By Pete Nelson with AgLaunch
The idea of venture capital is not something commonly discussed in coffee shops across farm country, despite the fact tremendous amounts of capital are pouring into agriculture in an effort to discover and fund the next big thing. The farm community de-risks new technologies all the time through millions of R&D dollars provided to universities via checkoff programs or old-fashioned, on-farm ingenuity. However, we are letting numerous opportunities to be involved at the ground floor of new ideas pass us by.
It’s important to understand how venture capital works and how the average farmer can engage. In the truest sense, venture capital is providing high-risk and possibly very high-reward capital to nascent companies with new ideas that have the potential to grow into something significant. This is done through angel investments, individuals or groups who invest in early-stage companies, or organized funds where a fund manager (general partner) manages a fund for its investors (limited partners) for a management fee and share of the profits.
In agriculture the goal should be first to make sure the technologies brought to market actually benefit the long-term profitability and resilience of your farm. Those same technologies could also provide a profit by investing early.
Potential ROI With Great Risk
The odds for venture capital investment improve dramatically when the investor has a depth of knowledge in the subject area and can incorporate the uptake into their business interests.
It’s common for farmers to get pitches from multinational companies and even startups. The question is whether you are content to just evaluate these technologies on your farm or if you would rather find a way to get involved early in the development.
In terms of ROI, investing a small amount of capital or services at the earliest stage is the most valuable investment. For example, a $100,000 investment at a startup’s formation could be worth as much as $8 million if the startup raises additional fund rounds and is acquired for $300 million.
| Round 1 | Round 2 | Round 3 | Round 4 | Exit (Acquisition/IPO) | |
|---|---|---|---|---|---|
| Capital or Services Invested by Farmers | $100,000 | - | - | - | - |
| % ownership by angel investor/network | 5% | 4.5% | 3.6% | 2.88% | |
| Value of angel investor/network equity | $100,000 | $450,000 | $900,000 | $2,160,000 | $8,640,000 |
| Total investment by round | $100,000 | $1,000,000 | $5,000,000 | $15,000,000 | |
| Valuation of company at point of investment | $2,000,000 | $10,000,000 | $25,000,000 | $75,000,000 | $300,000,000 |
Here are a few ideas to help you on the angel investment journey:
- Pool together with other farmers to share information and opportunities.
- Support technologies that allow you to get your hands dirty.
- Work with startup founders who value your knowledge more than your cash.
- Have a long-term perspective of where you think farming is going, and use that to inform what you invest in now.
- Spread your services and investment across as many companies as possible to increase your odds of success.
- Find deal-flow partners who can put the right opportunities for field trials, focus groups and investment in front of you.
Pete Nelson has been experimental farming, venture investing and creating innovation hubs with farmers in the U.S. and Canada since 1997. He is currently co-founder and president of AgLaunch, a nationally recognized farmer-led innovation platform for advancing the next generation of agricultural technologies.
