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Because the agriculture know-how (agtech) business adapts to a brand new regular in fundraising—and a vastly totally different macroeconomic local weather than in years previous—funding alternatives are slowly beginning to emerge. As an alternative of ready on the sidelines for situations to stabilize, strategic corporations and monetary traders can use this restricted window of alternative to make daring strikes and achieve a aggressive benefit.
Over the previous few years, the agtech business has confronted a significant capital drought. Enterprise capital (VC) funding has declined by 60 % since late 2021, on account of broader market uncertainty and decreased danger urge for food amongst traders. Though the funding setting is exhibiting indicators of stabilization, the influence of the slowdown on agtech start-ups, particularly, was vital. We estimate that roughly $6 billion that was invested in 30 necessary agtech start-ups was misplaced in 2023 due to turnaround or misery conditions. And a number of other corporations might face an analogous destiny: in our analyses of 349 well-funded start-ups, we have now discovered that at the least 30 % of them, that are elevating $10 billion to $15 billion in combination capital, are working behind on their fundraising targets and can doubtless want capital injection.
Regardless of these headwinds, the long-term business outlook stays promising. All of the components that made funding in agtech interesting previously stay pertinent right this moment: meals safety and sustainability issues are prime of thoughts for coverage makers and customers, and developments in know-how, notably in digital and biotech, are serving to agtech companies develop into extra worthwhile, productive, environment friendly, and environmentally pleasant (see sidebar “An investor’s perspective”). Furthermore, though a number of start-ups are going through financing challenges, they proceed to display that they’ve robust mental properties (IPs) and expertise, usually alongside novel enterprise fashions.
Robust instances can current distinctive alternatives, and this holds true for the agtech business. In our view, there are a number of totally different performs on the desk for strategic corporations and monetary traders to contemplate within the present setting, starting from bolt-on acquisitions to direct minority investments, as we’ll spotlight on this article.
Impression of the capital drought
In 2022, we examined how a pointy drop-off in funding affected agtech start-ups after we witnessed speedy development between 2012 and 2020. The challenges continued into 2023, with the sector experiencing a year-over-year decline of 30 % in VC funding (Exhibit 1). The slowdown occurred towards the backdrop of a broader retreat in general VC funding, which fell by 50 % over the identical interval.
There are a number of the explanation why that is occurring. Inflationary pressures have resulted in elevated prices for important assets resembling power, labor, and uncooked supplies, creating sustained uncertainty concerning the long-term profitability and scaling potential of those start-ups and slowing down innovation. Because of this, many start-ups are fighting weak unit economics—a retreat from the “development in any respect prices” enterprise mannequin—disappointing gross sales (for instance, in plant-based protein), and lengthy improvement cycles.
On this setting, institutional traders have develop into more and more cautious of increasing their non-public fairness (PE) and VC publicity in agtech start-ups due to the autumn within the fairness worth of their investments and lackluster efficiency. Greater rates of interest have additionally made it costlier for them to offer funding for start-ups, whereas concurrently rising the risk-free price of return.
Buyers’ expectations for agtech start-ups have shifted over time, too. When the going was good, traders centered on corporations that demonstrated robust development. Nonetheless, in a extra challenged macroenvironment, they’ve elevated emphasis on constructive money stream era.
This development in non-public agtech funding can be being mirrored on the general public facet. Whereas this information is usually missed within the broader evaluation of the VC funding setting, our composite evaluation of 35 public corporations in third quarter 2023 confirmed a decline in market cap of round 60 % from the height of first quarter 2021.
The influence of this capital drought has been vital. We estimate that roughly $6 billion that was invested in 30 necessary agtech start-ups was in danger, if not already misplaced, as of June 2023. There are a number of causes for this, together with chapter bulletins, shutdowns, restructuring, and acquisitions. All 5 agtech subsectors we analyzed (next-gen meals and various proteins, controlled-environment agriculture, digital and precision agriculture, biosustainable supplies, and sustainable inputs) confronted numerous challenges, starting from layoffs to bankruptcies, in each pre-IPO and public agtech corporations (Exhibit 2).
Past the influence in pure greenback phrases, the lack of expertise throughout these 30 corporations totaled over 3,300 people. And there may be nonetheless the chance that the mature IPs, applied sciences, and belongings owned by these start-ups may very well be erased, if they don’t seem to be meaningfully redeployed.
To grasp what number of different agtech corporations may be going through financing danger, we examined the elapsed time for the reason that final funding rounds of 349 pre-IPO agtech start-ups and the way it in contrast with the typical period between funding rounds over the previous decade.
However the strikes start-ups have taken to increase their runways, we imagine this information offers an approximate indicator for the extent of stress. Primarily based on this analysis, we estimate that 30 % of those start-ups are looking for their subsequent funding spherical and can doubtless want a capital injection quickly to stay operational (Exhibit 3). The aggregated capital they raised is estimated at between $10 billion and $15 billion. With out additional funding, this capital may very well be misplaced, together with the IPs and expertise they’ve developed.
The toughest-hit subsectors may very well be next-gen meals and various proteins, digital and precision agriculture, and controlled-environment agriculture (Exhibit 4). A number of start-ups in these subsectors have stretched their runways past preliminary expectations and are doubtless in want of extra funding.
Causes for optimism however a slim window to behave
These funding challenges and the potential lack of capital may immediate some to sound the demise knell for the agtech business, however in actuality, its long-term outlook continues to look promising.
Let’s begin by analyzing the funding decline in historic context. When analyzed over a ten-year interval, agtech funding continues to stay sturdy, regardless of ongoing challenges. Funding information additionally exhibits early indicators of stabilization after the COVID-19-pandemic-induced peak in 2021: the $4.6 billion invested in agtech start-ups between first and third quarters 2023 is, in truth, barely larger than the $4.4 billion invested throughout the identical interval in 2020. This implies that funding hasn’t dried up totally for agtech start-ups. Whereas combination funding is certainly decrease than the 2021 peak, start-ups with development potential are nonetheless in a position to appeal to traders.
Furthermore, regardless of present macroeconomic challenges, there are a number of tailwinds powering the long-term development of the sector. The agriculture business advantages from digitization and the adoption of superior applied sciences, together with robotics, biotech, and generative AI. Potential finish customers additionally stay motivated to discover these new applied sciences, notably as they develop into extra reasonably priced. On the similar time, meals safety is a prime geopolitical precedence. With the agriculture business answerable for over 1 / 4 of emissions, sustainability stays a significant drawback. Upstream, we see larger farms planning to extend their use of sustainable, digital, and precision agtech options. And additional downstream, there may be fast-growing adoption of flexitarian (semi-vegetarian) diets, particularly among the many extra prosperous and concrete populations.
Given these long-term development components, now’s the time to play offense. In our view, incumbents and traders have a brief window to behave and supply monetary or operational help to the start-ups that face funding challenges, whereas their capital nonetheless retains excessive worth. Doing so proactively, whereas the IPs are nonetheless contemporary and prime expertise continues to be round, may help traders retain and solidify the long-term worth of those start-ups.
Methods for traders and incumbents
Regardless of quite a few challenges, together with crop enter stock points, incumbents have navigated business disruptions and are due to this fact in a robust monetary place to capitalize on funding alternatives. Primarily based on our evaluation, free money stream amongst massive agrifood incumbents, for instance—particularly within the growers, inputs, and meals ingredient classes—grew at a CAGR of 10 % between 2019 and 2022, which suggests they’ve capital obtainable to deploy.
In the meantime, traders, notably these with cleantech agendas, nonetheless have appreciable funds at their disposal. Local weather tech funding in PE elevated by one hundred pc to $3 billion between 2021 and 2022; funding elevated in VC by 10 % to $10 billion throughout the identical interval. The investor pool can be increasing: lately, there was an inflow of non-VC traders (resembling development fairness and infrastructure traders) within the local weather tech sector, which partially overlaps with the agrifood business.
Under are 4 potential approaches that present an array of danger/return trade-offs, whereas addressing the underlying challenges at these start-ups:
- Asserting operational self-discipline. The sudden and stark change within the funding setting has been a wake-up name for start-ups. As start-ups recalibrate their methods, conventional PE traders can use this era to instill better focus and self-discipline (ideally tied to tangible efficiency milestones, resembling unit economics targets or enrolled acreage).
- Distressed funding. We frequently observe that start-ups, particularly in digital and precision agriculture, have compelling merchandise however battle with monetization due to consumer habits or worth chain challenges. There are cases when corporations have run out of runway, however it’s attainable to comparatively rapidly fine-tune the providing and pivot the enterprise and pricing fashions to create a quick-win alternative.
- Roll-up performs. Many agtech start-ups face points relating to product competitiveness: merchandise could lack in efficiency or price competitiveness, resulting in decrease market traction. Different-protein corporations, for instance, should handle a number of challenges without delay: style, affordability, and commercialization (together with branding and distribution). A sequence of acquisitions of corporations which have checked one or two (however not all) of the packing containers might create an entire better than the sum of its elements.
- Partnerships. Latest rate of interest hikes (and better price of capital) have challenged many enterprise circumstances, notably in areas with lengthy improvement timelines, resembling sustainable inputs and biomaterials. By offering money injections and offtake agreements, strategic companions can lengthen the runway and derisk their investments.
Methods for start-ups
On their half, agtech start-ups also can make strategic and operational adjustments to their enterprise fashions to navigate these difficult instances. Whereas the tailwinds mentioned on this article ought to give them hope, they have to additionally acknowledge and reply to the return to normalcy within the funding setting.
The discount of burn charges stays paramount. Now we have seen totally different corporations undertake this focus in step with their very own business contexts. Sustainable-inputs corporations, as an example, are weighing the breadth of their R&D pipelines, recognizing that it’s attainable to “show the platform” with a smaller variety of new merchandise than they could in the end be able to producing. Different choices embody using partnerships or a future proprietor’s personal gross sales representatives to faucet into new geographies. In the meantime, established (however nonstrategic) enterprise strains will be monetized via divestitures or licensing preparations to herald capital.
Begin-ups also can look into whether or not vertical integration is a “should do” to commercially derisk the enterprise or a “good to have.” Within the meals and substances house, for instance, we have now noticed a narrowing of enterprise fashions, with some corporations curbing B2C meals product ventures to focus purely on B2B ingredient performs.
The agtech business stays as related as ever. Whereas the unsure world funding local weather has made traders extra cautious about their subsequent strikes, seizing progressive alternatives right this moment could also be important to unlocking development.
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