February 6, 2017

Venture capital funding in the agtech market slowed in 2016, falling by 30 percent to $3.2 billion versus 2015 levels, and interrupting three consecutive years of rising investments, according to AgFunder, a San Francisco-based online investment platform for agtech.

The pullback, which hit bioenergy, drone technology, and food delivery startups the hardest, unfolded amid the makings of a bubble comprised of frothy valuations for startups coupled with heightened investor competition for deals. Despite the drop in capital, funding remains above 2014 levels of $2.4 billion, and sources suggest the next wave of M&A could put agtech back on top.

The makings of a bubble in agtech formed as venture capitalists, comprised of those focused on agtech and broader tech investments, flooded the market segment, driving up competition for deals and sending valuations to levels that were not justified based on “revenue and traction,” according to the AgFunder report.

Rob Leclerc, AgFunder founder, told GAI News that of the 670 investors his firm tracks, only a dozen of them are agtech focused. “I think you saw some value inflation from 2015, and that set a lot of expectations at least on paper for entrepreneurs and investors. Talking to some agtech VCs, they were concerned last year that some valuations were very frothy. Investors were pouncing on opportunities and valuations were not properly reflecting the value and potential of the company at that point in time,” he said.

Leclerc added that there is no need to panic at this time.

“The broader technology market was driving most of the volatility in the market, probably much more so than people having a specific thesis on agtech, and saying, ‘let’s get out of here.’ Investors were pulling back on everything and LPs were telling them, “slow down, calm down a bit.’ So there was a little bit of a soft landing there,” said Leclerc.

Indeed global VC investments last year fell 10 percent while global VC deal activity dropped 24 percent. And while the decline in VC funding for broader technology surfaced in Q4 2015, the slowdown in agtech wasn’t evident until the first quarter of 2016. Nonetheless there are green shoots of greater deal activity in the global VC market for 2017, which could be a harbinger for agtech.

Despite the drop in investment size, deal activity in the agtech segment picked up last year, evidenced by a 10 percent jump in the number of deals versus year-ago levels. More than half of deal activity occurred at the seed-stage level, reflecting a 16 percent increase over 2015 levels. Series A financing, however, took a turn for the worse, falling 31 percent and 43 percent in deal activity and investment size, respectively. Series B rounds were a success for agtech startups, evidenced by $791 million raised and a near doubling in the number of deals at this stage versus 2015 levels.

Global Deals Surpass U.S. Investments

Meanwhile, global deals last year outpaced investments into U.S.-based agtech startups, evidenced by domestic startups representing less than half (48 percent) of deal activity. This compares to 58 percent and 90 percent in 2015 and 2014, respectively. In Canada, there was an uptick in deal activity, where 48 startups with a focus on farm management software and the Internet-of-things (IoT) space raised capital.  In the UK, the number of deals rose from 19 to 28.

“There are a lot of countries looking to be the next Silicon Valley. They saw global growth in agtech and a lot of countries said that ag is our strength; we should be a leader in this industry. So investors and strategic interests came together to bring more capital to the space and to focus on it more seriously,” said Leclerc.

Something that concerns Leclerc is a lack of exits — specifically M&A — that surfaced in 2016. He says for the most part the industry hasn’t seen anything that remotely resembles the pace of acquisitions in the 2013-2014 era.

“To keep the engine running, investors ultimately need to see a return on their investments. That’s the challenge. Venture capitalists can model the potential returns on paper, but ultimately it comes down to exits,” said Leclerc, pointing to M&A as the vehicle for those returns.

While there has been deal activity on the top-tier level among the likes of Monsanto and Bayer as well as ChemChina and Syngenta, for instance, few of the second-tier of strategics have followed suit.

“There’s a lot of dead wood in organizations slowing up progress. Some innovators are saying, ‘let’s get involved.’ Detractors are saying, ‘everything is fine. [Agtech] could be a fad. Let’s wait and see how it plays out,'” Leclerc said, adding that while a second wave of deal activity could be delayed, it presents a real opportunity for the second-tier players.

“There’s an opportunity right now to identify and acquire technologies ahead of the larger companies and take those companies off the market, develop new business and areas of expertise to give them a strong competitive advantage over the next decade or two. I’m surprised they have not been more aggressive in this space to be honest,” he said, declining to name any of the second-tier players who are candidates for this consolidation.

Meanwhile one of the categories that is likely to attract more capital in 2017 is biotechnology, which commanded more than one-fifth of funding in the agtech segment last year at $718 million with much of that capital being directed toward crop technologies.

“We saw investment into gene editing, microbiome and biologics. Those are areas that don’t have the stigma of GM produce and potentially have a faster path to market because of the lower regulatory hurdles. So there is a lot of interest there,” said Leclerc. Meanwhile this category could experience some increased competition for deals stemming from the life sciences sector as investors in the space face frothy valuations of their own, leading them to hunt for value elsewhere.

-Gerelyn Terzo

Gerelyn is a regular contributor to GAI News. She has been writing about institutional investing and asset management for the majority of her career, and has developed a focus on agriculture given the global scale of the industry’s relevance and importance.