The fast-paced nature of venture capital funding in agtech is arguably its greatest flaw, experts said last week at the World Agri-Tech Summit in San Francisco. The pressures for a return on an investment could hamper efforts to scale revolutionary tech innovations.
Venture capital firms, which make large investments in early-stage companies with high upside and growth potential, typically want short-term returns. That often doesn’t work for agtech startups, said Vipula “Vi” Shukla, senior program officer of agriculture research and development at the Bill and Melinda Gates Foundation.
“I think there is a fundamental disconnect in timelines between expectations in the VC model versus the patience required for both technology development and technology market penetration and scaling in agriculture,” Shukla said during an investor panel. The Bill and Melinda Gates foundation recently announced a $200 million commitment to scale innovation in sub-Saharan Africa and South Asia to help smallholder farmers adapt to climate change.
In general, investments in agtech are lower because of the risk involved. Weather seasonality and the slow-growing nature of crops requires more patience from stakeholders to establish whether their investments will pay off.
“The old model of ‘I can write a check and I can get my return in 3-to-5 years’ — less clear how that really works here,” said Stephan Dolezalek, a managing partner at Grosvenor, a London-based diversified property group.
Despite strong demand for innovation, the agtech industry has faced a major capital drought in recent years. Venture capital funding has declined 60% since late 2021 due to broader market uncertainty and decreased risk appetite from investors, according to a recent report from McKinsey & Company. Currently, about 100 startups are running behind on their fundraising targets and could face bankruptcies, layoffs and other distressing scenarios this year.
Eric O’Brien, co-founder and managing director of private equity firm Fall Line Capital, said the problem lately with agtech venture capital funding is not the model, but deal selection.
“The model itself can work, but it’s a matter of are we selecting the right companies and are they solving big enough problems that there’s enough demand for what they’re trying to build,” O’Brien said.
One problem, according to Dolezalek, is that there are too many “copycat” firms trying to solve similar problems. In other words, the startups chase “incremental improvements” instead of trying to change the world.
Additionally, there is a lack of successful stories to look to today compared to three years ago, Dolezalek said. Instead, bankruptcies have dominated the news, including the collapse of Aerofarms, one of several vertical farming startups that filed for bankruptcy last year after struggling to make a profit.
“Today it’s harder to point at those same companies and say ‘that’s exactly what success looks like’,” Dolezalek said.
Aerofarms has since emerged from Chapter 11 bankruptcy and is under the leadership of Molly Montgomery, a venture partner with lead investor Grosvenor Food & Ag Tech. Grosvenor isn’t giving up on Aerofarms just yet, believing there’s still potential for growth in the vertical farming sector.
“We took it through bankruptcy because we do think indoor farming is going to be incredibly valuable and important,” Dolezalek said.