2 - Cows🐄 & Chickens 🐔 & Bivalves 🦪, Oh My: Funding Innovation for Agriculture
Ever seen a Unicorn 🦄 farm? Didn’t think so.
Howdy! I am, it turns out, not sticking to a every-two-week cadence for this newsletter. Today’s post centers the humans building commercializable solutions for agriculture. There is frequently misalignment between these companies and the people who lead them and the venture capital/finance world. This matters because capital allocation often results in power dynamics and perverse incentivization that can compromise good intentions. Furthermore, resources, usually financial, are required to build companies, and where there are funding gaps, company creation can be stifled.
Ever seen a Unicorn 🦄 farm?
Modern venture capitalists hunt unicorns, but there have only been a handful of venture-backed unicorns in agtech in the past decade. Will there be a higher number or concentration of unicorns in the future? Sure, probably, inflation is crazy - a billion dollars just doesn’t go very far these days! That said, there still won’t be very many, and the majority of venture exits in agtech will continue to come from M&A.
According to Kyle Welborn’s analysis in CropLife, 32 out of 33 agtech exits in 2022 occurred via M&A, and this is pretty in line with historic trends. These are not 🦄(1B+) transactions - the 5-year rolling average for agtech M&A exit prices was $111M between 2018 – 2022. 2022 was admittedly a bad year for VC and dragged stats down a bit, but these stats nonetheless represent an irrefutable truth: the most successful agtech companies haven’t been worth billions.
At the same time, agricultural production practice changes are essential to mitigating and responding to the climate consequences of agriculture. We, as people who eat, need regional food economies to build food webs that are resilient in the face of increasingly frequent climate events (fires, derechos, droughts, floods, hurricanes, atmospheric rivers…) We need to implement economically efficient practices that reduce input requirements without substantially decreasing yields. We need farming to be an attractive enough occupation that a diversity of awesome humans compete to work in producing food, fiber and fuel. These aren’t nice-to-have-things - these are issues of national security. The US is projected to reach record import levels in 2023, and we already import almost ⅔ of our fresh fruit and 1/3rd of our fresh vegetables.
Agriculture is an enormous market, contributing $164B to the domestic economy and $3.5T to the global economy. Unfortunately, agriculture is not monolithic, and it’s incredibly difficult, if not impossible, to design a product that serves the entire industry. This fragmentation exists along many dimensions, starting with crop type, farm size (both acreage and revenue, which are linked but not inextricably so), geography, and marketing strategy (commodity sales to value-added vertical integration and everything in between.)
We must finance innovation in agriculture, because we cannot continue to live the way we want to, much less improve the quality of life for ourselves and others, without it. And, we’re not going to have that many unicorns in agtech.
So how do we resource the cows and chickens and bivalves that we need? Let’s break it down: (Bear with me on the barnyard+ metaphors - I can’t help myself.) I’ve inserted a table below to help you keep track of the different critters in both the biological and business-metaphor sense.
The cows*🐄: Cows convert stuff we can’t eat into stuff we can eat. They take a long time to do it, and they burp out a lot of methane in the process. They’re also kind of slow and lazy, as a group, which is actually a good thing for domestication. Even better, they produce a lot of highly nutritious products that we need (meat+dairy+loads of other stuff!) Most cows live most of their lives grazing, and some live 100% of their lives grazing.
The 🐄-companies of agtech startups are those companies that can realistically grow to be $100-500M acquisition targets. They’re probably getting acquired by one of the existing big guys (think Bayer, John Deere, Cargill, etc.) They often bring in some of their potential acquirers as investors around their Series A or B rounds. They raise a substantive amount of VC funding, and they have the ability to deliver solid returns for their early stage investors - rarely the 100+ x multiples that consumer SaaS and biotech bring about, but no one is going to be too mad about a 3-10x multiple. Every now and then, you might stumble upon Knickers-the-giant-cow (who isactually a steer), but you just don’t really get many cows with magical horns sticking out of their foreheads.
Regardless, 🐄-companies can and will be funded through venture, and there’s lots of venture money sloshing around and looking for a home in ag.
🐄-companies are cattle-like, too, because in the world of sustainability and impact and trying to “make things better,” they’re complicated. Do farmers and eaters really benefit from more consolidation in agriculture? In some ways, usually in terms of gross emissions reduction, yes. In other ways, like farmer market access, pricing power, and consumer choice, not so much. Cows aren’t for everyone. Some VCs are going to approach agtech with a unicorn-or-bust approach, and more power to them.
* Cattle people - please don’t be too mad that I combined dairy & beef & cows & steers & bulls into one stretchy metaphor. And preemptively - same goes for chickens & hens & broilers - lighten up!
The chickens🐔: Chickens don’t need that much food or space or time to grow and/or produce eggs, which is awesome. They’re also kind of dumb and can get mean (walk through a broiler house with caution, trust me.) Hens lay eggs, which are basically a miracle in every way - nutrient dense food encased in natural biodegradable packaging and produced almost daily.
The 🐔-companies of agtech startup world are those that go to market through kind of a hybrid tech/consulting approach. A great example of this are the masses of soil-carbon-project/regenerative-transition companies we’re seeing right now. They all have aspirations to incorporate technology, but the ones with customers win those customers with handshakes in fields and boots on the ground. These companies can actually get to breakeven/profitability relatively quickly. They provide real services that their customers actually want to pay for. Right now, too many 🐔-companies are forcing themselves down the venture route, and that probably won’t end well.
The 🐔-companies could get acquired by the big guys, at relatively low ($10M-250M) valuations. If equity fundraising is kept to the minimum and conducted at reasonably low valuations, these can produce positive outcomes. There are also interesting opportunities for 🐔-company roll-ups (yikes, that sounds either like a wrap or like a really weird evolution for fruit by the foot…)
I think we need more 🐔-companies. I think that most specialty crop labor solutions will come in the form of chickens, so much so that I’m concerned that I’m going to stretching chicken metaphors for a long time to come…oh well. I think this because specialty crops are highly fragmented and relatively under-serviced. By rebranding “unskilled” labor as “specialist [crop]/[task] service provider, there’s an opportunity to build dozens of successful, multi-million-dollar revenue companies that efficiently bring solutions to farms.
I did mention that chickens can be dumb and mean. 🐔-companies that are hyper focused on their own survival and specific niche run the risk of missing opportunities to collaborate and iterate.
The bivalves 🦪: There is literally not a cooler class of species than bivalves. Oysters, mussels and clams literally filter pollutants from water to produce (delicious) protein. Wild.
🦪-companies represent bootstrapped startups, which are equally impressive. These are just gritty, motivated people building businesses that get to sustainable profitability. These businesses do not face the pressures of investor power dynamics and therefore can (but needn’t) remain nimble, independent and true to their mission and values.
🦪-companies don’t need much help from the capital allocators among us. Like their invertebrate brethren, who might need a bit of support in establishing themselves when humans have interfered wildly with their environment (pollution+overfishing), 🦪-companies can struggle with subsidized pricing schemes enabled by venture funding. Even more significantly, the opportunity to bootstrap as a founder is massively impacted by systemic inequity and socioeconomic disparities; some people are poorly positioned to bootstrap relative to others. There should be opportunities for people who can’t crash in their parent’s extra room and work in their garage to start companies without punitive equity dilution.
The bisons 🦬: 🦬-companies are an add-on category, thanks to thoughtful feedback and creative thinking from Kevin Silverman. 🦬 represent agtech companies with a very direct and monetizable climate. This category merits deeper thought and discussion than I’m giving it today. That said, there a number of companies (biochar and rock-dust supplements, for example) that are trying to transform agricultural land use in a way that both improves (or maintains) agricultural systems while also removing greenhouse gases from the atmosphere. There’s also a range of companies that service the entire agroforestry and land use sector (MRV stuff), and those have a greater chance at higher exit valuations while also delivering value to farms than your average ag solution. These types of solutions seem to be far more attractive, generally, to VCs than better sensors or crop-specific FMS systems. With the proliferation of ClimateTech VC funds that have emerged (and that continue to do so), I expect that this category will be relatively well resourced in coming years.
Most of the solutions that agriculture needs require resources that are different from those that are available today. I’ll talk about some solutions that I see in future posts (which are going to increase in frequency, I promise), and I’d love to hear from you if you’ve got ideas (I’m very open to adding metaphorical animals to my barnyard table, so feel free to make suggestions…)
* Thanks to Kevin Silverman and Mitch Rubin for taking a look at v1 and helping to make this version better!* *
