Digging into the Future of Funding in Agtech
Speakers at the recent AgTech Investor Symposium hosted by ACG Raleigh Durham explored the investment climate for agriculture technology as venture capital financing slows
Once viewed as a hot new space for disruption, the agriculture technology sector is now weeding out the venture capital investors who entered it with hopes of quick wins.
Panelists at ACG Raleigh Durham’s second-annual AgTech Investor Symposium on Oct. 12 discussed the adjustments in expectations for both investors and businesses raising capital in a sector that they argue still holds plenty of promise—just not in the way early VC entrants envisioned.
One theme during the symposium was the slow process of selling a new product to agricultural customers, and how that’s influencing investing decisions.
“The agtech sales cycle is longer than most investors or entrepreneurs give it credit for,” says Scott Porter, a managing director at investment bank Cascadia Capital and the leader of the firm’s agribusiness practice. Porter presented an update on the agtech market during the symposium and spoke during the Investment Opportunities panel, sponsored by law firm Husch Blackwell.
Before fully committing to using a new product on their fields, for example, farmers will typically test it on a small plot. They’ll assess the product’s effectiveness after using it for a season, and if it worked, they might expand its use for the next season. On the flip side, farmers are loyal customers once they find a product they like and trust. “It’s difficult for other companies coming in with new products to displace you,” Porter says.
Still, the agtech sector’s prolonged sales cycle is at odds with the VC investment model, which seeks to scale businesses quickly. The reality has run counter to the expectations of investors who entered the sector over the last decade. “Venture capital firms have come in, placed big bets and big investments in the agtech sector,” Porter says. “Ultimately, the forecast that they underwrote to and invested in were not met.”
Tim Hassler, a managing director at Lewis & Clark AgriFood, a late-stage, growth equity-focused fund, points to Monsanto’s acquisition of Climate Corp. for over $900 million in 2013 as a catalyst for investment and M&A in agtech. Since then, however, exit activity has been slow, and no exits have approached the levels of Climate Corp.
You need to be a patient investor in the space. Exits aren’t going to come like traditional venture capital.
Lewis & Clark AgriFood
Hassler, who spoke on the Investment Opportunities panel with Porter, adds that agtech requires a longer time horizon. “You need to be a patient investor in the space. Exits aren’t going to come like traditional venture capital,” he says. Unlike the VC model, with a three- to five-year exit time horizon, “six to 10 years is probably more realistic.”
That’s raised questions about whether venture funding is the best source of capital for agtech businesses. Porter notes that experienced investors in the sector have grown cautious, which has led to a bifurcation of capital. Some investors have shifted toward earlier-stage companies where they can invest at lower valuations; others have focused on later-stage businesses with clear traction in the market. That’s left a void in the middle, which Porter characterizes as the Series A, B, C and D rounds, and made it challenging for businesses at those stages to raise funds.
Other investors are leaving the space altogether. “Up until recently, (there were) a fair number of what I would call ‘tourist investors’ in the agtech space, that don’t have a focus on it but kind of dipped their toe in the water at very high valuations,” Hassler says. “And those generally have not worked out very well.” Groups that have remained active tend to be experienced agtech investors who continue to see opportunity, he adds.
Agtech companies looking to raise capital are finding that prices aren’t what they used to be.
“I think generally that valuations are coming back to Earth,” says David Swintosky, a managing director at investment bank Dunning Capital and a speaker on the Deals Done panel, sponsored by law firm Smith Anderson.
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Not every company will be able to access the funds they need to grow—or even to survive. “It will be that type of market where winners win big and the losers lose,” Porter says. “The top 25% won’t have issues raising capital in this market, although it may be harder than it otherwise would be. But the bottom 50% will really struggle, and we’ll see many sales, many liquidations, many bankruptcies.”
Pre-revenue companies will have the hardest time raising capital, Swintosky predicts. “There are going to be companies that are running out of money, right? And they’re just going to be forced into a transaction, or to liquidate or shut down,” he says.
Filling the Void
Venture capital isn’t leaving agtech altogether. In fact, it “is still very critical to the sector,” Porter notes, particularly in areas like bioscience, where VC interest remains high. “I just don’t think every situation is primed for venture capital.”
Other funding sources include corporate venture capital, which Porter says continues to be active in agtech. Pension funds, endowments and other institutional investors, along with sovereign wealth funds and ESG-focused funds, can also be good fits for the sector, depending on the time horizon of their funds. Family offices, too, have entered the market, but they tend to prefer to partner with another investor and so don’t resolve the challenge of finding a leader for a funding round.
For its part, private equity has shown an appetite for agtech investments. Hassler notes that the businesses that appeal to private equity tend to be well-established with meaningful revenue, and with a technology solution they’ve developed along the way—as opposed to being all about technology, as with a typical VC-backed business. Yet these sorts of companies are “few and far between,” he says.
Porter points to “midmarket agtech” businesses as especially promising for private equity. He characterizes them as family-owned companies that have been around for upwards of 15 or 20 years and that have developed a niche within agriculture with a technology component—hardware or software for indoor farming, for example.
These businesses don’t have the rapid growth rates that VC investors seek, but they have strong, steady growth. “Those midmarket types of agtech companies are a great fit for private equity and are not often thought of as part of the agtech ecosystem, and I think they should be,” Porter says.
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These companies tend to keep a low profile, however. “They may be vocal and out with the farmers, but they are very quiet in the midst of the deal community, and many investors don’t know of them,” Porter says.
He points to a company called Specialty Sales that Cascadia advised during its sale to Benford Capital Partners in 2018. Specialty Sales had developed a patented, proprietary hoof bath system for cows that helps prevent disease. When Cascadia took the business to market, Porter says the response from private equity firms was enthusiastic.
“They love the opportunity within agtech. But those types of companies are lesser known and often not thought of as traditional agtech companies that have grown up in the venture capital world,” Porter says. “Those are the types of companies that I think are right for private equity.”
A Bright Future
The AgTech Investor Symposium drew more than 100 attendees, 40% of whom traveled from out of state. Leaders from 15 agtech operating businesses registered for the conference. In addition to the panel sessions, the event included one-on-one DealSource meetings among senior lenders, mezzanine capital providers, private equity groups, family offices, venture capital providers, investment bankers and C-suite executives. Next year’s event will be held in St. Louis.
Participants lauded the symposium as a valuable source of information about a sector whose future is bright, despite declining valuations and a challenging fundraising climate.
Hassler points to the myriad factors that are driving the need for technological enhancements in agriculture—including population growth, demand for protein and clean-label ingredients, and water and arable land scarcity—all of which are bolstering the agtech sector.
“All the companies we look at are trying to solve one or more of these problems,” says Hassler. “I think everybody is still pretty bullish about the market. It’s just taking longer than everybody thought to materialize.”
Katie Maloney is ACG’s content director.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.