Join our mailing list to receive our news & views:
November 17, 2021
For AgTech companies in today’s marketplace, it’s not enough to have game-changing technology. As we saw in Part One of this series, penetrating the farmgate and deploying innovation inside complex farm-to-plate production and supply chains can strand innovators in the dreaded “Valley of Death.”
In Part Two, we want to look beyond the companies in this “Valley” and focus on what the winners in today’s AgTech capital markets are doing right. We believe 10 structural and operational themes unite the companies leading the massive effort to remake the way the world eats.
Multiple Paths to Create Value
Companies attracting the most investor interest either penetrate multiple end markets or derive value at numerous points along the food production chain.
For example, Benson Hill, the food tech business that went public via SPAC in September at a $1.35 billion valuation, has rallied support from investors with a vision of using data science to engineer better crops in less time. The company’s business model aims to generate profitability at each step of the journey—from farmgate to processing to product.
Other leaders in the segment are finding ways to make their AgTech-driven offerings applicable to other, overlapping end markets like Pharma, Biotech, Industrials, and Environmental Services.
Platforms, Not Products
Winners are not only creating compelling products, but they also have a proven ability to apply their core technology or insight to future products via a scalable platform.
For example, winners in the crop inputs space have developed differentiated and proprietary platforms that use sophisticated AI-driven analytics to power efficient innovation and serve as a barrier to entry. Benson Hill’s CropOS platform uses predictive analytics to cut initial development costs for genetically modified crops by 90%. And AgBiome has used its proprietary Genesis™ technology platform to develop a sequenced microbe collection with applications across multiple markets. The company has now launched one product and plans to debut two more in 2022.
In these cases, both companies have developed more than just a product; they’ve developed discovery platforms capable of innovating across many products well into the future.
A Clear Go-To-Market Strategy
The “If you build it, they will come” philosophy has been a prominent casualty of the Valley of Death in AgTech. Investors now demand that early-stage businesses must not only show that they have built a better mousetrap but also that they have a solid plan to sell it to customers.
There is no single successful strategy in this space. Demand can come from farmers or consumers—or in the form of a partnership with large ag strategics or distributors. Building out a direct-to-grower platform (bottoms-up marketing) can be a long-term winning strategy—if successful—but it is very expensive. On the opposite end of the value chain, companies like Apeel have efficiently driven adoption at the farmgate by partnering with retailers through consumer-driven demand (top-down marketing) of its increased shelf-life technology.
Investors are no longer under the delusion that tech alone can carry the day in such a complex production chain. Fundraising winners have a clearly defined go-to-market strategy with proven KPIs to support their success.
Multiple Models to Generate Revenue
Winners can benefit from diversifying revenue streams to provide buoyancy as commercialization gains traction. In the long run, companies hope to develop wholly-owned products to generate sales and drive value. However, in the short term, joint ventures and early licensing efforts offer market access and produce royalty revenue. For those with a deep technology pipeline, late licensing can provide early monetization for a concept still being proven.
AgBiome is an excellent example of a company monetizing research revenue, JV partnerships, and late licensing to mitigate near-term cash burn and fund development.
Managing Burn if Sales are Not Robust
Investors are putting more of an emphasis on burn and timing to cash flow. AgTech winners tend to be able to show clear sales traction or a manageable burn. In a best-case scenario, they can demonstrate both. Investors have grown weary of pouring money into companies with great ideas, nominal commercial traction, and large burn rates.
Ginkgo Bioworks is an example of a company with a large burn rate (EBITDA of -$187 million) countered by $133 million in sales—a level of marketplace traction that has caused its market cap to grow since it went public via a SPAC. Companies like Greenlight and Zymergen, where EBITDA losses well above $100 million annually are countered by sub-$20 million sales figures and modest traction, are seeing their valuations suffer as a result.
Progressing Toward Scalable Unit Economics
Fundraising winners know the importance of scalable unit economics and approach the market with a clearly defined and quantified unit economics story.
One of the hottest sub-sectors in AgTech is indoor farming. Still, the bulk of investor money continues to flow to traditional greenhouse-type concepts rather than vertical farm models intended to maximize land use efficiency. That’s because while many vertical farms have developed innovative technology, these pioneers have yet to prove they can scale the concept profitably.
That same concept—a relentless focus on driving margin for individual efforts—runs through investors’ most favored AgTech concepts, with the goal being 35-50% EBITDA margins in the long run.
Remembering That Customers Matter
It’s well known that institutional investors are under more pressure than ever to comply with Environmental, Social, and Governance (ESG) standards when putting capital to work. There is no question this trend has helped many AgTech startups get a close look from investors in recent years, especially those focusing on innovations that increase sustainability, boost yields, and reduce carbon inputs.
While sustainability will get you a first look, the real winners in the AgTech fundraising game are the companies that win new business because their solutions displace existing products and are validated by loyal customers. And not just any customers—fundraising winners have blue-chip customers that can validate their products. Expect investors to want to interview key customers and keep a close eye on customer growth and churn metrics.
Partnering Right, for the Long Term
AgTech innovators who understand the space and its Valley of Death challenges make sure they partner with the right investors from the start—capital sources with a long-term focus and the ability to ride a great idea from R&D through market strategy development to revenue realization and profitability. Family offices with industry expertise are often a good fit, as are large institutional investors with deep pockets who back startups with infrastructure designed to allow the investors to stay in all the way to an exit.
Public or Private?
We’ve referenced a couple of AgTech companies that have recently gone public via SPACs. These companies are taking advantage of a new valuation paradigm in the AgTech sector, with SPACs and the public markets currently offering a valuation premium of 20% or more over private markets. Fast growth AgTech companies with differentiated models have taken advantage of this value paradigm in the markets.
That said, this dynamic is a double-edged sword. Public markets are holding innovators to projections and expecting companies to grow into their premium valuation. The key theme here is AgTech innovators have the ability to take advantage of SPAC dynamics—but only press go when truly ready.
Thinking Strategically the First Time
While the “always be fundraising” mantra is true, winners are cautious only to formally approach the market once per round. Companies that reapproach investors shortly after an unsuccessful raise can lose credibility and raise antennas.
When you are ready for the raise, approach the market once with a clear message and swift timing expectations. Doing it once and doing it right are more important than ever. Second chances are increasingly hard to come by in this sector, as investors look to make big bets in specific niches and quickly move to consolidation among major players. Winners in this fast-moving competition will be prepared to navigate the Valley of Death and move up the S-curve to success, with substantial moats protecting them from the competition.
Scott Porter is a Managing Director at Cascadia Capital, where he puts his deep knowledge of food and agriculture in the western United States and Canada to work in service of clients pursuing mergers and acquisitions, restructurings, and private placements.
Please complete the form below to access this resource.