What’s Next for Global AgTech

Twenty-sixteen was a year of contrasts for the agriculture technology startup market and paves the way for the sector’s next generation of technologies in 2017.

Last month, we published the 2016 AgTech Investing Report, detailing $3.23 billion in investment across 580 deals. That’s a 30% decline in funding dollars from 2015’s record-breaking $4.6 billion, but a 10% climb in deal activity year-over-year.

The decline follows the wider global venture capital markets, where funding fell 10%, and even more if you discount some extreme outliers, such as the late stage financings of Uber ($5.6 billion), Didi Chuxing ($7.3 billion), and Ant Financial ($4.5 billion).

But the growth in the number of agtech deals, driven by a 77% increase in seed stage investment, bucks the global trend where deal activity fell 24% and early stage activity saw the greatest proportionate decline.

The growth in seed stage activity can be attributed in part to the increasing number of early stage resources available to agtech entrepreneurs. From accelerators to incubators to venture development organizations, at least 33 organizations globally cropped up in 2016 to support entrepreneurs looking to disrupt the food and agriculture industry.

While this support of early stage agtech businesses is encouraging, it also opens up a question about how this second wave of agtech innovation will find investment backing at the later stages, particularly in light of the 43% decline in Series A funding to agtech startups in 2016.

How the Industry Supports Agtech

By our count, there are 14 active, agtech-focused venture capital funds today with $850 million under management, and eight more currently raising funding. Even in such a small group, they are spread across the US, Canada, France, Holland, Israel, India and China. There are also a growing number of corporate venture funds in the food and agriculture industry, dedicated to supporting new innovation.

Syngenta was the first to launch a corporate venturing arm back in 2006, and Monsanto joined in 2011 with Monsanto Growth Ventures (MGV). MGV and Syngenta Ventures are by far the most active, but their peers BASF, DuPont, and Bayer have started agtech investing initiatives too. There are some also newer initiatives from smaller agribusinesses such as The Andersons, which launched Maumee Ventures in 2015, and ag retail firm Wilbur-Ellis which launched Cavallo Ventures in 2016. More recently there’s been more corporate venture activity among the food companies, and in 2016 Kellogg’s, Campbell’s Soup, Tyson Foods, and Danone announced new investment initiatives with eighteen94 Capital, Acre Venture Partners, Tyson New Ventures, and Danone Manifesto Ventures respectively. We expect more to come in 2017 including a fund from Archer Daniels Midland.

While participation from the agtech VCs remained relatively constant in 2016, and we saw growth in the corporate venture space, these investors still provide a very small portion of the sector’s overall investment needs. This means the industry needs to rely on general tech investors to fill the gaps in funding, and they played a key role in getting the first generation of agtech startups off the ground.

The First Wave of VC-backed Agtech Startups

The five most active investors in 2014 were Khosla, Cultivian, Y Combinator, Andreessen Horowitz, and KPCB. They invested mostly in precision ag and sensing, alternative proteins, and food e-commerce. That year, Conservis, Granular, aWhere, Semios all raised Series A deals, while FarmLink, AirWare, FarmLogs, and Farmers Edge raised Series B. Beyond Meat, Hampton Creek, and Impossible Foods raised Series B, C and A rounds respectively. Instacart raised a whopping $220 million Series C from three of the above VCs, and Blue Apron raised a $50 million Series C. There were also some noteworthy deals in the indoor agriculture, waste technology, and biotech sectors, but mostly from lesser known tech VCs.

Investment activity from some of these mainstream investors declined in 2016; Khosla made just three compared to 9 in 2014, for example. The pullback from these funds doesn’t mean agtech is out of favor with them, but reflects the fact that fund priorities ebb and flow along with innovation and industry development.

The industry is sorely lacking in exits, therefore exit data to provide VC funds with performance metrics for agtech and encourage further investment in the sector. There is also the possibility that some technologies will take longer than expected to gain the traction tech investors expect, which could create a lull in investor activity as they wait to see results. If lacking traction results in a down round, that could wipe out many early investors from the space altogether.

Cause for Optimism

We are optimistic that the second wave of agtech will bring more general tech investors into the fray on the back of a faster growth trajectory. Our conversations with some of the top VCs in Silicon Valley indicate that they’re eager for these new opportunities and many with a strong thesis recognize the cyclicality.

Many of the first wave of agtech startups had to build a full-stack solution just to deliver an MVP (minimum viable product) to their customers: hardware, operating systems, software applications, and communication systems. This second wave will build on an existing foundation and ecosystem, however. We expect that these startups will have more rapid growth and experience quicker adoption by farmers and customers because they can focus on building products that deliver value to their end customer rather than enabling technologies. One example is in the drone technology space, which now has an ecosystem of specialized companies innovating around the basic technology. First there were drones manufacturers like DJI, which manufactured UAV hardware technology and placed a generic camera on it to collect data. Next came DroneDeploy, an operating system designed to help drone pilots operate and offer some basic analytics of the imagery. Today we have Gamaya, which has built a hyperspectral camera to attach to drones for increased resolution, and IntelinAir, which is using machine learning to analyze third party drone imagery through an application. Expect to see similar ecosystems building around other agtech subsectors, and crossover technologies coming to the sector from other industries too.

Growing Awareness

There’s a growing awareness among consumers, investors, industry, and entrepreneurs, that the entire food chain needs to be overhauled. It’s not just meeting the food requirements of a growing global population that’s concerning investors and entrepreneurs; the food chain is largely inefficient and opaque, beset by safety issues and lacking in traceability; consumer eating trends and regulations are rapidly changing with indications that much of the existing food industry can’t keep up; agriculture’s environmental footprint is unsustainable and increasingly unpopular; and rising labor costs are cutting into razor thin margins.

Agribusinesses understand that they need to pay more attention to innovation and indicated in a survey we conducted with Boston Consulting Group that they would invest more resources on new technologies to revolutionize their industry. It’s likely many of them are currently preoccupied with the ongoing mega-mergers of Bayer and Monsanto, Chem China and Syngenta, and Dow and DuPont. But they also need guidance; the majority of those surveyed indicated uncertainty in how to approach investing in innovation.

We can also expect corporates from other industries to start participating in agtech. In December, precision ag startup Farmers Edge raised funding from Fairfax Media, the investment company of billionaire Prem Watsa, due to potential synergies with its insurance business, and recently South African media company Naspers invested in FarmLogs.

New venture investors are also yielding from all corners of the globe. US startups accounted for 48% in 2016, down from 58% in 2015, and 90% in 2014, as we saw Chinese investors make some large bets in the sector, and activity in other Western markets like Canada and the UK grew. There are growing ecosystems of agtech startups across our network in New Zealand, Australia, Latin America, Singapore, and Europe, all with accelerators, conferences, and startup competitions cropping up to support them.

Technological developments will also drive investment. 2016 saw particular growth in funding for agriculture biotechnology startups with post-GMO technologies exploiting the microbiome and gene-editing. Food waste reutilization also drove ag biotech investment. Novel Farming Systems that are producing insects, microbes, and indoor crops, gathered pace with the promise of providing sustainable food, ingredients, and animal feed alternatives.

And the data support our optimism. While funding dollars declined in 2016, the number of investors remained steady with 670 participating compared to 672 in 2015 when funding reached $4.6 billion.

There will be challenges, and the agribusinesses need to step up to those challenges; start acquiring more companies and making more venture investments. But, with an industry that represents 10% of global GDP and accounts for only 3% of venture investment, there can only be one long-term direction for investment in agtech startups.

(For more insights on agtech funding in 2016, you can download the full report here.)

by Louisa Burwood-Taylor – Head of Media & Research AgFunder – dedicated to funding the next food & agriculture revolution.