Fall Line Capital is a US farmland fund manager that also invests in agriculture technology companies. It closed Fall Line Farms Fund I from a number of top-tier institutional investors in 2013 on $127 million. The fund has made four investments in the agtech industry to date including the most recently announced investment into Asilomar, a biotech company. Co-founder and managing director Eric O’Brien, talks about the firm’s strategy, plans and challenges in the US farmland market.
What’s the investment strategy of Fall Line Farms Fund I? Is there a specific region that you are looking into?
Farmland is the primary focus of the fund, with agtech investments as a complementary and important component of our strategy. We invest throughout the US and have, to date, focused outside the core of the corn belt, where we think our expertise can create the most value, and where we can do the most to improve the productivity of the land we buy. Our focus is finding farms where a combination of capital improvements and operational best practices can increase productivity and improve cash yield to our investors.
On the agtech side, the fund has made four investments so far, ranging from software to hardware and biotech, and from seed stage to as late as Series C. We recently co-led the Series A at Asilomar because its product focus is absolutely strategic to what we do on the farmland side. If they can make a meaningful difference in yields under drought stress, that has broad applicability to our farmland. Our key criteria for AgTech investments is whether we believe the innovation is meaningful and directly applicable to our farmland within a reasonable timeframe.
We describe ourselves to agtech companies as an optimal combination of a venture and strategic investor. We bring the capital and company-building experience of a traditional VC, as well as the domain experience and connectivity of a strategic partner. Prior to co-founding Fall Line, I spent 12 years at Lightspeed Venture Partners in Silicon Valley making early-stage investments across a variety of industries. Now at Fall Line, not only can we invest and provide general advice to our CEOs, but we can test new technologies, conduct large field trials on our farms, help commercialize products, and become end customers. That is a breadth of value-add that few investors can bring to AgTech companies today. And we believe this value-added approach makes us a good syndicate partner with other investors. Our general preference is to syndicate our investments with other strong groups, including generalist VC firms, AgTech specialty firms and strategic investors.
How has Fall Line’s experience in farmland investment been?
We look at things differently from more traditional farmland investors. While we do not operate farms directly, we are very active managers willing to make substantive investments of capital, time and expertise to make fundamental changes to the land we acquire. This strategy enables us to go into regions in the US that we believe have been overlooked by institutional investors because farms there are perceived as more difficult to manage or too small and fragmented for institutional involvement. We have been able to get into markets where we see huge potential to add value by changing cropping practices, making fundamental improvements to the land and making add-on acquisitions to grow farms to more traditional institutional size. We are willing to do some of the heavy lifting to put these kinds of opportunities together and, so far, it has been working well. We are fortunate to be working with a group of excellent local operators at each of our farms who work closely with us to implement best practices and new technologies, and they have become a terrific source of deal flow for us.
How’s is your agtech acquisition pipeline?
There has been a tremendous increase in interest in agtech recently, which is something we didn’t anticipate when we first created Fall Line, but it’s an area we have always had interest in. The rise of agtech has created lots of opportunities for us because we are one of the only firms in Silicon Valley that has actual ag domain expertise. We see a lot of deal flow from our fellow VC colleagues, and we are very happy to give them our feedback and be collaborative syndicate partners. We work well in conjunction with more traditional VCs and other AgTech VCs because our main focus is not primarily on agtech deals, so we don’t feel the need to always be the lead investor or overreach on capital allocation in a deal. As a result, people like to show deals to us because we play nicely with everyone. The pipeline is strong, and there are lots of good companies out there.
What do you think of the current US farmland market?
On the farmland side, we feel that the market is not at an equilibrium point, which makes it challenging from an underwriting perspective. We have very low commodity prices and we still have land prices anchored to comparables from two to three years ago when commodity prices were much higher. In the short-term, this dynamic really compresses the expected cash returns on farms and it makes underwriting very challenging. We expect one of two things is likely to happen so the market won’t stay out of the equilibrium for very long. Either land prices need to come down to reflect the lower cropping margins that the futures curve is indicating, or crop prices need to come back up. This is the first time in probably fifteen years that we’ve had three years in a row of declining crop prices, so we suspect that land prices will likely come down. It takes a while for short term commodity prices to ripple through land prices, but it eventually does happen. For now, our focus is on finding opportunities where our value-add creates enough headroom in expected returns to hit our underwriting targets despite today’s compressed cash yields. It’s not easy, but we’re finding them.