Growth prospects remain strong for vertical farmers

The experience of London-based start-up Growing Underground and the previous excitement created by its predecessors, suggests institutional capital could enter the fray sooner rather than later.

The world of vertical farming – also known as controlled environment ag – may soon have yet another heavy-hitting player with which it must contend, with London-based Growing Underground recently kicking off its £15 million ($19.6 million; €17.8 million) Series A.

Established in 2012, the start-up grows micro green herbs such as rocket, pea shoots and radish, among others, using a hydroponic system that uses no soil but relies on LED lighting and a controlled climate environment.

Until now, Growing Underground has depended on its initial start-up capital from, “as they say, friends, family and fools,” as co-founder Steven Dring put it to Agri Investor during our visit to the company’s headquarters last week, which is based 33m underground in a disused part of the London Underground subway network.

This was followed by two rounds of crowdfunding in early 2014 on Crowd Cube which yielded £2 million, along with an undisclosed “corporate investment from one of Europe’s largest independent salad growers.”

For Growing Underground, the Series A represents its first real foray into private capital markets. How the company has fared with this fundraise to date and the experience it has had in attracting retailers to its produce, offers a useful window into current investor sentiment towards this relatively young sub-sector. It also signals the prospects of businesses in this space that could become future portfolio companies.

To begin with, the start-up is directly raising the £15 million it has targeted without the aid of any external firms and has already secured £3 million, which, according to Dring, is due to the eagerness of investors to gain exposure to the business and the controlled environment sub-sector in which it operates. As with a lot of agtech and innovative food production approaches, the majority of the investors are made up of family offices and high-net-worth individuals.

“We are currently reviewing potential advisers, however based on the current level of interest, we may not require them,” explained Dring.

The reception Growing Underground has received from food service businesses such as restaurants and retailers is also telling.

“We were pushing at an open door,” Dring says of the reception the start-up received from major grocery chains. “They want new entrants into the market, and they want to see innovation. All of the retailers are aware that in 2014, KPMG mapped Walmart’s fresh produce supply chain over the top of the IPCC’s climate change model, and 95 percent of their fresh produce supply chain was under threat over the next 15 years.”

“So, you’re going to a retailer and offering them a solution to a problem they’re already looking at,” he said.

The fledgling company’s annual turnover figures, which have registered significant year-on-year increases, appear to support this. The business started trading in 2015 and “did a matter of pence” in its first year, said a wry Dring, which grew to £30,000 in 2016; £100,000 in 2017; £298,000 in 2018; and “just shy of £500,000” last year.

The co-founder expects the business to become EBITDA positive by the end of 2020, with this milestone being one of several that must be achieved in order to access the £10 million portion of the two-tranche £15 million Series A.

Much like the more developed operators in this space such as InFarm, which raised a $100 million Series B in 2019 and Plenty, which secured a $200 million Series B in 2017, Growing Underground also has its own bespoke approach to indoor farming.

Putting aside the impact this siloed approach has had on the sub-sector’s ability to reach maturity (it hasn’t helped) and in turn attract institutional capital, it has given Growing Underground a proprietary method that can be sold to prospective indoor farming operators.

The start-up is duly exploring this avenue, with six advanced proposals already out with clients to build new farms using its approach, which will be established under separate special purpose vehicles.

If the Growing Underground experience is anything to go by, prospects in this space remain strong, suggesting it is only a matter of time until institutional capital is put to work here in a meaningful way.

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