Venture capital fund managers analyse the investment landscape in foodtech and agtech, and agree these are the building blocks of next-generation health-conscious food and drink brands
By Murielle Gonzalez
Agrifoodtech is a keyword and it defines the growing segment of start-ups and venture capital investors seeking to improve the global food and agriculture ecosystem through innovative technology – it brings together agtech and foodtech under one overarching term. Readers might have noticed more and more coverage of agrifoodtech on NutritionInvestor because the next-generation health-conscious food and drink companies don’t exist without it. We’re reporting on an ecosystem and, as such, it’s intrinsically connected – the effect of the Covid-19 crisis in the food supply chain is clear evidence of that.
We have turned our sights on agrifoodtech because signs in the market show that now is the time to invest in it. This report canvasses international fund managers and investment analysts whose input explain why this is happening, and where the opportunities lie.
Milena Bogdanova Bursztyn, an early-stage investor from Germin8 Ventures, believes investments in agrifoodtech are ripe for returns because technology innovation in this sector is long overdue. “Agriculture is among the least digitalised industries, and that in itself brings about opportunities for innovation that could provide investors returns.”
Founded in 2018, Germin8 Ventures is based in Chicago and operates a network across six continents in major ‘food meets tech’ markets including Israel, Ireland and the UK, the Netherlands, Australia and New Zealand. It manages a $20 million fund, investing in seed and Series A funding rounds.
PitchBook data proves Bursztyn right. “Agriculture is one of the oldest areas of technology and innovation in existence, and its objectives have changed little throughout history,” reads its Q2 2020 Agtech report. The document notes that agtech began to attract venture capital funding roughly a decade ago, with the industry raising $322 million in 2010. Since then, deal activity in the sector has grown at an annual growth rate of 32.7%, reaching $4.1 billion last year.
PitchBook’s Agtech Q2 report reveals $2.1 billion was invested across 112 deals in this space during the quarter, up 172.6% from Q1. Analysts say this explosive growth stems from two primary factors: population growth and climate change. “The global population is expected to swell to 9.8 billion people by 2050, driving more demand for food. At the same time, greenhouse gases are warming climates and creating increasingly frequent extreme weather events that threaten crop yields.”
Ben Belldegrun, founder and managing partner of Pontifax AgTech, concurs. “Increased focus by consumers, regulators and investors on climate change have fuelled greater importance on food and agriculture technologies that are able to drive sustainability in the food and value chain,” he says. “We are seeing greater interest by investors in technologies that reduce greenhouse gas emissions, improve soil health, and drive grower wellbeing.”
Pontifax AgTech, a growth capital investor in the global food and agriculture space, closed its second fund with $302 million last month. Based in California, the fund reached its extended hard cap of $300 million and was oversubscribed, bringing the firm’s total assets under management to $465 million.
Belldegrun notes Covid-19 has focused investors on specific thematic areas that are beneficiaries during the pandemic. “There is increased interest around genetics and traits given the broader market enthusiasm surrounding life sciences. There is also a focus on health and nutrition as a notion that ‘food is medicine’, and on food safety and traceability,” he says. “Given supply chain disruption that has occurred, large corporations are focusing on transparency of the food system.”
For Germin8’s Bursztyn, agrifoodtech innovation hubs can be seen in Europe, especially in Ireland and the UK around biotechnology for food and agtech applications. “The Netherlands has been an all-time innovator in this space, and you also have Israel. Argentina and Brazil are also interesting agtech hubs,” she says. “It makes sense because these are agricultural economies or agriculture makes up a large portion of their GDP. They have a huge export trade as well, including commodities and materials for food and agriculture.”
Graham Stoddard, an investor at Lewis & Clark AgriFood, concurs on the global landscape. “We tend to focus on companies that have operations in the US, but have spoken to companies headquartered all around the world,” he explains. “We see a lot of interesting stuff coming out of South America, primarily Brazil and Argentina, as well as from Europe and Israel.”
Lewis & Clark AgriFood is investing out of its second fund with $110 million assets under management. In September, the firm led a $27 million venture round for Brightseed, a California-based start-up founded by former Hampton Creek head of research and development, Jim Flatt. With proprietary technology, Brightseed seeks to identify the presence of specific nutrients in plants that are believed to boost human health.
Stoddard says the investment thesis pertains to businesses within four primary verticals – plant science, animal health, food and feed ingredients, and supply chain. “We look for companies which operate between the farm and dinner table, and sustain a moat via intellectual property, business strategy or both,” he says.
There are other markets worth having on the radar. Bursztyn, for example, says Africa has enormous untapped potential. “The majority of the population in Africa make a living through agriculture – that’s really significant,” she says. “The impact you can have as an investor on bringing agtech and help it scale is exponential.”
Bursztyn argues that while the world is experiencing climate change, Africa is one region hard hit with it already. “We have to think about how we can bring technology that addresses the issues we’re facing – drought, crop extinction, biodiversity issues, deforestation for agricultural purposes. All can be solved through innovation in agtech.” She notes it’s not just about bringing agtech to Africa, but about supporting homegrown agrifoodtech innovation.
India is another market with potential. Omnivore, a venture capital firm based in Mumbai and with offices in Delhi, pioneered agtech investment in India, backing more than 20 start-ups since its inception in 2011.
Its managing partner, Mark Kahn, reveals agrifoodtech is an emerging sector with growing interest from mainstream generalist venture capitalists, impact VCs, and strategic investors. “Even the government and large corporates in India are rapidly recognising the critical role of agtech in improving the lives of Indian farmers and advancing the overall agricultural ecosystem,” he says.
Kahn explains that in 2015, the popular urban business-to-consumer segments saw a saturation of both funding and competing business models. This overload was a boon for agrifoodtech in India. “Investors refocused on business-to-business opportunities linked to small and medium enterprises, farm-to-consumer brands, and rural fintech for farmers. These three categories commanded maximum investments in the last five years.”
He also notes there has been a remarkable surge in agritech start-up activity due to rapid advancement in underlying technologies. Kahn says rural smartphone penetration and mobile internet has provided the digital backbone to scale both business-to-farmer and business-to-business-to-farmer models. “An increasing number of farmers are now able to improve their yields, lower their operating costs, and ensure their produce gets the right market value.”
Kahn believes this positive phenomenon led to the evolution of a supportive agtech ecosystem with participation from accelerators, strategic corporate involvement, and venture capital firms at every stage.
Agrifoodtech: Israel focus
The Annual AgriFood-Tech Global Investors Summit drew to a close yesterday with 600 participants, domestic and international. Organised by GrowingIL and Start-Up Nation Central, the three-day online event showcased Israel’s breadth and depth of agrifoodtech innovation.
GrowingIL is a non-profit joint venture of the Israel Innovation Institute, Ministry of Economy, Digital Israel and Start-up Nation Central. It aims to develop the Israeli agtech ecosystem and reshape its agriculture to meet emerging global food needs through the implementation of groundbreaking technologies.
To achieve its goal, GrowingIL connects stakeholders with global players, fostering collaborations – one of many initiatives is organising events that address unmet needs of the ecosystem.
Shmuel Rausnitz, tech-sector lead at Start-Up Nation Central, reveals that this year has seen $185 million invested in Israeli agrifoodtech across 32 rounds. “A couple more rounds will be announced soon that will bring the total to well over $215 million,” he says, noting venture capital investment in the sector last year totalled $199 million across 39 rounds.
Rausnitz notes the median investment is $3.5 million, which is on par with last year. He notes, however, that the median investment in 2018 was the highest it had ever been at about $1.25 million. “The past two years represent a major increase in round size,” he says.
Start-Up Nation Central is an independent non-profit organisation that connects business, government, and NGO leaders from around the world to Israeli innovation that can help them solve their most pressing needs, specifically focusing on high-growth technological sectors.
The company generates in-depth insights about Israel’s innovation sector and helps facilitate its growth and expansion in Israel.
The agrifoodtech investment arena is booming, but investors and founders recognise this is not an easy road to take. Rausnitz lists five areas representing headwinds for Israli start-ups in the agrifoodtech space:
- Lack of exits in the global sector
- Misalignment between a VC fund’s timeline and the pace of market
- The strength of the start-ups is in the tech, less so in the business
- Lack of a domestic market
- Regulatory processes
He explains: “Very few agrifoodtech companies anywhere have been acquired or gone public. Without precedents, it’s hard for investors to justify investing in early-stage start-ups and also to raise new funds to invest in more.”
Rausnitz notes the pandemic has only worsened the usual uncertainty about agrifoodtech prospects. “You can see greater hesitancy to invest in innovation reflected in the general pattern of this year in the Israeli sector – there’s more money in total, but mainly through follow-on investments rather than seed rounds.”
He notes Israel’s public-sector support helps brand-new agrifoodtech start-ups to take off, especially through the incubator model, taking the edge off risk in VCs early-stage investments. “But rarely is this enough. Israel’s most successful agrifoodtech start-ups did not take off with public-sector support.”
Rausnitz argues that venture capital funds anticipate returns after seven years. That might suit the circumstances of information technology, but agrifoodtech requires long testing periods and generally entails only an incremental spread through the world’s agrifood value chains. “Consequently, a start-up’s value takes much longer to grow, which sets back prospects of meaty exits,” he says, noting this doesn’t usually square with the VC timeline.
Bursztyn concurs but explains that because the potential of these new technologies is huge, the exits typically happen before start-ups can even generate revenue. “For any biotech solutions for agriculture, for example, the revenues typically come six-, seven, 10 years down the road – you end up being a bit of a patient investor.”
She notes, however, that early-stage investors in agrifoodtech don’t have to have the revenue to exit the investment. “The future cash flow potential unlocked by tech breakthroughs and disruption represent massive and sorely needed existential opportunities. That’s whay it’s an attractive space and companies can exit relatively early in their revenue trajectories.”
Rausnitz says here’s where impact investing comes to play, noting that sustainability-oriented funds targeting agrifoodtech start-ups are getting more popular. “The impact investment model is inherently more accommodating time-wise since LPs are looking for some proportion of both financial and ESG return.”
Then there is the question of business acumen. “Israeli start-ups are often founded and managed by scientists or engineers, maybe by people with senior business-development experience, but not by business people,” says Rausnitz.
He argues that the Israeli ecosystem is great at devising top-notch tech really fast but is less great at business and marketing, which slows down scale-up efforts. “Also, the chutzpah that fuels Israeli tech innovators inhibits business wisdom – the ‘I’ll do it and you can’t stop me’ attitude may lead to great tech but doesn’t work as well for building a stable business,” says Rausnitz.
When it comes to market potential, Israeli start-ups face an uphill battle in terms of commercialising and revenue-making because both take place outside the country. Rausnitz says almost no Israeli start-ups target domestic industries or markets for any purpose other than proof of concept for partners in other countries – and it takes money, time, and connections to build a customer base abroad.
Rausnitz observes start-ups often find Israel’s regulatory environment challenging, not always keeping up with their fast-paced needs to sign-off on novel ingredients. He believes this red tape isn’t critical, since start-ups are mainly targeting foreign markets, and thus focusing on the paperwork for agencies such as the FDA in the US and the EFSA in the EU. Still, lacking recourse for regulatory approval in Israel, start-ups’ growth gets slowed down while costs increase at the expenses of engaging with foreign regulatory agencies.
No one would expect the future to be a bed of roses, but the more we understand the headwinds and tailwinds coming our way, the better. The Finistere report ‘AgriFood investment trends in the Covid-19 era’ reveals investors are drawn to food and meal kit delivery, alternative protein, crop protection, and indoor agriculture. These categories attracted 31.1%, 22.6%, 58.7%, and 11.9% of the global venture capital deal value in agrifoodtech, respectively. “Lewis & Clark AgriFood believes these categories are benefiting from Covid-19 induced tailwinds resulting in bullish views from investors,” Stoddard concludes.
Date published: 12 November 2020