or areas of regen ag. After raising $50 million for its maiden regenerative ag fund, which was oversubscribed, Trailhead is coming back for more as it prepares for the launch of Fund 2.

Trailhead Capital Managing Partner Pete Oberle spent some time with GAI News, sharing further details on the firm’s thoughtful approach to regenerative ag amid the upcoming launch of Fund 2, for which the theme of investing in early-stage regenerative food and ag companies carries over from Fund 1.

1.) GAI News: As one of only a select number of investment firms dedicated to the regenerative agriculture transition, how does Trailhead Capital’s approach differ from the pack?

Oberle: “We invest in Seed and Series A-stage regenerative food and agtech companies that we see ultimately helping to improve soil health while expanding access to and affordability of regenerative food products. This excludes real assets such as land and infrastructure, and later stage investments such as private equity. Within the value chain, we consider companies delivering solutions on farm up through the supply chain, but stop at consumer-packaged goods (CPG) companies.

“So, within early stage food and ag VC, we differentiate with a broader coverage of the value chain between 1.) upstream opportunities operating in universes weighted toward incumbent OEMs and input companies, and 2.) downstream opportunities that expand the playing field to customers and acquirers including big tech companies, financial institutions and asset managers, consultants, etc. Our regenerative filter solving for soil health — which ultimately means more income to the famer and better quality of food — adds another level of differentiation that capitalizes on our expertise and network, amplifies impact and creates a portfolio ecosystem that sees the companies we’ve invested in regularly collaborating.”

2.) GAI News: Can you tell us more about the firm’s investment thesis and portfolio companies?

Oberle: “Our thesis rests on our core belief that regenerative agriculture represents the greatest potential to simultaneously improve human and planetary health, while generating outsized economic, environmental and societal returns. We believe we’re at a critical inflection point where increasing challenges around climate change, biodiversity loss, water quality/shortages, chronic disease and rural livelihoods are driving stakeholder demands for higher quality products that available technology can now affordably help deliver at an accelerated pace. Just one example of this is that companies adopting regen ag practices have grown 130 percent since 2019 to 550, including 79 public agri-food companies representing $3 trillion in revenue.

“Within our portfolio this has meant participating in sectors we see as critical to accelerating the regenerative agriculture transition. Upstream we break that down to regen inputs, automation, animal health and land use. Downstream we solve for the subsectors of finance, transparency/traceability, food waste reduction and digital infrastructure.

“So far, the portfolio includes 28 companies (we see it going to 30), with two exits to-date including the sale to Merck of Vence, a virtual fencing company that better enables rotational grazing and livestock management through the convenience of a computer or smartphone.”

3.) GAI News: What can you tell us about the portfolio selection process?

Oberle: “Beyond the initial filter of ensuring it’s a regenerative solution at the right stage, we are generally looking for opportunities in North America where there’s founder-product-fit, and sufficient traction at the right price with the potential to generate a minimum 10x on our investment and potentially return the entire fund on its own.

“We’re looking for a clear value proposition, a compelling ROI for customers, and attractive unit economics, and while we believe size of market and competitive moat are important, we also consider where a company may be creating a new market or can clearly execute better than the competition given at this stage most advantages are fleeting. We also want to see a clear angle for us to add value to the company, as we have Board roles in roughly two-thirds of our portfolio companies and want to be as helpful as possible.”

4.) GAI News: Can you share the rationale behind launching a second fund?

Oberle: “We believe our thesis has been validated while the tailwinds in our favor have been amplified and accelerated since we launched Fund 1. We’ve made progress in our mission, but there’s clearly a long ways to go in improving the food and ag system, as the recent U.S. presidential election highlighted. We continue to see incredible companies led by amazing people, and its always a good time to start companies addressing the world’s greatest challenges given their inherently long lifecycles that are fairly agnostic to macro market cycles.

“That said, its an even better environment for us to be investing now than it was four years ago, as company valuations have rationalized, capital discipline has returned, competition has thinned and talent is more widely available. This is further supported by our existing investors who have indicated strong interest in a second fund and who we believe will make up most if not all of it.

“It will be rinse and repeat in terms of fund strategy, investing in Seed and Series A stage food/ag companies that help scale regenerative agriculture through tech enabled solutions and innovation, but targeting a $75 million fund vs. our $50 million Fund 1 to write bigger checks and secure larger ownership stakes.”

5.) GAI News: What is the regional focus of Fund II?

Oberle: “The regional focus will be the U.S. and Canada, although we’re open to companies delivering globally applicable technologies based in other countries and coming from sources we trust. That being said, many of our investments will have business models that translate cross-border, just like numerous current portfolio companies that are operating in Asia and throughout South America.”

6.) GAI News: What can you tell us about the risks and returns of investing in regenerative ag?

Oberle: “We’re targeting market returns for venture capital, which means a 3.0x net return to or LPs over the life of the fund. We see the risk as being in line with traditional early stage VC funds, where ultimately 10 to 20 percent of portfolio companies drive a majority of returns.

“So, that means there will be numerous companies that may not return more than a standalone 1.0x, but we expect to be able to allocate more capital to the winners with the potential to benefit from power law returns and see them return the fund on their own. This is playing out within the current portfolio and we are currently tracking in the top quartile for our vintage of fund, which we shouldn’t emphasize too much given we’re only three years into the fund, but it does indicate we’re headed in the right direction.”

GAI News would like to thank Pete for his contribution and also congratulate the Trailhead Capital team on the launch of Fund 2!

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