If you’re an AgTech founder with game-changing technology, you likely made quick work of raising initial funding. Investors flocked to support bringing your innovation to market and spur early adoption, growth, and a fast-spinning sales flywheel that would justify a future raise.
But what happens when farmgate market penetration turns out to be more challenging than anyone anticipated, and it takes longer to reach the milestones you promised your investors? This dynamic can create extensive cash burn and an urgent need to raise additional capital at a time when your up-round milestones have yet to be achieved. This situation, not-so-affectionately referred to as the “Valley of Death,” can lead to valuation compression, further dilution, and make raising future funds more challenging.
Inside this valley, incoming investors have a less than rosy data set to consider and may be hesitant to back technology that customers seem reluctant to adopt. They will want to know why the company hasn’t hit its milestones and may use this position to negotiate stringent terms that can slow the capital-raising process. Meanwhile, burn continues and time is running out.
In the first of a two-part AgTech Capital Markets series, we will look at why this valley exists and how to maximize success in the midst of a longer AgTech sales cycle.
A Longer J-Curve
The market need, opportunity, and potential for AgTech to meaningfully change our food supply chain and world is massive but getting inside the “farm gate” to deploy innovation has proven to be challenging. Farmers are cautious when adopting technology, and full application across crops often takes many years, not months, as farmers use the test and wait approach. The reality—to which many of the sector’s most sophisticated investors have now adapted their models—is that the so-called “J-Curve” is simply longer in AgTech than in other industries, and perhaps should instead be considered an “S-Curve.”
Entrepreneurs and early-stage business owners have an opportunity to dig into these dynamics and adapt their approach to raising capital accordingly. Here are some key considerations ahead of your next raise:
1. Raise more money than you think you need. Consider discounting your post-raise cash requirement assumptions to your worst-case scenario (and then some). With more cash on hand, you will have less pressure to prove your product’s marketability in a short period of time. While you may encounter more upfront dilution, it is often less than what you might experience in the “Valley of Death.”
2. Broaden your outreach and look beyond the “usual suspects.” Venture capital firms focusing on AgTech are familiar with this problem, having lived it in their portfolios in recent years, and approach new investments with a skeptic’s eye accordingly. While the AgTech VC market is the more efficient part of the market—the fastest and easiest to find and access—it is not necessarily the most aggressive market today.
Beyond this efficient market lies a less efficient world of Institutional Investors—Sovereign Wealth Funds, Family Offices, Pension Funds, Endowment Funds Asset Managers, and other institutional investors—who deploy different investment models, often over longer time horizons. They do not necessarily have the same preconceived notions about AgTech adoption curves as VC investors; many also pursue long-term or long-hold strategies that make the rate of adoption a less critical concern. And some have Environmental, Social & Governance (ESG)-driven agendas that make them particularly enthusiastic about agriculture-adjacent opportunities. Broadening your outreach beyond traditional VCs to institutional investors will be a critical ingredient to any successful raise in today’s market.
3. Give yourself more time to raise your round. Accessing the broader market of slower moving and less accessible counterparties is, not surprisingly, more time consuming. That could mean a round takes seven months to raise instead of the three you originally planned. Additionally, markets are active, investors are busy, and counterparties have become more discerning around AgTech due diligence and model assumptions. If you raised more money in your prior round (see Tip #1, above), that might not be an issue. However, if you’re worried about running out of capital, now might be the time to run a cash flow sensitivity analysis and consider initiating your next raise sooner than you have in prior rounds.
4. Thoughtfully time your commercialization strategy. Once you commercialize your product, investors naturally begin valuing you on financial metrics and what your technology has done rather than what your technology can do. Thoughtfully timing your commercialization strategy with your next raise is critical. This push-pull between increasing your burn ahead of growth is as much an art as a science, but history suggests an all-or-nothing approach. Investors accept higher burn but expect immediate traction for that investment. Modest investments in a commercialization team that lacks scale is a recipe for higher burn with little traction, or the Valley of Death. Also consider alternative ways to prove out your technology ahead of going all-in on the commercial team. Many early-stage AgTech have benefited from licensing agreements, joint ventures, and partnerships with more strategics that allow access to the farm gate without meaningful investments in overhead.
5. Consider a dual-path process approach to maximize optionality and mitigate downside outcomes. Many large agribusiness multi-national platforms were active AgTech investors and buyers in the 2010s, only to be burned by valuations that turned out to be over-optimistic given the slow adoption curve. For a variety of reasons, that attitude has started to shift in recent months. Strategics have generally weathered the pandemic well, and as commodity prices have improved meaningfully, many strategics are flush with cash and revising their investing and acquisition strategies.
Broadly, strategics are also grappling with the same ESG pressures faced by public companies around the world. For some AgTech owners, a dual path fundraising & M&A process to both investors and buyers can help bring additional optionality to you as a business owner and mitigate the downside outcome should the capital raise not go quite as initially expected.
Finding Success in Today’s AgTech Capital Markets
The current AgTech cycle has reached a point where flexibility and an openness to multiple routes to growth are essential to success. For many businesses, simply following a traditional VC playbook or following in the footsteps of tech businesses serving different end-users is no longer the most viable option.
In the midst of meaningful AgTech tailwinds, we’ve seen a polarization of fundraising results—some companies usurping the Valley of Death, raising hundreds of millions of dollars at multi-billion-dollar valuations, while similar competitors are struggling to raise money. In the second part of this two-part series, we will explore this polarization and why some AgTech companies like Benson Hill, AgBiome, Bowery, and Ginkgo, to name a few, are finding success in today’s AgTech capital markets while others are not.
Cascadia’s Food, Beverage & Agribusiness team has the good fortune to work with entrepreneurs and business owners with inspiring visions of addressing the food and sustainability needs of current and future generations. Their ability to bring the same creativity and enthusiasm to considering all the routes to growth will serve them well in the months and years ahead.
Scott Porter is a Managing Director at Cascadia Capital, where he puts his deep knowledge of food and agriculture in the United States and Canada to work in service of clients pursuing mergers and acquisitions, restructurings, and private placements.