June 15, 2015

Jeffrey Steen Managing Partner Kachina LLC

High risk capital, in the form of angel, seed or venture equity, is critical to the success of high technology firms, regardless of the industries those tech firms target. However, different industries’ unique characteristics present barriers to successful high risk investing. There are means to mitigate those challenges, but firms must be cognizant of the issues or risk disappointing returns.

Agriculture faces some significant problems: feeding more people with less land, exotic plant diseases with no cure, high labor costs, or replacing RoundupTM or neonicitinoids with non-chemical solutions for pest control. These are big markets, with big dollars attached, and those types of problems are ripe for the sort of non-linear disruption venture backed firms excel at.

But the ag business poses some specific problems for investors, particularly those in closed-end ten-year funds. Luckily for these investors, they can simply look for insights to one of the major reasons behind their past success: their ability to corral top minds from the target industry.

Most ag-specific issues can be lumped under the notion of “Doing Business at the Speed of Mother Nature.” Underlying all stages of the agriculture industry is the crop cycle. Row crop farmers in the Midwest plant in spring, harvest in late summer and fall, and hunker down for the snow. Permanent crop farmers like nuts or citrus get one crop a year. Sure there are a few exceptions, such as vegetables in the Salinas Valley, but the vast majority of the world’s farms are on an annual schedule.

“So what,” says the venture investor. “That’s the reason I funded software. It has a rapid development cycle and depends on developers, not on growing patterns.” However that’s not entirely true, and savvy investors should understand why.

From Moore’s Law to agile software development, the business of high-tech investing is one that is used to a fast pace. It is accustomed to seeing products iterate multiple times in 18 months. But the ag market only gives feedback on an annual basis. “We’ll only know once a year if your product solves our problems,” goes the typical farmer’s thinking. Additionally, the farmer’s cash flow is earned essentially all at once, and can be highly variable from year to year. Not many industries have this dynamic; even retail, which does most of its business in Q4, generates revenue in the other three quarters. These issues give product developers a limited window to get feedback that matters, drastically slowing development and sales cycles.

Ten-year, closed-end funds need to get firms funded, grown and sold in 3-6 years in order to generate attractive returns, so how does a portfolio firm in the ag tech space balance the realities of their market with the expectations of venture investors? It could be this is a clarion call for innovation in the actual structure of high risk investing, but that’s a topic for another time.

There are a few things a fund can do to mitigate these issues, and it simply requires investors to copy the model they already use for success in their other areas of focus. Successful high risk investors quite often come from the industries in which they are investing. Sand Hill Road is littered with former customers, product managers, engineers, bankers and entrepreneurs from the segments in which they now invest. That in-depth knowledge is absolutely critical to success. It makes deal sourcing, diligence, staffing, growth and exit all more seamless due to the vast networks the investors bring with them to the job of growing successful companies.

While the problems agriculture faces are unique, they share familiar characteristics to opportunities VC’s see every day. One obvious example is labor costs for harvesting and packing. Agriculture still largely depends on people for low value tasks like those. It is the single biggest line item in many growers’ costs. VC’s are certainly experienced at using technology to replace labor.

One not so obvious area is the vast amount of research and development bottled up in land grant universities because few business people understand the implications of that research. Unlike research in the electrical engineering and computer science department of Stanford or Berkeley, there is no network of entrepreneurs and investors reaching into those research areas and commercializing the promising innovations. The same is true in many R&D departments of major agri-business suppliers like Monsanto and John Deere.

Lastly, only people from that industry truly understand the farmer’s key influencers: the almost shamanistic relationship between a grower and a pest control advisor or crop advisor; how important a packer/shipper is to virtually everything a grower does in the field; how the marketer influences growing decisions; how coffee shop gossip is given equal weight as the data from the UC Extension specialists. Considering these influences in product development, sales and distribution can cut years off market penetration efforts.

Many farmers are already using technologies, in many cases frustratingly antiquated ones. By learning first hand who those existing suppliers are, entrepreneurs and their funders can find opportunities for investment and disruption. Building relationships with farmer buyers and users, insights can be gained into what their real problems are, and real barriers to product uptake that some tech firms wanting to sell into the ag markets may not have considered. There are many farmers out there who are PhDs, who used to be engineers, investors, product managers, or who just understand what tech firms are trying to do and are willing to help.

Lastly, and most importantly, include ag folk on the investing team. After all, it is that deep expertise that made many VCs successful as investors. That perspective is as important to the development of a company and its product as the CEO or VP of engineering. If Silicon Valley is serious about ag tech, some GP’s need to have dirt on their boots.

Jeffrey Steen is a member of the speaking faculty at GAI AgTech Week in San Francisco, June 22-24, 2015.

The opinions expressed in this editorial are the author’s own and do not reflect the views of GAI News.