June 21, 2015

Michael Raymont Managing Director VAC Capital

AgTech’s greatest promise is that it can maximize the quantity and quality of global food production while conserving resources. While much of the recent excitement surrounding AgTech has come from technology innovators and investors, another important voice has not always been part of the conversation: input from farmers (throughout this article, I use the word “farmer” to include any person or corporate entity using land and/or water to produce food and/or biomass).

AgTech has “world changing” potential: increased yields for both crops and animals, reduced spoilage, decreased water usage, etc. Researchers, scientists, entrepreneurs and leading edge investors have been working on solutions to deliver on this potential. Companies work on developing, commercializing and delivering these solutions, and investors see the potential and fund their efforts. But what about the end user, in this case, the farmer? A farmer needs AgTech to help him reduce risks and increase profits.

As with any venture capital opportunity, it is never enough to have a great product or technology. Innovative companies need to prove that they can deliver needed products and technologies to a market that benefits from their use. In AgTech, that customer is the farmer. Today’s farmers face volatile commodity prices, unpredictable weather, changing market demands and slim profit margins: they need AgTech products that will result in reduced risks and better returns on their fixed investment in their land and equipment, and their variable expenses such as seed, fertilizer, chemicals, fuel, labour etc.

Farmers tend to be conservative and skeptical by nature. As Willard Vandiver once famously said “I come from a state that raises corn and cotton, cockleburs and Democrats, and frothy eloquence neither convinces nor satisfies me. I’m from Missouri, and you have got to show me!” Farmers also have vast experience and knowledge of their own farms, and frequently they have generations of practical and productive operating experience. Best practices learned by sharing many years of farming practices between farm communities have led to many optimized solutions, and purveyors of new agricultural technologies will need to ensure that their product/technology can and will deliver better results for farmers than the carefully crafted practices they use today. For a farmer to justify the use of new technologies, they need to have “proof” that such technologies will create net benefits to them, which might take many forms such as decreased risks, increased yields, reduced spoilage, higher value products, improved soil/land quality and so on – whatever a specific technology promises in terms of its benefits.

But farmers need to be aware of advances in specialized areas critical to their type of farming, soil, cropping practices, species raised, products produced, etc. Why? — because farming is now a globally competitive business. For example, at the basic commodities end of the spectrum, wheat is grown in such distant locations as China, Australia and Canada, as well as the US, and for other high-value farm crops such as almonds, the US competes with Spain, Italy and surprisingly, Iran as one of the top four global producers. For avocados the US comes in fourth place behind Mexico, Indonesia and the Dominican Republic, so clearly Agriculture is a highly competitive global business and the high quality, low cost producer is going to win. So farmers will have to embrace AgTech at an accelerating pace. In addition to global competition, they are facing volatile commodity prices, water shortages, increasing input costs, environmental pressures, extreme weather events, and increasing farmland values which pressure their need for return on equity (their farmland, especially for the non-family farm). And finally, the old adage that farmers “live poor and die rich” doesn’t endear many of the younger generation to embrace farming, but smart farmers will readily adopt those Ag Technologies which demonstrably reward them with lower risks, higher profits and better return on equity.

I suggest there are five key areas where AgTech has the most potential to deliver:

• Seeds and traits
• Fertilizers and Micronutrients with environmental benefits
• Chemicals – Pesticides, Fungicides, etc with reduced environmental impact
• Digital/Precision Agriculture, and
• Animal health and yield

AgTech will deliver. There are many reasons for optimism in the growth of the industry. The economics of investing in, and developing great VC returns from AgTech combined with the compelling pressures for the farm community to rapidly adopt cost effective AgTech solutions have transformed the industry, especially in the last decade.

Private equity/VC investment in AgTech has grown 20 times in the last 10 years*. Huge amounts of public funding are dedicated to Agricultural R&D providing a great “library” of AgTech opportunities. Development and commercialization costs are much lower and market-ready product cycles have compressed dramatically. AgTech tool kits are now more advanced and costs have come down faster than Moore’s Law, which combined with lower regulatory hurdles, has accelerated time-to-market. Cost of goods sold are decreasing, resulting in better margins and more valuable AgTech companies. The acceleration of the growth of AgTech companies means that investors can create more valuable exits in less time, at lower costs. And finally, exit opportunities through M&A and perhaps even IPO’s are providing increasingly attractive IRR’s for investors.

The world can be a big winner from AgTech, and the world needs AgTech to deliver on the demands of a growing, hungry and changing world. On a more microeconomic scale, there are huge opportunities in AgTech for smart investors, entrepreneurs, and farmers. But more than ever, it’s important to ensure that all participants in the Agtech community and beyond are listening/talking, and creating a stronger AgTech ecosystem. The Agriculture and food industry is the biggest industry in the world, and the potential for financial, social, and economic benefits is immense. Investors and entrepreneurs in AgTech should never forget that basic tenet of business success – listen to the customer and their needs, and always ask whether your technology addresses their challenges.

*Ag Funder 2014 Report

Michael Raymont 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.