Interest in ag tech has picked up dramatically in the last few years. Here are the trends to understand.
As software continues to eat the world, it’s now reshaping how the world cultivates and procures its food. Using the CB Insights database we looked at what’s spurred momentum for agricultural technology (ag tech) and the trends shaping who’s investing in the space and where that investment is going. Sign up to receive the full briefing here.
Ag tech started gaining significant attention after the acquisition of The Climate Corporation by Monsanto for $1B+ in 2013. The Climate Corporation collects and analyzes field data to help farmers make better decisions, and was one of the major movers to bring data analysis to the space.
Since then, the ag tech category has risen fast, with 2017 already setting new highs for funding. Unpredictable and extreme weather, produce shortages, and the possibility of reduced immigration which threatens to drive up the cost of farm labor have brought ag tech into the spotlight more recently. New startups are getting funded to increase efficiency across all different parts of the farm, from farm management software to robotics.
Here we look at the 5 trends shaping the sector:
1. Ag Tech Financing Is Maturing, But Exits Have Dipped
More than $800M has been invested in the ag tech space between 2012 and 2016. Probably not coincidentally, that activity picked up significantly in 2014 after The Climate Corporation acquisition, with a spike in Q1’14. Seed-stage ag tech companies accounted for the majority of deals through 2014, but since then we’ve started seeing more Series A financings. There have been a handful of Series B and later-stage rounds in recent years as well.
Despite an uptick in M&A activity after The Climate Corporation acquisition, though, exits have actually declined since 2014 and there haven’t been any recent IPOs. When we look at some of the companies that have been acquired, it’s been a few midsize exits of private companies alongside The Climate Corporation.
One of the questions that the data poses is whether or not companies focused only on ag tech can provide big returns and be investable businesses for VCs. Many of the acquired ag tech-specific companies didn’t raise equity financing prior to acquisition, while large public companies like Trimble, which have managed to build large tech-driven businesses, operate across multiple different industries beyond just agriculture. Ag tech-specific companies have yet to see any other large, investor friendly exits outside of The Climate Corporation.
2. Corporates Play A Bigger Role In Ag Tech
Corporates are becoming more active players in the ag tech ecosystem with many setting up their own venture arms to invest in startups. Corporates took 3 of the top 10 spots for most active investors, with Monsanto and Syngenta being the most active through their investment arms. As a whole, corporates now participate in nearly a quarter of all deals, up from as few as 3% of deals in 2013.
Some of the agribusiness corporates are confronting industry shifts head on, while others are acquiring companies and consolidating. (The space as a whole is seeing mega consolidations at the top, including Bayer-Monsanto and Dupont-Dow.) Below we mapped the acquisitions and investments made by agribusiness and chemical companies using our business social graph. Full analysis of private market trends among agribusiness corporates can be found here and in the webinar, alongside a spotlight analysis of Monsanto.
3. Frameworks and Business Models
It’s useful to think about ag tech companies using a few different frameworks to figure out who they’re targeting and what value they’re adding.
- The first is to look at whether they’re targeting the operating costs of a farm or if they’re more involved with the overhead costs, which tend to cover the physical assets on a farm.
- It’s useful to also think about where in the actual supply chain these companies are targeting. Are they trying to help farmers get their materials, connect consumers to farmers, or improve the distribution of goods?
- And finally, are these companies replacing processes that already existed in farming, making those processes more efficient, or creating entirely new processes that may not have existed before?
Once we think about companies using these frameworks, it becomes easier to bucket them. For example, farm robots like Blue River Technology and Farmbot target the machinery part of the expense sheet, and replace the manual labor part of the farming process. Drones are also being used on farms more frequently, and create an entirely new process by providing aerial imagery and helping farmers more efficiently track how their farms are operating. We analyze other ag tech buckets in the webinar.
4. Trends and Approaches
Looking at development in the ag tech landscape, a few trends become clear about how agriculture is shifting.
- Decentralization – The dropping cost of next-gen farms + the ability to grow in urban environments is creating a decentralized network for produce production. Next-gen farms can be weather independent, require low labor, and create food closer to the end consumer, which can help insulate people from supply chain shocks that might happen in food production from centralized farms.
- Leverage Accumulation – The business models for a lot of companies in the agriculture space involves aggregating and leveraging small- and medium-size farms, and now we’re seeing lots of tech companies going after this piece of the sector. Farmers Business Network is dedicated to this, using a platform for farmers to share information with each other. Many of the farm management software companies are leveraging their aggregated farmer customer base to provide data benchmarks for farmers, as well as negotiating better deals with suppliers on behalf of the farmers. This means many of these new companies could fulfill some of the functions that farming cooperatives are currently taking care of.
- Healthcare + Agriculture – Trends in agriculture and healthcare run in parallel with each other. Developments in gene sequencing and editing, microbiome research, and AI-driven R&D can be seen in both sectors.
- Verticalization – Many companies that originally started in one part of the ag tech stack (hardware, software, services, etc.) are now moving into other layers as well. This could be a function of capturing more value per customer to mitigate the customer acquisition costs, or it could be ensuring that customers are correctly using the data provided by offering ancillary services, among many other reasons. New companies within next-gen farms, for example, are taking a full stack approach from inception, using robotics related-software to manage farms, and offering education programs to teach people how to use their system.
- Mobile – Mobile has reshaped almost every industry, but this is especially the case in agriculture given how field-based and mobile the industry is. The largest effects are felt in emerging markets, where mobile phones are giving farmers access to information they didn’t have previously and making it easier to distribute critical products to them as well (including enabling new farm financing mechanisms). We’re starting to see more companies raise as “mobile-first” or “mobile-native” ag tech companies.
5. The Future of Agriculture
It’s possible that the future of agriculture looks completely different. Below are some things to think about in terms of what comes next for ag tech.
- Fully Automated Farms – As robotics become better and more efficient, will we need farmers at all? Many of the next-gen farms are largely automated at this point. And, as we approach full automation, the skill set needed from the modern-day farmer might change, requiring an understanding of agronomy as well as technology.
- Changing Food Preferences – It’s also possible that the types of foods we actually eat changes. For example, insect protein has recently seen more media attention as a less resource intensive protein source than traditional meats. We highlighted companies working in this area here.
- Perishing Perishability – Companies like Apeel Technologies are keeping foods fresher for longer, and even some of these “farm in a box” companies, like Freight Farms, can create their own micro-climates. This means different crop types that could not survive a journey previously could be more readily available across the globe, introducing new produce and products in our homes.
- Gene-Edited Crops – Developments in CRISPR and gene-editing is not only allowing us to grow foods with certain traits that might improve their survival, but also forcing us to rethink our definitions for Genetically Modified Organisms (GMOs).
- Lab-Grown Foods – It’s possible we skip the farm altogether. The cost of lab-grown foods has dropped dramatically, with some companies creating animal products in labs and meals in a bottle (Soylent, Ample). These methods theoretically can produce foods more efficiently without all of the inputs that farms require and in a much shorter timespan.