So it’s all over for Bowery. The agtech unicorn is shutting down, according to PitchBook, which cited internal documents and multiple company employees.
In its pomp the New York-based company was valued at $2.3 billion. It had raised venture capital of over $700 million from a legion of leading firms and A-list celebrities like Justin Timberlake, Natalie Portman and Lewis Hamilton.
The plan was to build vertical farms to produce lettuces, herbs, and berries. It had inked partnerships with grocery chains such as Whole Foods, Amazon Fresh and Albertsons.
What went wrong?
The company faced difficulties in scaling its operations profitably. High capital expenditures for building and equipping vertical farms and higher-than-expected energy costs contributed to financial strain. Labour costs, which can account for a fourth to a third of vertical farming expenses, may have been a factor despite efforts to automate processes.
Bowery postponed opening two new farming facilities in Georgia and Texas, which were previously scheduled to open in the first quarter of 2024. The company failed to secure additional funding or find a buyer, leading to its decision to cease operations.
Industry-wide pressures played their part in Bowery’s problems and it’s no news that the vertical farming industry as a whole has faced major tests. Several other vertical farming companies, including Infarm, Jungle, and Future Crops, have wound down their operations due to similar financial constraints.
So is Bowery’s demise another single case of bad luck or does it signal a wider warning for the sector as a whole? To steal a quote, vertical farming isn’t dead. It just smells funny.
According to Stephan Dolezalek, managing partner at investor Grosvenor Food & AgTech, upheaval is nothing new in emerging sectors like vertical farming.
He should know. Grosvenor is an investor in US-based AeroFarms, whose capital-intensive vertical farming model could not achieve profitability fast enough, leading to a liquidity crunch that forced it into restructuring. It emerged from bankruptcy proceedings in September last year with a new CEO and a new plan to pivot to providing premium and healthy products, emphasising both nutritional value and flavour.
Disruptive change across a whole range of industries, Dolezalek explains, tends to involve entrepreneurs and venture investors seeing the opportunity and aggressively chasing it, often without fully understanding just how challenging success will be.
The result is that the early excitement begets more money flowing into a sector before that sector has any possibility of paying back those investments. “Sooner or later that reality sets in and there is a big pull-back on investment, causing quite a significant number of companies to fail,” he says. “But wait another 5, 7, or 10 years and you realise that the industry has in fact become quite large and the investment in the companies left standing has paid off enormously well.”
Without that initial “overenthusiasm” or “bubble behaviour” it is unlikely that many industries would have been anywhere near as successful in changing our world for the better, he insists. We would not have seen the switch from small molecule drugs to biotech, he says. Nor would we be witnessing growth in the wind, solar, electric vehicle, and battery industries.
“I fully expect that given the crazy level of spending we are seeing on artificial intelligence that we will, in the not-too-distant future, see a similar crash as the near-term value of AI technologies won’t be able to support the built-up valuations,” he explains. “But I also expect that 20 years from now our world will have been changed far more significantly by AI than we can today foresee.”
Despite its collapse, Bowery has accelerated the vertical farming sector
Companies like Bowery, therefore, play a critical role in progressing the science and technology in ways their competitors and the industry benefits from, “even if they individually cannot chart a path forward in the difficult time”.
Today, insists Dolezalek, there’s a level of consumer excitement and acceptance of vertically grown greens that simply didn’t exist even five years ago.
“Several of the companies that are no longer with us played important roles in establishing that consumer acceptance and in better understanding what it takes to build financially viable farms,” he says.
Dolezalek further contends that the ongoing ravages of climate change will continue to increase the costs of field farming in ways that will eventually benefit vertical farming.
The challenge for investors and entrepreneurs now is how to better understand the economics of controlled environment agriculture generally.
According to Dolezalek, there are going to be crops that remain cost-advantaged in an outdoor setting; there are others where a glass greenhouse is the optimal setting; and there will be those that are best grown in fully-controlled vertical farms. “Understanding that and getting it right will be critical to figuring which companies will survive and thrive over the next few years.”
Bowery may not be the last vertical farming company to fail, however. “I’m sorry to see Bowery be what may be one of the last not to ‘cross the chasm’ before the industry begins a period of more stable scaling and growth,” muses Dolezalek. But he reiterates we wouldn’t be where we are or “where we are going” without the contributions of Bowery’s founders, employees and investors.
The Icarus factor is familiar in start-up industries
Leo Marcelis is professor of horticulture and product physiology at Wageningen University in the Netherlands. He is the lead author of a recent study which recommends vertical farmers use dynamic environmental control or manipulating light according to the needs of specific crops to make them grow stronger and healthier in an indoor setting while minimising energy use.
He agrees that the Icarus effect (the phenomenon of businesses failing abruptly after a period of apparent success) is a common problem in new sectors. Regarding Bowery, he says expectations were originally too high. Now, however, we are back to realism. “We will see some new companies start or others expand.”
Is the VC model unsuited to vertical farming?
But there’s another problem potentially compounding the ability of the sector to expand, believes Chris Davies, founder of the UK-based vertical farmer Harvest London. VC funding has played a crucial role in starting up the vertical farming industry. But he thinks VC’s short-term focus is mismatched against the long-term nature of vertical farming and controlled environment agriculture and is increasingly unsuited for vertical farm investments.
It’s a shame that Bowery went bankrupt, he says, but complains they are one of a group of CEA companies that raised huge amounts of money at very high valuations.
“The failures in the industry don’t necessarily come from the fact that vertical farming doesn’t work,” he stresses. “But comes from a misalignment on the financing side of things. Having VC funding necessitates a growth at all costs model, instead of focussing on profitability in the short term. Venture Capital is also a very expensive way of building heavy assets.”
He has faith that the UK has bucked the trend of failures in the space, particularly with Grow Up, Jones Food Company, Fischer Farms and Harvest Farms – thanks to a better alignment with finance partners.
Harvest Farms, for example, is working with private equity and infrastructure funds instead of VC. This gives it “longer-term investment horizons” and “more realistic views” on returns that are “more aligned” with the CEA business. “Working with these firms also necessitates being incredibly focussed on profitability instead of just growth,” notes Davis.
And like Dolezalek, he believes that amid the challenge of decarbonising food systems the fundamentals of the industry are still sound. “Growing food outdoors is going to be more and more challenging with climate change, water shortage, chemical runoffs, and land usage. Transporting food productions nationally and internationally is going to get more and more challenging. CEA farms can grow more with less resource and can do that closer to our cities.”
The power challenge, he adds, can be addressed with effective strategies that tackle the management of power pricing through hedging and power trading to reduce exposure to price volatility. Harvest Farms has a strategy of co-locating vertical farms with other urban infrastructure and developments to shielding itself from the challenges of spot power pricing.
To steal another quote, pioneers get the arrows; settlers get the land. The vertical farming sector is hoping the Bowery case illustrates this.
