The billion-dollar agritech start-ups disrupting farming

By Emiko Terazono in London | December 10, 2018

Hauling corn from field to silo on a truck, South Dakota farmer Chet Edinger is having a good harvest. The mood of the 53-year-old, who also farms soyabeans and wheat on more than 5,000ha of farmland, has been boosted this year by a corn seed recommended by Farmers Business Network, a digital platform dubbed as a “Google for farmers”.

Mr Edinger planted a variety that he had “never tried and never heard of”. Yet the gamble has given his farm “the best work we’ve [harvested] so far this year”, he says.

Growers in the US have traditionally relied on a distribution system where they had little access to comparable data and opaque pricing of everything from seeds to fertilisers to pesticides. But the combination of falling prices amid bumper crops, consolidation of agricultural groups and the US trade war with China has forced them to seek ways to shore up revenues.

“Normally we would not even try a seed,” says Mr Edinger, “because there are so many out there in the market it’s like throwing darts at a board.”

He is not alone. An increasing number of US farmers are exploring alternative ways of purchasing seeds and chemicals as well as data and insights.

With 7,000 members — accounting for 28m acres of farmland, about 3 per cent of the US total — FBN provides extensive crop, seed and other agronomic data, plus a marketing and ecommerce platform for grains, offering more price transparency for fertilisers and pesticides. It has in effect become a social media platform for the exchange of farming knowhow.

    

Backed by investors such as Google’s venture capital fund and Temasek, Singapore’s sovereign wealth fund, the California-based company is among a handful of agricultural start-ups looking to establish themselves as independent businesses, rather than be swallowed up by larger agricultural groups.

Launched in 2015 by Amol Deshpande, a former partner at Silicon Valley venture capital group Kleiner Perkins who also worked at agricultural trader Cargill, and ex-Google programme manager Charles Baron, FBN says it wants to create a level playing field for farmers.

“The farmer is the least profitable participant in the farm supply chain,” says Mr Baron, adding that growers bear more risk than the companies they purchase from and sell to. “We found [out] through our growers just how frustrated farmers are with the structure of the agricultural industry.”

Traditional agricultural businesses do not offer their farmer customers comparable crop data, whereas FBN offers members who pay $600 a year aggregated numbers on efficacy and yields of various seeds, fertilisers and pesticides in different soil types and geographies, helping them make buying and planting decisions.

Using the network’s crop matching service, Mr Edinger has also sold his non-genetically modified corn at a premium price. “I won’t know until I’ve done my full analysis, but in terms of revenues and profits, we’re going to generate more net dollars per acre by utilising FBN [this year],” he says.

Agritech is attracting a diverse range of investors. And large funding rounds — FBN raised $110m last year and is now valued at $660m by Pitchbook, a data provider on private companies — are providing the foundation for the first wave of agritech start-ups with the potential to be valued at $1bn.

The single most important reason for this interest is innovation. It is not simply changing agriculture and food production, bringing in more transparency and new products as well as shortening supply chains — it is also offering investors such as SoftBank, Google and sovereign wealth funds a road map they recognise from other industries that have been transformed by technology.

This has provided start-ups with a financial foundation to grow their operations, attract executives from a wide range of sectors, including Silicon Valley, and eventually look to float on the public markets. Coupled with the falling cost of available technology — from data processing to artificial intelligence and storage — it is boosting the firepower of these start-ups.

$660m

Valuation of FBN by Pitchbook, a data provider on private companies

“Two and a half years before Google was founded, the cost of data storage was 100 times greater,” says Matt Barnard, chief executive of Plenty, an indoor farming start-up. “Had it started three or four years earlier, there would have been no business because the cost of data would have been prohibitive.”

Digitisation of the retail market at one end of the supply chain is already well under way, and the US is seeing a similar phenomenon at the producer end. Analysts and venture capitalists expect this to trigger a big shift in how food is produced and brought to the table. And although this is also beginning to happen in Europe and Asia, observers believe the US, with a large farming base and consumer market plus plentiful venture capital, will be a major testing ground for these agritech groups.

When David Perry co-founded Indigo, a Boston-based agricultural microbes start-up, in 2015, his aim was to create a standalone business that would “fundamentally change agriculture”. Having launched and floated two life sciences-related companies, he realised that over the past 10 to 20 years all the agricultural start-ups with potential were purchased at an early stage for not more than a few hundred million dollars.

“Agriculture is the last of the large industries to really adopt new technologies and business models,” says Mr Perry. “In retail, there is Amazon, automotive has Tesla, transportation Uber and Lyft and there is Netflix in media. In every other large industry we can point to a new company that’s changing the way the business is done.”

Indigo hunts out naturally occurring organisms such as bacteria and fungi to coat the seeds of grains to aid plant growth. It has also created what it calls a “farmers’ eBay”, an online marketplace which matches buyers and sellers of grains and oilseeds.

Amid rising worries about the overuse of synthetic agricultural chemicals such as fertilisers and the environmental damage they cause, the microbial segment occupied by Indigo is one of the agritech sectors attracting most investor activity.

Mr Perry and co-founder Geoffrey von Maltzahn, Indigo’s chief innovation officer, have launched a partnership with 50 large-scale farmers to trial the company’s microbial products.

“The product works,” says Jeremy Jack, a grower based in Mississippi farming a wide range of grains and cotton, who has been trialling Indigo’s microbial product on his rice crop. He has yet to harvest the data, but adds: “The science behind it is real.”

Indigo’s most recent funding round raised $250m from backers including the Investment Corporation of Dubai, a sovereign wealth fund, bringing its total financing to more than $650m. Pitchbook estimates its value at $3.2bn.

The worry for some specialist investors is that the new-found enthusiasm for agriculture has helped inflate valuations, which could hurt both start-ups and the wider sector. The main issue when valuing agritech start-ups, says Niccolo Manzoni of Five Seasons Ventures, a Paris-based agricultural venture capital firm, is the paucity of data.

Since Monsanto’s near $1bn purchase of Climate Corporation in 2013, there have been only two other large transactions to provide valuations for the sector — DuPont’s purchase of farm software group Granular for $300m and tractor maker Deere & Co’s $305m deal to buy Blue River, a start-up that makes machine learning tools for the industry.

“You only have three data points instead of 500, and you can’t draw a realistic conclusion,” says Mr Manzoni, warning that high valuations place a lot of pressure on management teams.

The challenge for these standalone start-ups is to scale up their businesses to the point where they can produce sufficient cash flow and profits without the safety net of large agribusinesses.

But some are over-promising on what they can actually achieve, says one venture capitalist. “They are like small food ingredient companies claiming they can be Nestlé in a few years,” he says, adding that a failure of one of them could sour investor appetite for agritech.

Traditionalists say its complex supply chains and stringent regulations make it different from other industries that have been disrupted by technology.

“In Silicon Valley tech you really can have a 20-year-old who wakes up with a dream. Some of them can create entirely new companies because it’s such a green space,” says Brian Loeb, who oversees venture investment at New York-based Continental Grain, once a leading grain trader that now invests in food and commodities companies. “[But] in agriculture, no matter how big any of the innovations are, our view is that they still always have to fit within, it’s still always part of the complex puzzle.”

Others are less sceptical. “Just because [an industry] hasn’t been disrupted does not mean that it won’t be disrupted,” says Spencer Maughan, co-founder of Finistere Ventures, a California-based agritech venture capital firm.

In truth, agriculture has seen disruption before, via industrialisation, the green revolution and, more recently, genetically modified crops. But the advent of digital technology is expected, by some, to be more radical.

Alongside Japan’s SoftBank, former Google chairman Eric Schmidt’s Innovation Endeavors and Amazon founder Jeff Bezos, Finistere has invested in Plenty, a company aiming to provide consumers with fresh, nutritious vegetables and fruit that have not travelled 5,000km from farm to the shop shelves.

Modern fruit and vegetable production is based on whether it survives weeks in trucks and warehouses rather than on taste or nutrition, says Plenty’s Mr Barnard. Iceberg lettuce, he says, is a great example: grown because of its durability rather than consumers’ love for the vegetable.

Plenty grows plants, including leafy greens and fruit such as strawberries, in 20ft tall towers — vegetable skyscrapers. Using data science and AI, it controls the growing environment, including LED lighting, warmth and irrigation. More significantly, the company says it can achieve yields up to 350 times greater than traditional agriculture using 1 per cent of the water and less than 1 per cent of the land.

"Just because [an industry] hasn’t been disrupted does not mean that it won’t be disrupted". Spencer Maughan, co-founder of Finistere Ventures

Yet the “vertical farming” arena is littered with bankruptcies because of the high costs of initial investment and production and the need to keep groceries affordable. Using his team of scientists working in AI, machine learning and big data, Mr Barnard is looking to overcome these issues. Plenty is looking to grow a network of facilities in cities around the world to industrialise the process.

“We have signed some agreements around the world for farms that are in the early development stages,” he says, declining to reveal where they are.

Meanwhile, venture capital backers believe a flotation of an agritech start-up will have the power to transform agriculture. “If they are listed and have access to such deep pools of capital, I imagine it would send ripples through the entire sector,” says Finistere’s Mr Maughan. He says that would benefit farmers and, ultimately, consumers.

FBN’s Mr Baron says his members want the company to remain independent, a proposition supported by its investors. And sees it as a way to revolutionise the industry.

“By having a farmer network that is driven by our members and not controlled by the industry, we can create an independent farm economy that allows [them to access] new companies and new technologies, practices, markets and new information technology in a totally different way. Our mission is to put farmers first.”

Microbes The power to protect against drought

When Geoffrey von Maltzahn, its chief innovation officer, started Indigo, it was based on the idea that the evolutionary principles of microbes interacting with the human body were similar to that of plants.

For more than a century, scientists have been aware of the impact of microorganisms in the gut, but it is only in the past 20 years they have come to grips with how they function and affect human health.

Indigo coats seeds with microbes, which it says will provide protection against stresses such as drought, as well as improving yields.

“The advances in [DNA] sequencing technology, as well as computational tools, [meant] we could potentially go about beginning to understand some of the fundamental relationships of these communities in some of the largest crops in the world,” he says.

The spotlight on the use of microbials for agriculture comes amid a rise in environmental concerns over the use of chemicals such as pesticides and fertilisers, blamed for a decline in soil fertility and water pollution.

The agricultural industry’s interest in microbial is not new. In 2013 Monsanto, the seeds and chemicals group, announced its alliance with Novozymes, a Danish industrial biological company.

Since then, interest has grown and in 2017 more than $860m across 35 deals was invested in the microbials sector, according to Finistere, the venture capital group, making it the single largest investment area for agritech last year. Bayer entered a joint venture with US start-up Ginkgo Bioworks, while Zymergen raised $160m in a round with SoftBank. Other microbial start-ups include Pivot Bio.

Indigo has collected more than 60,000 microbes and, through machine learning and data tools, brings those microbes into traditional greenhouse and field trials.

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