Agritech Startups: Venture Capital vs Consumer Capital

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Robots for plantingModern agriculture works quite differently from that a few decades ago. This change is primarily because of the introduction and use of technological advancements like devices, machines and information technology. Even sophisticated technologies such as robots, drones, artificial intelligence, sensors, GPS based auto control/auto navigation technology, internet of things etc. have come into play. Advanced farm management systems like precision agriculture or satellite agriculture have the potential to make agri-businesses not just more profitable but also safer and environmental friendly. Figure here shows a robotic planter.

With an increasing population to be fed and a decreasing or declining state of natural resources, farmers look upon agri-tech strategies and solutions to maximize productivity and optimize efficiency.

Growth Of The Agri-tech Sector

Agriculture has a long value chain and the sector is often described as being more horizontal than vertical. There are apparently 16 sub-sectors (there could be more!) —as diverse as biotech, food e-commerce, and smart equipment; and 10 of these sub-sectors had more than 5% share of the Agri-tech market, and there is ample room for growth across the value chain. 

Agtech investments 2015Investment in Agri-tech was relatively flat before 2013. Most tech innovation in agriculture was concentrated in biotechnology and seed genetics, and both investment and innovation was limited to players with close ties to the agriculture  sector. However in 2013, AgTech grew 75% to reach $860 million across 119 deals. Agri-tech subsequently grew 170% in 2014 and continued to show strong investment in 2015. However, there was a slump in investment in 2016, as it fell by 30%.

Despite the growing investment opportunity in the sector, the decision for agri-tech startup funders on how to fund the early stages of the startup is a difficult one, particularly because of the huge amount of information on startup financing available today. The Table here gives a snapshot of various types of investments available in the market today for startups.  

Capital Types for Startups

Experience Of An Agri-tech Startup Founder

AgDNA Founder and CEO, Paul Turner narrates his experience of raising capital for his startup. 

Paul Turner About 18 months ago I was looking to raise Venture Capital (VC) Series A financing for AgDNA. I didn’t appreciate the impact of his question at the time. Heck, I’ve got an MBA. I’ve read all the startup success stories. Growing your business with VC is how it’s done. Or at least that’s what I thought at the time. However, the reality of capital raising is much different. Once you go down the VC path, new dynamics come into play. Company valuation, preference shares, pre-emptive rights, compounding interest, board seats, shareholder dilution and the expectation of a 10X return for the VC fund.

Nevertheless, we signed up with the team at AgFunder to get the word out about AgDNA and get in front of the VC agritech community. We launched our campaign on AgFunder and were immediately being introduced to genuine agritech VC firms. The pitch about our business started out well and became more and more succinct with every presentation. Although after about a dozen pitches I could see a trend beginning to take shape. Essentially every VC put AgDNA in the agritech “software” bucket. This meant a lot of energy had to go into differentiating our value proposition from our competitors along with educating investors on the merits of software in agriculture. I soon learned VC doesn’t automatically translate into expertise about your sector. There are some very knowledgeable VC firms and some that are still trying to figure out how agriculture works and what agritech means for the customer.dilution and the expectation of a 10X return for the VC fund.......Almost 12 months had gone by, and I remembered once again the question of “venture capital versus customer capital.” The answer was now much clearer to me. Customer capital (aka sales revenue) was the most obvious and efficient source of cash to grow the business......Build it, Nail it, then Scale it! Accelerating your agritech startup too early with VC finance could have long-term unintended consequences. At AgDNA we elected to make sure we are well into the “Nail It” phase before reconsidering VC backing.

Benefits Of Chasing Customer Capital 

  • Customer capital in the form of sales revenue is the cheapest type of financing for any business. 
  • Customer capital doesn’t come with all the fine print of venture capital.
  • It doesn’t need to be paid back. 
  • It forces the founders to focus on the core of your business. 
  • Aligning to customer capital means organic growth of the company.
  • The ability to grow revenue to the point where the company breaks even and ultimately becomes profitable can provide a lot of flexibility and freedom to operate going forward.
  • Company remains 100% focused on the customer.
  • Ownership is still 100% with the founder or alternatively with private investors on board, allows all shareholders to remain on equal terms with only ordinary shares.
  • A well thought out delay in acquiring venture capital gives enough time to develop a clarity on product market and create robust revenue models, both of which go a long way in pleasing Venture Capital Investors at the time of valuation. 
  • With a healthy amount of customer capital, founders can explore VC on their terms. 

According to the US Bureau of Labour Statistics, 679,072  businesses were less than a year old as on March 31, 2015. According to the National Venture Capital Association (NVCA), in 2015, which was considered to be a bonanza year for Venture Capital Investment, only 1444 companies could raise venture capital funding for the first time, a probability of 0.002126 (0.21%). Of the 1444, 1035 (72%) were Information Technology startups. The probability of getting an early stage  funding has come down in 2016. 

Immature Venture Capital Market For Agri-tech Companies

The agri-tech investment ecosystem is still immature. Today, agri-tech has a group of core investors, that have had some connection with the agriculture industry in the past. In recent years that number has increased but there are still funding gaps, particularly at the seed and growth stages. There are very few generalist VC investors interested in agri-tech; and those that are interested have limited knowledge of the complexity of agriculture markets and have expectations of growth profiles like those of other sectors e.g. Information Technology.

The Flipside

It is only befitting to chart out the cons of focusing on Customer Capital alone. Sales channels take time to develop. Every startup needs working capital to function, to build the team, to develop a great product and to delight its customers. However, this seasonality of agriculture means lumpy cash flows which can setback the entire process. Realigning the business toward customer capital aka organic growth need laser focus and a concentrated team, in the absence of which the effort may not yield intended results. Organic growth may seem to stretch for ever and might create complacency among Founders. Pursuing VC finance is usually an uphill task and also means dilution of the company.However, VC when timed right, acts as the rocket fuel to scale up. 
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