In 2017, the average valuation of all financings is $1.27B (as of August), already exceeding the $1B seen in all of 2016. Also, while deal count remained highest in Series A, the total percentage of financings that were $25M or above grew significantly, accounting for 61 percent of all financings so far this year, while only accounting for nine percent of the total deal count. Valuations are also climbing with Series A (the largest cohort of deals) post-money rising from $16.1M in 2016 to $24.8M. We know that even the best of databases tend to under-report all deals (especially at angel/seed stage), but the trends are undeniable.
At our second invite-only Agtech Deal Day event in Los Gatos last week, there was engaging discussion among investors and founders about some of the extraordinary rounds being raised in the $100M level and above. Some of the increase in Series B (or later) financings can be attributed to the rising number of companies raising, a natural by-product of the pipeline of seed and A deals of recent years. However, there are also companies that are arguably creating disruptive platforms, and business models that go well beyond “traditional” farm technology companies. High-profile companies in this group include Farmer’s Business Network, Indigo and Plenty, which have all raised large rounds and valuations atypical of the sector.
It can be reasonably argued (certainly by their CEOs) that they are pursuing technology platforms and/or a role in the value chain that is much more ambitious than many of their peers. In the case of Plenty, CEO Matt Barnard recently noted a global market for their farm system ~ 500 facilities and a market for produce and high-value fruit in excess of $200B – while expressing intent to tackle seed breeding and production. Indigo CEO David Perry’s recent article blog commented on the “plateau” of ag yields and rising input costs and underlined their goal of replacing 90 percent of chemical insecticides and fertilizers with microbes, while creating premium markets for the farmer’s crops. Farmer’s Business Network CEO Amol Deshpande is building new business models for crowdsourcing of data on seed performance, and developing new distribution and supply models to increase farmer profitability while taking aim at the high legacy margins in inputs with a generics model not unlike that in Pharma.
However, despite all of the innovation in our midst, investors targeting the farmer know that technology adoption is a major challenge. Talking to some of the leading investors in the sector, there is an acknowledgement that winning markets “one farmer at a time” is unlikely to be successful. While getting credible data on value addition is key, most investors we talk with recognize the importance of strategic partners and channels. This certainly is a factor in the number of syndicates working closely with strategic investors or their parent entities, and the rise in CVC entities over the last 5 years that is noted in our report.
Investors will be increasingly leery of startup plans that fail to recognize the challenges of getting to a venture return in the expected five-year window with this approach. Of course, getting initial customers and multi-year datasets on robust customer trials is necessary, but it is difficult to see this approach scaling. We recently invested in the Insuretech startup Crop Pro. The company is undertaking a novel strategy to insure farmers using new Ag technologies on farm as a means of matching adoption risk to the potential upsides of trying new technologies. CEO Billy Rose argues that farmers in a poor profitability environment are more likely to try new tech that can drive profitability if downside risk is managed.
There are big bets being made by companies like these and many others in our sector aiming to build their own constituency. While not for the faint of heart, the investors in these companies are betting big on being able to transform, not just improve, Ag technology and, in some cases, the food distribution chain and financial services that support the farm system. The proof will, of course, be in the pudding, but large rounds also buy time and the ability to show results in the field, the marketplace and building material revenues.
Elite syndicates also have a habit of getting results, and groups like Innovation Endeavors, GV and Khosla Ventures to name a few have successfully crossed over into Agtech. It is also interesting to see non-traditional Ag investors like SoftBank entering the fray, which speaks to another developing trend – the option for investors to build “real companies” without looking solely to traditional Ag majors for an M&A exit. This secular trend is going to be watched closely as consolidation impacts exit options and timelines.
In this context, I think we will see a bifurcation in valuation between incremental/enhancement technologies in Agtech and those companies that are redefining what Agtech and related markets will look like in the future. This trend should not be surprising given it has happened in every other major venture segment. Its an unprecedented time of opportunity in Agtech for managers, LPs and entrepreneurs alike.
Author: Arama Kukutai