The agribusiness industry is ripe for disruption. Growers, processors, and manufacturers are having a huge, increasingly visible, and problematic impact on environmental and social sustainability. And food producers, suppliers, and sellers are under pressure to meet increasing consumer demand for healthier products and more transparent supply chains. Simultaneously, the industry faces supply constraints from factors such as climate change, degraded natural resources, and increasingly strict regulation.
As a result, many well-established agribusiness companies are struggling to maintain market share. In 2014, packaged food companies lost $4 billion in market share to smaller, fast-growing brands that were meeting the demand for less-processed food, and according to the 2016 Credit Suisse Packaged Food Preview report, the top 25 packaged food companies have lost $18 billion in market share since 2009.
We’re also seeing significant consolidation: As companies struggle to cut costs and find efficiencies, acquisitions are becoming increasingly attractive. In the last few months alone, Bayer CropScience (pesticide and seed provider), Danone (known for yogurt brands like Dannon and Stonyfield), and Mondelez International (famous for snacks like Oreos and Triscuit) have all attempted to acquire other companies in hopes of growing profits and eliminating redundant costs. And just recently, international beer giant AB InBev’s takeover bid for SAB Miller was approved.
Meanwhile, institutional investors such as venture capitalists (VCs) are paying more attention to food-tech and ag-tech startups that are using technology to disrupt the status quo food and agriculture system. According to the well-cited AgFunder report, private investment activity in the industry nearly doubled in 2015 alone. Compared with $2.36 billion in 2014, the agribusiness industry attracted $4.6 billion from 672 unique investors across 499 ventures.
While this new investment may seem like good news for a struggling food industry, it’s important to remember that agribusiness is not Internet technology. The same kind of venture capital model so effectively used to scale startups won’t work for the agriculture system, because it is fundamentally based on slow-moving, unpredictable natural systems. Agriculture is also a particularly conservative industry. Investors and entrepreneurs may find that gaining traction proves both challenging and time-consuming. Another problem is that, though environmental sustainability is a necessary component for agriculture ventures, many investors still believe that environmental impact is at odds with profit.
Right now, the investment landscape for agribusiness is starting to look a bit like the clean tech industry did before it crashed. Starting around 2005, corporate and VC investors—coming off huge successes in Silicon Valley—poured capital into alternative energy technologies, such as solar, wind, and biofuels. The goal: to make more money while helping move the US economy from one based on polluting, climate change-causing fossil fuels to one based on “clean” energy sources. However, when the economy crashed in 2008 and energy prices dropped as a result of natural gas entering the scene, even vast amounts of government subsidies could not save the clean tech industry. VCs realized their model, with its short three-to-five-year timeframes and inability to support large capital expenditures, wouldn’t work. The money fled—and fossil fuels remain the status quo. A second wave of clean tech innovation with new business models and investor types is beginning to emerge, but as private sector leaders in agribusiness develop best practices for accelerating sustainability-oriented innovations—ventures that create an environmentally and socially sustainable future and deliver value to customers and firms—can they avoid the mistakes of clean tech? We think so, and corporations, investors, and entrepreneurs all have a role to play.
Corporate venturing (CV)—external innovation efforts by established corporations including but not limited to direct investment in startup companies—holds a lot of promise. Given their experience, scale, and resources, established agribusiness corporations are well poised to help build the food system of the future, and CV allows them to gain access to the innovation ecosystem cheaper and faster.
Take agrochemical and seed companies Syngenta and Bayer CropScience. Earlier this year, these companies decided to find and support external innovation by backing AgTech Accelerator, a commercialization platform intended to help start up companies and research efforts build industry-transforming companies by providing expertise, resources, and capital, or by licensing intellectual property. Both Syngenta and Bayer have representatives on the accelerator’s board to ensure that their companies benefit from its innovations, while new ventures in the accelerator gain access to the corporations’ knowledge and network.
This type of CV activity is promising, because it creates cross-sector and pre-competitive partnerships. Corporations’ capital and expertise unlock new mechanisms that support innovation, including research from university labs, connections to growers or industry organizations, and venture capital that can use accelerators as a source of industry-verified deal flow—resources most startups otherwise wouldn’t be able to access.
Meanwhile, agribusiness investors, including VCs, need to differentiate themselves by cultivating domain expertise—in a specific agricultural subsector, for example—so that they can act as qualified advisors to entrepreneurs.
New Crop Capital (NCC), for example, is a $25 million fund entirely dedicated to creating plant-based and cultured protein that can substitute for environmentally demanding animal products. But, like the other leading investors, it knows it cannot work alone. NCC is working with universities and nonprofits to stimulate entrepreneurship that they can then fund.
Similarly, Better Food Ventures, a VC firm in Silicon Valley, has founded The Mixing Bowl Hub, a “dot-connector” that—through events such as hack-a-thons, expert panels, university workshops, and pitch competitions—helps support entrepreneurs entering agribusiness for the first time. By educating the entrepreneurial community, the firm creates better investment options for its fund.
Sustainability-oriented entrepreneurs need to find investors that appreciate their vision for impact as well as financial returns. To secure this type of capital, agribusiness entrepreneurs need to strike a balance between their commercial, sustainability, and technical orientation—to maintain a commercial orientation and convince investors of their technical expertise without compromising the integrity of their sustainability mission.
What that balance looks like, of course, depends the investors and the startup. For example, Indigo Agriculture, a company developing biological inputs that can replace synthetic ones (and just closed a $100 million funding round), features sustainability on its front page. For Indigo, sustainability is integral to its value proposition; biological inputs offer an environmentally friendly alternative to current farming inputs like pesticides and fertilizers. Yet, the environmental benefits come after commercial and technical orientation. Indigo was able to raise money by promising an equally effective alternative, developed by a highly qualified team of scientists and domain experts. Perhaps more than other entrepreneurs, sustainability-oriented entrepreneurs must reassure investors that they are qualified to deliver on technology.
Spoiler Alert, a business-to-business marketplace for reducing food waste, embraced the practice of maintaining a commercial orientation when it chose to apply to the leading tech accelerator TechStars, rather than a food-focused accelerator. SpoilerAlert is indeed a food-tech startup with a sustainability-orientation, yet it has prioritized building a strong commercial and technical reputation. The TechStars brand will help convince investors that Spoiler Alert is a company out to make a profit and a difference.
Like other entrepreneurs, those in agribusiness must be well-versed in investor types (venture capital, corporate strategic, or family office), and understand the differences between each type’s goals and timeframes. Traditional venture capitalists may expect returns in less than five years, while some corporates may be able to wait longer, and family offices may not expect returns at all. Entrepreneurs who know their investor also know how to tailor their pitch and have a higher chance of securing capital that aligns with their mission.
Despite many contrary media headlines, the global food system is not broken. It can produce more than ever at increasingly low costs. But, it is not yet robust enough to withstand future conditions. Everyone—including policymakers and consumers—has a role to play. But the private sector—including established food and agriculture corporations, investors, and entrepreneurs—can unlock the capital necessary to accelerate innovation while avoiding the fate of the clean tech industry. If so, they can ensure that sustainability-oriented agribusiness innovations become the status quo, rather than the anomaly.