Startups in the food tech sector are gradually becoming more attractive to venture capital as pioneers reach maturity and early investors realise their exit strategies.
Investment in agri-tech startups can lead to the development of world-changing technologies that can feed the world more effectively and help protect crops against disease and climate change impacts.
But the long-term patient capital required to allow them to do so remains hard to find, delegates at last week’s F&A Next 2023 event in the Netherlands were told.
While early-stage companies in areas such as the energy transition, green cities and industrial tech are attracting the attention of venture capitalists (VCs), the new wave of agri-tech innovators are often still regarded as being too much of an unknown, using unfamiliar business models, carrying the risk that investors won’t be able to make a successful exit.
“We identify the need for public or even philanthropic money in the sector which is not really required in the other sectors,” Frédéric de Mévius, managing partner at London-based impact investor Planet First Partners told the event.
De Mévius said it was important to keep these forms of patient capital flowing to provide a base of success stories in agri-tech that give investors more confidence in the sector.
“I would say that the moment we will see a few [investor] exits in the agtech sector, that will be the moment when more money will come at the early stage, because then people will see the journey. So, we need to build these unicorns,” he said.
That public sector support has been more evident in Europe, where green policies are relatively strong, compared to most other areas of the world. These policies have driven funding from EU financial institutions, as well as measures intended, ultimately, to stimulate private sector interest in sustainable investment, such as the EU Sustainable Finance Disclosure Regulation (SFDR), which is designed to encourage green lending by making the sector more transparent.
F&A Next is an is an initiative of Rabobank, Wageningen University and Research, Anterra Capital and agri-food tech accelerator StartLife, aimed at stimulating innovation in sustainable food production and bringing together startups and scale-ups with investors and relevant companies.
Asian investor reset?
In Asia, agri-tech investment has different drivers, a key factor being Chinese government concerns over ensuring adequate domestic food supply and reducing food imports in coming years. As part of that push, Chinese-based venture capital companies – some backed by wealthy parents such as Baidu, TenCent and Alibaba – have been encouraged to pour funding into food technology pioneers.
However, as Matilda Ho, founder of Shanghai-based food tech VC firm Bits x Bites, explained at the event, much of that funding has not been targeted in the most effective way.
She said too many “impatient” capital providers were taking their cues from government, pursuing tech-driven firms in sectors such as agri-robotics or farming-as-a-service, and bringing with them tech sector expectations that those companies should be growing exponentially fast.
“They have this grow-at-all-costs mindset that really puts agri-tech founders under a lot of pressure,” she said. Ho singled out alternative protein tech as one area where funding has been directed without thinking through whether there was a market for the product.
This situation seems to be changing, as Asian investors realise they have to take a more
systematic view on funding agri-food tech companies if both start-ups and their investors are to prosper. Ho said there had been “a pause and a reality check” this year.
“I think this will be good and healthy check for the long term. I think we need more smart patient capital for this ecosystem,” she said.
Numbers as well as narrative
Another speaker calling for a more clear-eyed approach to VC investing was Joachim Blazer, an independent start-up analyst. He told attendees that both investors and founders should pay as much attention to the numbers as the impact narrative, even at the earliest stage of company development.
He said it was easy to focus on attractive impact goals of start-ups but fail to fully assess the business model required to achieve them while also growing revenues and returns at an acceptable level for the investor.
Even in opening discussions, it made more sense for both sides to work up a few possible scenarios for an investee company’s growth and assess how the investor’s exit may look. In simple terms, he recommended assigning probabilities to various scenarios happening, and then averaging out the outcomes to get an idea of potential growth and returns.
“It takes away a lot of friction, because you don’t have to spend time on building a narrative that may be really exciting, but doesn’t make any financial sense. I see people losing months on prepping their deck to make it smoother and getting no after no,” he said. “The numbers are all subjective, but they are a nice starting point for a conversation with the other side of the table.”
StartLife accelerator partnership
Event host StartLife, which was co-founded by Wageningen University and Research, also announced a fresh agri-tech tie-up of its own, having formed a partnership with Dutch-based Rubio Impact Ventures to support sustainable food tech startups. StartLife is to provides Rubio with access to very early-stage startups, which Rubio can then help to scale up with capital, its expertise and its network.
Rubio has already invested in Solasta Bio, a start-up that develops bioinsecticides, which StartLife has supported since it was spun out of Glasgow University in 2020.
Laura Thissen, StartLife’s operations director invited “start-ups with game-changing technologies that can have a huge positive impact on biodiversity, climate change or land use to contact StartLife for support and a potential introduction to Rubio Impact Ventures”.