VC firms are one of the primary business models driving agtech investments. But given we still don’t know if we have yet reached the bottom of the notorious VC contraction cycle, the jury is out on whether the traditional VC model is the best fit for the agtech sector.
These funds usually have a lifespan of around 10 years. Given the timelines in ag, some doubt if this provides the time to deploy the capital and make a return.
The question of whether pivots or new approaches are needed for the world of VC to more successfully drive industry momentum was front and centre at the recent World Agri-Tech Summit in London.
At the event Eduardo Mufarej, co-chief investment officer at the investor Just Climate, said the agtech investment community “can’t do anything” without farmers and landowners. “Sometimes I think we disregard this element and think adoption is easy.”
The issue of a potential misalignment between the short-termism of VC compared to the long-term nature of ag has been given fresh impetus thanks to Pitchbook’s new Q3 2024 agtech report. This reveals that investor confidence is returning with venture capital funding on the rise. But deal counts continue to decline and exit opportunities remain limited.
What does this report tell us about the VC mismatch debate? “It reveals ongoing VC interest in agtech despite concerns about mismatched timelines,” says its author Alex Frederick, a senior emerging technology analyst at PitchBook. “With $1.6 billion invested in Q3 2024, VCs are adapting to the sector’s long-term nature through larger, later-stage deals and record seed investments.”
But challenges persist, he says, including muted exit activity and valuation pressures for late-stage start-ups. He notes that VCs are therefore focusing on subsectors with potential for shorter-term returns and collaborating with strategic investors. “While the industry shows signs of adaptation, tensions remain between traditional VC expectations and agtech’s longer development cycles,” he says, “suggesting a continued evolution of investment strategies in this sector.”
‘Our sector works’
Others are less uncertain. VC is set to continue to play a crucial role in driving innovation and growth in the sector, believes Adam Anders, co-founder and managing partner at Anterra Capital, an 11-year-old agtech VC with offices in Amsterdam and Boston.
Anterra is an influential player with a strong track record of fundraising and investment in innovative companies. But a decade ago such a thing as VC agtech was virtually non-existent. “There weren’t even metrics. Now we are unequivocally into the billions,” says Anders. That’s proof, he is sure, that this still young industry can transform the future of food and agriculture: one of the last sectors to go through a venture-backed, entrepreneur-led tech transformation. “We’re talking about an enormous sector,” he says “and there is a wealth of perfectly suitable venture capital deals to be done in agri-food tech.”
Anterra closed its second Global Food and Agriculture Technology Fund, which was oversubscribed at more than $260 million, in 2022. It has since been shopping for start-ups in various quarters, including biotech, crop protection and animal health.
Yes, there are headwinds, acknowledges Anders. He admits there were too many overvaluations and capital intensive or low-tech endeavours during the agtech ‘boom’ years – of course not helped by the ‘toxic mix’ of a rush of capital post-Covid followed by an inflationary period.
He seems to agree the current recalibration reflects a shift towards more strategic and measured deployment of capital in the agtech sector, with a focus on companies with the strongest potential to address key industry issues.
“If you are looking for software or biotech venture dollars going into an agtech opportunity that scales efficiently and quickly, there is absolutely those opportunities,” he says.
And not all tech takes a long time to deploy in the world of agriculture, he insists. “Look at the global adoption of biotech and GMO seeds. There’s 90% market penetration in every single market that they’ve been legally approved in. Farmers will adopt technology if it’s got a profound and clear return on investment and certain technologies will scale.”
And he believes the alternatives to VC funding – such as later entry, structured finance or strategic partnerships – are suitable for some opportunities with a different profile. “If you are investing in a company where for each incremental growth step you’re going to need a big chunk of capex investment, then that traditionally is not a place where VC dollars flourish,” he says, pointing out “you can’t afford to spend a lot on capex if you’re raising dollars at a 20% cost of capital.”
Some alternative funding structures, even government support, should be a lever for capital intensive opportunities like vertical farming, he suggests. But ultimately he has faith that VC is simply the best option for allowing start-ups the capital and expertise needed to rapidly scale game-changing cutting-edge technology, whilst offering investors decent returns within a reasonable cycle to boot.
“And so, yes, our sector works.”