Ahead of this month’s World Agri-Tech Innovation Summit in London, investors in the sector discuss what startups can do to attract more investors and keep their own finances under control, as borrowing costs soar.
Today’s uncertain global investment climate has put an end to the years of stellar growth of investment in small, innovative agritech and foodtech firms, at least for now.
But those firms can still do a lot to make themselves more attractive to investors eager to invest in the diverse opportunities on offer, according to investors taking part in the World Agri-Tech Innovation Summit, to be held in London at the end of September.
Over much of the last decade, investment poured into agritech. Around 20 times more venture capital was invested in new agritech ventures in 2021 than 2012, while VC investment in the overall market grew by only elevenfold, according to a 2022 McKinsey report. Capital was still looking for a home in agritech during the Covid pandemic for those in a position to take advantage. But since then, the story has changed.
An uncertain global economic outlook, high interest rates, the collapse of US tech-focused financial institution Silicon Valley Bank and the shrinkage of the market for initial public offerings (IPOs) are among factors that have led to a sharp decline in VC investment in agritech – alongside other sectors – with negative consequences for young companies seeking to scale up or raise money.
A 40% decline in the number of deals made by funds in agritech startups in the first half of 2023 is contributing to a hiatus in exits, according to Hadar Sutovsky, VP external innovation at global specialty minerals company ICL Group, based in Tel-Aviv.
“Relatively few early-stage companies are progressing to secure late-stage funding due to the uncertainty in the economic environment, elevated interest rates and low IPO and exit activity,” she tells Impact Investor. Sutovsky is also general manager of the ICL Planet Startup Hub, ICL’s agri-food innovation and investment platform – a hybrid VC investor, accelerator and incubator, prioritising investments of strategic interest to its parent.
Amanda Donohue-Hansen, partner at US-based Sandbox Industries and managing director of Cultivian Sandbox early-stage venture funds says that, while the challenging funding environment for food and agritech startups meant some were struggling, a correction after the years of plenty was not surprising, given the difficult macroeconomic backdrop.
“I love the attention and ultimately capital that was invested in food and agriculture technology in recent years. But I think we can forget that these are high-risk ventures and not all will make it – that’s the nature of venture capital and entrepreneurship. We’ve just been spoiled with capital over the past few years, and now there is a bit of a reckoning happening”, she says.
Conservative funding climate
However, Donohue-Hansen is keen to stress that market uncertainty rather than available financial resources is the main problem for investors. She says it was important to highlight that there is still record dry powder and capital in the agritech sector, but investors are being more careful in how they invest that capital.
“Companies need more capital to keep growing right now, so they’re having to lean on their investors. That means a lot of food and agritech investors, including ourselves, are reserving more of our capital to help support the companies in our existing portfolio in a more challenged funding environment and being more conservative with new capital investments,” she says.
A softer IPO market is not helping either, as it potentially removes one avenue for investors to exit from companies and free up capital for other investments. This adds to the greater financing difficulties typically faced by companies seeking late-stage funding, which often need to take on more debt than early-stage startups – servicing debt was not such a problem in the low interest environment of the past, but it is a big one now.
Attractive opportunities
Nevertheless, all the factors that made investing in agritech attractive in the past remain in place, with some looking even more persuasive.
Ben Stafford, CEO of UK-based purpose-led impact investment manager Regenerate Asset Management, said the need to shift towards sustainable and more profitable farming meant there was a ready market for agritech that could support farmers in achieving these goals. This was often driven by regulation and subsidies, or environmental and social imperatives such, as tackling water scarcity or labour shortages.
“There has been a technology lag in agriculture compared to virtually any other economic sector, which is now ripe for innovation, as some farms seek to become more sustainable and climate positive,” Stafford says.
On the other side of the equation, investors are also increasingly seeking impactful ways to use their capital. As the McKinsey report notes, food and sustainability remains high-priority areas for a number of investors during the recent downturn, as indicated by “a less severe decrease in global sustainable assets when compared with the broader market and the repurposing of funds toward ESG”.
Creative tech solutions
One reason for continued interest are the varied investment opportunities on offer in a sector creating increasingly sophisticated solutions, often backed by fast-developing AI-based technology.
Sandbox, for example, looks at innovative technology companies across the food value chain, from production to consumption. The company’s investments include Yard Stick, which has developed a spectrometer that can be used to measure soil carbon in-situ accurately and cheaply, and Debut Biotech, a firm developing bio-based food ingredients to replace synthetic or chemical alternatives. Donohue Hansen said companies at the intersection of food and health, such as novel functional foods and digital tools that help consumers achieve their health goals through nutrition were also of growing interest.
Among investments made by Regenerate’s VC arm is one in robotics firm Muddy Machines, which has developed an automated asparagus harvester using AI, with the potential to be adapted for other crops – a boon for farms in countries such as the UK, faced with acute agricultural labour shortages. Regenerate also launched a European sustainable agriculture fund earlier in 2023 to invest directly in agricultural businesses growing and supplying regenerative and climate-positive produce in Europe.
ICL Planet’s recent deals include a just-announced $2m investment and multiyear collaboration with Agrematch, an Israeli AI-driven startup to accelerate development of plant nutrition and innovative biostimulants, a $10m investments in Lavie Bio, which develops microbials-based products to improve food quality, sustainability and agriculture productivity, and a partnership with foodtech start up Protera, which is developing sustainable plant-based protein ingredients using precision fermentation.
Pragmatic approach
ICL Planet’s Sutovsky is optimistic investment will bounce back in the mid-to-long term, but that small, innovative agritech firms seeking to scale up and attract further investment need to take sensible measures to survive in the short term. The primary challenges included raising capital, valuation discrepancies, equity dilution, legal and regulatory hurdles, the economic climate and finding the right investor, she says.
Companies need to show meaningful progress towards growth milestones, regardless of their valuations, while founders would probably need to fine-tune their value proposition. “In many cases they would need to revisit their valuations, especially as they consider their longer-term capital needs,” Sutovsky says. Conserving cash was another must, she adds.
Some agritech firms may also need to switch focus from expectations of an IPO or buyout by a large corporate in the near-term, perhaps seeking collaborative deals on technology development instead in order to maximize revenues, according to Sutovsky.
Donohue-Hansen says Sandbox was now spending more time with portfolio companies, supporting them to improve their capital efficiency and where appropriate raise new capital.
“We think future investors are going to care a lot more than the markets did three years ago about capital efficiency and profitability. So, we’re spending a lot of time with our startups looking at capital efficiency and responsible profitable growth,” she says.
