How to encourage investment in early stage agtech

Agtech investment, once confined to the “top three” of drip irrigation, seed genetics and biofuels, is widening.

New technologies are driving change in the sector, including mobile devices, sensors monitoring anything from water use to disease, big data analysis, drones to map drought zones, alternative protein sources and genetic engineering.

But one major challenge remains: encouraging investment not just in established, less risky companies but also younger, earlier-stage start-ups.

Entrepreneurship in the space has grown, prompted by success stories and growth in investment from some big names, particularly in the last two years. New investors include Kleiner Perkins Caufield & Byers, Google Ventures, DFJ, Khosla Ventures, and Andreessen Horowitz. The amount of investment from agtech-focused VCs has also increased, due to the launch of new funds. In 2015, 499 companies attracted $4.6 billion of investment, almost doubling 2014 investments of $2.36 billion.

However, most investments made in agtech and foodtech are made in more mature companies, past early-stage milestones. Many good ideas do not get to commercialisation stage, simply because entrepreneurs, having raised initial capital through funding programmes or from the ‘three Fs’ (friends, family, and fools), run out of money and can’t meet milestones.

This begins a vicious cycle. Without follow-on funding, a start-up can’t undertake significant development, but without significant development, it can’t attract funding.

So how can we motivate more investors to put capital into early-stage innovation?

One answer lies in spreading the risk. Bringing a few VCs on board does this, allowing a company to raise more. The Series A funding for CropX, led by Finistere Ventures, Innovation Endeavors, and GreenSoil Investments, used this strategy. Impact investors looking to put money into environmental sustainability and food security are also there, a high profile example being Bill and Melinda Gates.

Another way of spreading risk is getting the agricultural sector itself more involved, from regulators, input and technology providers to farmers themselves. In Israeli medical technology, bringing on several VCs also brought in sector participants such as physicians at the initial funding level, in turn giving VCs more confidence in investments.

Farmers want to invest in their sector, and, like the doctors who have transformed the early-stage medical investment landscape, look to areas they understand. Until now, most have invested in farmland. Soon, however, these investors will want to look at maximising returns from that land.

Some, particularly in the US, have already realised that farmer involvement in early stage agtech investments could have a big impact on the sector. In April, agri-drone sensor and analytics developer Slantrange raised $5 million in a Series A funding round. Its first backers, though, were Nebraskan corn and soybean growers.

Finistere and International Farming have launched an agtech joint venture, which will use IFC’s farmland base and Finistere’s scientific testing programme to accelerate growth and commercialisation in portfolio companies.

Farmers themselves mostly invest through private or government organisations, if at all. In Israel the kibbutzim, which form a large proportion of the farming community and operate a bit like co-ops, could invest, but convincing them to make a collective decision to do so could take time. There are also private farmers who express interest, but not enough to call it a trend. It’s a change that also needs to take place in Europe.

Another important step is to ensure international players and multinationals are aware of the potential in the local scene, as we have done by setting up a $10 million early-stage investment fund with Bayer Crop Science.

Agtech start-ups will be more successful both on the market and in raising money if a wider group of investors join those that are already there, including the backbone of the world agri industry – farmers.

The fourth Trendlines AgriVest Conference will be held on 27 September 2016, where the firm plans to talk about farmer involvement in agtech investment among other topics.