Ever since the acquisition of the first “Ag Unicorn” (Climate Corp. by Monsanto), a flood of new digital agriculture startups has been trying to turn investor interest into market traction. Adding to the surge in market interest, Bayer’s recent $62 billion bid to buy Monsanto to create a global agrochemical giant and China National Chemical’s (ChemChina) proposed $43 billion acquisition of Syngenta earlier this year show that the big ag players are hungry for growth and market share.
In fact, there were $31 billion in acquisitions by the “Big Six” ag companies between 2008 and 2015, with those key players reporting more than $22 billion available in cash for more acquisitions at the close of 2015. Whether they end up using those funds to acquire each other, new innovations or both, there is one common goal: to drive margin growth.
Why digital ag?
The major ag players view the ability to offer new products and services to fill their pipeline as the key to their future growth — and digital ag has the potential to do just that. Digital ag is about improving the decisions farmers make about planting, fertilization, crop protection and irrigation based on the inputs, as well as yield and quality outputs, at harvest.
Adding digital services that can integrate these decisions in support and enhancement of the seed biology and chemistry products that constitute the bulk of agtech’s “Big Six” revenue today is hugely strategic to the future of these and other major companies in the ag ecosystem. Traditional ag players will use digital ag to tie themselves more closely to the farmers’ on-farm decision-making platform.
Indeed, the hardware distribution players (Agrium, Simplot, Wilbur Ellis) and “Big Six” majors are already engaged or have developed their own platforms, and are looking for ways to partner with the potential new “disruptors” entering the market. For instance, John Deere and IBM have been developing smart-farm equipment and integrated software for years and have recently started to foray into web and mobile-based tools. However, now VCs and entrepreneurs have fully turned their attention to technology opportunities in agriculture, with AgFunder noting that agtech investment reached $4.6 billion in 2015.
However, the current wave of ag innovation will not necessarily equal strong market adoption. The adoption rate of new technology by farmers is notoriously slow — self-steering tractors and combines, for example, are less than 20 percent adopted after a decade or more of effort. Farmers demand a step change in value. Indeed, adoption is the key challenge facing these players, new and old alike. Certainly progressive farmers like Tom Farms or International Farming Corp. are counter-points that are aggressive about capturing better yield and sustainability, but they are pathfinders, not the mainstream.
Who will thrive?
So how many of the dozens of digital ag players that were funded in the last few years can survive the coming Series B funding crunch? As farmers face declining commodity prices and tighter farm margins, these startups will only succeed if they can prove to farmers that they can deliver more value per acre through actionable insights. Digital ag success stories will be built on demonstrating utility, the economic gain per acre farmed. Based on accepted industry norms, farmers expect $3 of gain for every $1 invested.
Selling to farmers is a complex task. A core challenge for farmers — and a major opportunity for agtech — is the need to do better with the resources and infrastructure they already have. The farming market is fragmented, with more than 97 percent of the 2.1 million farms in America remaining family owned, and most averaging less than 500 acres of land, according to the USDA. Yet, the fragmentation doesn’t end at the land. Farmers are also being forced to wear more hats than ever before — from forecasting the weather and watching futures markets to becoming biologists, chemists and now data scientists and technologists. It can be overwhelming.
For every company that succeeds, there will likely be dozens that fail.
To be a viable digital ag disruptor, companies need to ease the mounting burdens on today’s farmers by helping them make better use of their time while driving better performance on their farms. The digital ag players that will thrive are the ones that are extremely easy to use, can prove they deliver substantial value and have a strong business model.
For example, AgDNA takes machine data from John Deere farm equipment, analyzes it and automatically uploads new prescriptions to improve seeding, fertilizing and harvesting. Working with the equipment dealers to enhance the value of the hardware investment also means that AgDNA does not have to try to sell directly to farmers.
Companies like Decisive Farming, Conservis and Granular are all tackling integration and ERP functions with sophisticated offerings that provide dashboard and “integration” platforms in a unifying suite. From a food safety perspective, CropTrak adds value from post-harvest to processing by providing traceability and logistics management to protect the food supply chain. Not only can food processors know exactly where the crops came from and how they were managed in the field and during the shipping process, but it also gives processors ways to detect issues from certain field yields and correct them.
Finistere portfolio company CropX is working to develop a new class of sensor that can be self-installed and calibrated, as well as buried below ground, all at lower cost and connecting to intelligent adaptive algorithms that customize irrigation prescriptions on existing pivot and drip hardware. Many of these companies are also introducing a business model that is new to ag — adopting a SaaS solution to allow farmers to pay on a subscription basis instead of upfront hardware purchases.
These startups target a wide array of issues for farmers — from pre-planting and planting to farm management, post-harvesting and processing. Investment opportunities in precision ag technology (soil monitoring, seed trait genetics, irrigation systems, crop protection and more) will continue to increase, and it is critical to look at the complete farming lifecycle.
Who will wither?
For every company that succeeds, there will likely be dozens that fail. Digital ag companies that are too complex for farmers to easily deploy across their farms will struggle to get adoption. In addition, we think data visualization tools that rely on public data sets like soil maps, land satellite data or public weather data have an uphill battle differentiating their offer while competing with “me too” products.
Variable-rate fertilization is a key example where there are many competing offers seeking to help farmers drive better nitrogen and phosphorus application on farms, for example. FarmShots is an interesting startup that is developing a different data visualization niche by using online satellite data in combination with drone imagery to manage disease and pest control, complete with automated alerts.
In agriculture, it is clear that startups need more than disruptive tech to win.
Facing a surge of copycat technologies, digital ag players may also need to answer tough questions like, “What makes you different from the other five companies that might be trying to sell a similar service or product?” We think automation could be an important edge. Digital ag innovators like AgDNA, Blue River, Farmers Business Network, FarmLink and Farmobile all stand out from the pack in terms of automation capabilities.
It is important to note that it isn’t just about the underlying technology. Digital ag companies also need a compelling business model to thrive. Creating a market advantage in such a competitive playing field is key. Simply asserting “we increase yield” or “we are on a million acres” isn’t enough. There are a lot of data points that go into measuring yield in any given year, but this is also a major part of the challenge.
Showing causation in yield improvement below 10 percent thresholds is hard to prove against a complex background of factors — and often requires multi-year field trials to build confidence. In this regard, one of the sobering factors is the patience and length of commitment required by the investors to support promising companies through this adoption cycle.
How to cut through the hype
In agriculture, it is clear that startups need more than disruptive tech to win. Business strategy execution matters, and the demonstrated ability to deliver true utility on a non-linear, scalable basis is the ultimate selling point for the farmer trying to figure out which solutions make the most sense for their farm.
Digital ag companies need to create validation and early market interest through farmer uptake and certified field tests. Growth capital and farmland resources will be critical for companies looking to grow into viable, global farming businesses.
But with countless digital ag companies claiming “millions of acres” under management, investors will need to cut through the hype and determine to which opportunities to provide capital support as they strive to get critical mass and cash flow breakeven points. Equally important, and a key part of the work Finistere is doing, is the “ecosystem” of go-to-market partners, and particularly distribution channel partners with a mutual interest in driving new revenue sources through a digital ag revolution.