Last week I spoke at the 2012 AgReturns conference in San Francisco. This was the latest installment in the conference series that used to be titled Ag 2.0. I guess the organizers changed the title to inspire attendees to drive for exits and financial returns in this nascent sector for venture investment!
The conference featured presentations from entrepreneurs and investors from the food and Ag sectors. Topics included precision agriculture, sustainable Ag inputs, Ag-biotech, and food and Ag consumer products and services.
My talk was on the correlations between venture investing in Cleantech and AgTech. A couple of years ago I used to sit on panels with titles such as “Is AgTech the new Cleantech?” Given the sparsity of positive investment returns to date in the Cleantech sector, I’m not sure that being the “next Cleantech” is necessarily the right direction for AgTech. An alternative question might be, “Is Food/Ag the next exciting vertical for Tech?“. However, there are definitely some valuable lessons to be learned from the last 5 years of Cleantech investment which can be applied to the more nascent AgTech sector.
Look for scalable, capital efficient investment opportunities
If the industry can extract one key lesson from the last 5 years of Cleantech investing, it’s that the best opportunity to produce venture-level returns comes from companies with scalable, capital efficient business models. Just as Cleantech has its multi-$100MM solar manufacturing, wind and biofuels sectors, there are plenty of opportunities to sink 9 figures into investments in the AgTech sector. Since speaking at the AgReturns conference I’ve received business plans ranging from multi-$100MM fertilizer production plants to designs for new combine harvesters. There are, however, a number of emerging AgTech businesses that leverage low cost sensors, ubiquitous cloud-based data, and supply chain logistics to produce scalable businesses that look a lot like the promising resource efficiency and demand reduction companies emerging in the Cleantech sector.
Look for focused go to market strategies
One of the challenges with bringing new solutions to market in the Ag sector is a fragmented customer base that is extremely conservative towards adopting new technology. Selling new irrigation/fertigation or SaaS software solutions directly to farmers is slow, inefficient and not cost effective. Several speakers at the Ag Returns conference gave examples of how they’ve succeeded in using co-ops, contract grower groups, and established channel partners to solve this challenge.
It’s all about the team
I’ve always been a “back an A Team with a B product, rather than a B team with an A product” investor. One of the challenges for the AgTech sector has been a lack of experienced entrepreneurs. This is beginning to change as entrepreneurs from the Cleantech, Biotech and IT sectors identify opportunities in some of the leading AgTech startups. This is a positive development for the sector, which should accelerate the growth of category creating companies.
We need some exits to validate the sector
The Cleantech sector languished for several years until some of its marquee names (Tesla, Solazyme, First Solar) demonstrated the returns that could be achieved. At the AgReturns conference, John Ryals from Metabolon presented an excellent summary of the returns in the AgTech sector to date. Unfortunately, the list of exciting exits is still relatively short. Everyone talks about the 13X return from Athenix and then struggles for a second example. As I’ve discussed in a previous posting, one promising opportunity for value creation is likely to be where the Cleantech and AgTech sectors converge in the production of biomass feedstocks for bio-conversion to fuels, chemicals and materials. Just before the AgReturns conference, Ceres had a public offering of $65MM at a market cap of $350MM. The other leading biomass seed and production companies, Chromatin (a Physic Ventures portfolio company) and Mendel, are also showing great progress.
Areas to watch
At Physic Ventures, we believe there are a number of attractive investment sectors emerging in AgTech and FoodTech. In the AgTech world, we believe that consumer demand for safety and transparency, coupled with increasing regulatory pressure creates an attractive opportunity. There will be large markets for companies developing solutions that make the food supply chain safer, reduce wastage and provide transparency to consumers.
In the FoodTech sector, Physic Ventures recently led the Series B financing of Yummly, a leading website providing information on how to select, procure, and prepare healthy, nutritious and delicious food at home. I will cover the context for this investment and the range of new opportunities it highlights in a future posting. Needless to say, this is a great example of how Food and Ag are emerging as a promising vertical for applying the modern toolkit of consumer facing tech solutions.