Looking for the food and ag ‘sweet spot’ for exits

Following the deep market correction that occurred in the tech space last year, to which agtech was naturally exposed and has suffered from, attention has swiftly turned to portfolio scrutinization.

The question being asked is: who got caught up in the hype and invested poorly, and who amassed a portfolio of companies with profitable futures that will lead to good exits?

The best illustrator of the frenzied state of the agtech market in 2021 and the slump that followed last year is demonstrated by the fact total fundraisings reached $53.2 billion in 2021, before falling 44 percent to land at $29.6 billion in 2022 (per AgFunder data).

The 2022 figure seems a far more realistic reflection of where the market actually is, given that between 2018-20, total fundraisings rose gradually from $21.1 billion to $27.7 billion. Given this context, the 2021 figure of $53.2 billion is a clear outlier.

“The one big [knock-on effect] is the impact on the ability for venture capital funds to raise capital,” a source told Agri Investor. “Because so many new funds launched and so many of them haven’t had exits or are young first-timers. And unfortunately, I think it’s going to be complicated to keep momentum there.

“We did four exits last year, which is amazing, and we managed to get the top of the market and that’s great. They’re the best four we’ve ever had and it’s great that the industry has got some exits, but it’s not enough,” the source added.

Along with fundraising, exits were also strong in 2021, as the likes of AppHarvest, Local Bounti, Benson Hill and Ginkgo Bioworks all rode the SPAC wave to go public, while Oatly, Zomato and Quorn parent company Monde Nissin took the IPO route, to name just a handful of public market exits.

Manna Tree Partners co-founder and manager partner Ross Iverson told Agri Investor he thinks the slowdown in exits from the agtech space that coincided with the general market slump of 2022 is going to lead to a shift in the segment of the space that will be ripe for exit activity.

“There are all of the venture capital funds that had, I would say, decent success from 2010 to maybe 2020-21,” Iverson said. “I think those firms are going to really struggle to exit those assets over the next five years.”

Iverson added that “it’s going to really leave this growth equity and buyout phase as kind of the sweet spot in private equity, from our view.”

One segment of the agtech market that did buck the trend in 2022 and is likely to garner long-term investor interest was upstream climate-related technology, namely bioenergy and biomaterials, ag biotechnology, novel farming systems, and farm management software and IoT.

Upstream investments as a whole saw the least dramatic year-over-year fundraising decline between 2021-22, falling from $15.9 billion to $15.2 billion – of this, the above four climate-related categories accounted for $10.9 billion, or 72 percent.

This, perhaps, should not come as much of a surprise. Afterall, the explosion of interest in natural capital’s climate mitigation capacity is intrinsically linked to the production of food and how the natural world is managed.

It is telling that Manna Tree’s sole exit to date, which returned very healthy gross figures of 4x invested capital and a net IRR of 80 percent, was through pasture raised eggs business Vital Farms.

In other words, the firm’s blockbuster exit came through a growth equity investment in a company that has a climate-conscious business model.