The disruption over the last decade in the retail food value chain gained momentum in 2017 with the IPO of Blue Apron, and acquisitions such as Bai Brands ($1.7 billion), Sir Kensington Condiments and Whole Foods by Amazon ($13.7 billion). This wave of disruption is being paralleled in the agricultural value chain, driven by increasing land turnover and altered land use, renewed focus on sustainability and, as in retail, changing consumer preference.
A continued slump in commodity prices has seen “Big Ag” facing declining margins and prompted a wave of consolidation to get cost efficiency, as well as a search for new innovation over the last three years. As key products in seed and chemistry have come off patent, the change imperative for the Big 6 has only strengthened. Coincidentally, the agtech investment landscape has exploded over the last decade, from a niche, opportunistic clade of the venture capital investment class, to a legitimate asset class attracting focused and generalist funds with dedicated agtech investment allocations.
In collaboration with PitchBook, Finistere quantified this activity — 2017 was another record investment year for the sector, with more than $1.5 billion deployed. Significantly, the sector saw more than 300 distinct investors and 160+ deals, contrasting the 31 deals and less than $200 million invested in 2007.
The data in our recent report shows a clear maturing of agtech investment, with rising round sizes and notable VC-backed exits in 2017. Meanwhile, we are seeing increased appetite for growth equity coming in on a first wave of agtech unicorns. Corporate venture capital activity in the sector has expanded, with more than 30 active funds, joining the agtech-focused funds like Khosla, Fall Line, Finistere, Innovation Endeavors and S2G, among others.
Big challenges are being tackled by innovation
All of this activity gives us a sense of what is in store for 2018. Interest in discrete markets and technologies for agtech will continue as farm management adopts a data-driven agronomy, encompassing imagery, sensors and artificial intelligence platforms driving an evolution from precision to “predictive” agriculture.
Automation is set to be another big mover in 2018, as labor costs and shortages drive high-value ag producers to seek solutions to harvesting, weeding and crop protection. Meanwhile, new approaches to driving top-line value for the grower are being explored by biology-based companies such as Benson Hill, High Fidelity Genetics and Zeakal. Notably, these companies are emerging with technologies that leverage capital-efficient development models, new genomic approaches to traits and inexpensive AI toolsets — all features required for commodity crops.
It seems a given we can expect challenge and change to the established order.
Additionally, acquirers and entrepreneurs alike are re-focusing on novel chemistries — from new small-molecule discovery platforms to “biologicals” that provide alternatives to traditional crop and soil products. This is being driven by changing consumer preference, as well as growing resistance to chemical products like Roundup.
Likewise, consumers will continue to reject the black box nature of food production in favor of transparency, and regulatory and labeling trends will continue to evolve as gene-edited foods come to market and vertical farms ramp up organic local production.
Shifting market dynamics
Looking ahead, 2018 will see much-anticipated endgames, with $200 billion worth of transactions driving consolidation of the Big 6. Specifically, Dow/DuPont and Bayer/Monsanto are under the microscope, but largely expected to conclude. Nutrien has emerged from the merger of Potash and Agrium, and ADM renewed its bid for Bunge, likely to also attract Glencore to an M&A fight. It is anyone’s guess how long it will take these new organizations to find their feet, but with more than nine in 10 exits driven by M&A, many startup CEOs and their investors will be watching this space with intense interest, and we could see an uptick in acquisition and strategic deal making next year.
It seems a given we can expect challenge and change to the established order. BASF’s acquisition of Bayer’s seed business for $7 billion alters industry dynamics as the company moves beyond traditional chemistry lines into seed for the first time. Overlaying this is the 2018 Farm Bill that is expected to incentivize innovation, especially in specialty crops, and may redefine risk structures through the farm insurance system.
Perhaps more significantly, the rise of mega funds such as SoftBank and competition from aggressive players like Amazon could reshape ag. Also, private equity firms closed $232 billion in 2017 and deployed $538 billion in the same period. With 90 percent of deal activity in the sub-$500 million range, PE firms are well-suited to capitalize quality companies seeking alternatives to M&A or the laggard IPO option. This offers a different option for the most promising companies to focus on creating sustainable EBITDA platforms for growth financing.
Non-traditional entrants will also continue to move into the sector through partnerships and as potential acquirers. Many of these are technology giants targeting core competencies — Google on data, Amazon on the food supply chain and Facebook on connecting and selling to farmers. In fact, the venture capital funds connected with these groups are already playing in the sector. They are backers of two of the most successful financings of 2017, which both raised more than $200 million: Jeff Bezos’ Expedition Fund in Plenty, and Google Ventures in Farmers Business Network.
Establishing centers of agtech excellence
In the United States, agtech mini-clusters and new fund investors are emerging in regions like Iowa, Missouri and Tennessee, while an increasing number of international startups seek a beachhead U.S. presence. Agtech also will continue to go global. With a reported 460 agtech startups, Israel is already well established. Meanwhile, the EU is building a strong pipeline, joined by Latin America and Australia/New Zealand, which have significant R&D public investment and are seeing the rise of “tweener” rounds (beyond seed, pre-Series A) where non-dilutive and angel capital is allowing startups to advance in capital-efficient models. This sits well with the accelerator fund model that groups like Dogpatch (Ireland), Radicle (U.S.), CSIRO’s Main Sequence (Australia/U.S.), Sprout, WNT (New Zealand), Yield Lab (U.S./Ireland) and SP Ventures (Brazil) are leveraging to build a robust pipeline feeding the venture ecosystem.
We’ve seen the diverse interest from investors in this sector firsthand, spanning corporates, professional VCs and family offices. 2018 will likely see a new record in agtech dollars raised, but with larger round sizes, as strong syndication with top-quality investors on both the West and East coasts continues to differentiate true winners from the mere adequate teams in this exploding tech market.