The following is an op-ed from Kirk Haney, CEO and managing partner of Radicle.
An influx of investors is bringing more money to seed-stage AgTech startups. And while that is an incredible thing for the industry at large, it certainly comes with its own set of challenges.
Surging Seed-Stage Investor Interest
According to the 2016 AgTech Investing Report, seed-stage deals were particularly strong in 2016. Seed investments accounted for 57 percent of total AgTech deal activity — representing a 16 percent year-over-year increase and $230 million of investment, up 77 percent from 2015. However, too many investors with little or no knowledge about the Ag space are latching onto the latest investment craze. Will it backfire?
Overall, there is still not enough capital in the space to support the massive potential of bringing new technologies to the Ag industry so the influx of investor interest is critical for the advancement of AgTech. However, as investors in seed-stage AgTech players will own larger percentages of the startups, they will also take on more risk. And while taking risks is commonplace for venture capitalists, it must always be calculated risk.
Understanding AgTech Investment Pitfalls
Investing earlier in AgTech is not always a good thing. To have a chance of succeeding, investors need to approach AgTech investments with their eyes wide open—meaning, they must have a clear understanding of what it takes to bring a new technology to market in AgTech. As AgTech does not play by the same rules as traditional Silicon Valley tech players, this will be a big challenge for AgTech in the years ahead.
Many investors expect AgTech to follow the same trajectory as software, and I expect they may be sorely disappointed. The AgTech seed stage takes much longer due to the need to develop a product and actually get real world field trial data (through an entire growing season) to demonstrate some efficacy. As a result, there could be a significant reset of valuations or companies will not be able to raise follow-on rounds to scale the technology commercially.
So what will some of the other major challenges be? One issue that many investors may overlook is that the farm is not yet connected like other industries. Many farms do not have the cell coverage needed to support the digital Ag evolution today. While the owner or operator of the farm may now be connected (approximately 70% according to the USDA), the acres are not. It is one thing to have Internet access (at the main house) and completely another to have 10,000 acres connected (across state lines). In addition, a significant number of those primary connections rely on technologies that may not be adequate when it comes to accessing and delivering the large quantities of data that sensors need to send wirelessly.
While we know these limitations as operators, when legendary investors like Marc Andressen state that "software is eating the world", some may think AgTech will follow the typical investment “rules”. However, software is only “eating” the connected world, and the farm is not yet connected. While this creates opportunity for new wireless technology for the farm, sensors, storage, etc., to close the connection gap, investors need to understand these nuances and have rational expectations before jumping into early AgTech investments.
Investors must fully understand the complexities of how to get new technologies into the Ag value chain – especially on farm – to help grow successful AgTech startups. I see so many software deals for farms, and I always ask how the data gets into the software. All too frequently, my questions result in puzzled looks on the faces of entrepreneurs as they naively state that "the farmer is going to enter it". Knowing how the farming industry works and the challenges farmers face every day on farm, I try not to laugh ... at least not aloud.
Funding More Opportunities in AgTech
While the investors testing the waters of the agricultural arena for the first time may have certain challenges to overcome, I think seed-stage AgTech investing interest will continue to climb in 2017. However, to give AgTech entrepreneurs the time and money they need to get their new company off the ground—and positively impacting operations on the farm—partnering with funds with domain expertise that will embrace rational Ag business plans will be essential. At the end of the day, what happens (or doesn’t happen) on farm will make or break an AgTech startup.