Bet the farm: reaping the rewards in agri-food investing

Despite being an $8tn industry and employing around 30% of the global population, the agri-food sector has been reluctant to embrace innovation and remains one of the least digitalised of all major industries.

This lack of innovation is particularly notable considering the industry is at the centre of the most critical global challenge faced by modern society and is coming under increasing pressure.

A growing awareness of pollution and environmental degradation, global warming and climate change, dwindling natural resources and a growing world population are all driving a requirement for the development of new means of food production, which are able to increase resource efficiency and limit our negative impact on the planet.

Driven by these rising concerns, new technologies have emerged and developed within the industry, aimed at disrupting an antiquated business model afflicted by stagnant inefficiency.

Alongside the development of new technologies, investments have been booming in the industry during the past five years. An ecosystem has developed that is fuelled by accelerators and sector-focused venture capital funds, which have recognised the potential unleashed by the tech revolution across the industry.

In 2018, the aggregate value of investments in the agri-tech and food-tech space reached $16.9bn, up 43% on 2017, according to the last AGFunder investing report. Deal volume increased significantly as well, reaching 1,450 deals, up 10.5% on the previous year.

Investments in companies operating upstream in the supply chain, including agriculture biotechnology, precision agriculture and robotics businesses, reached $6.9bn, with a 44% increase year-on-year, the fastest annual growth rate on record.

"A few years ago, this was a nascent industry and all companies were early-stage, while in 2019, some of those early movers have already grown into formidable startups that are attracting significant capital," says Rob Leclerc, founding partner at AGFunder. "There are immense opportunities opening up, especially upstream, with microbial and genomics, and next generation sequencing, which include biological pesticides and disease management, as well as gene editing."

Biotech revolution
Investments in the agriculture biotech space recorded a 59% increase in 2018, rising from $959m in 2017 to $1.5bn, according to AGFunder. The development of bio-pesticide and bio-fungicides able to substitute the current chemical products on the market, and the advancement in microbial technologies used as bio-stimulants and bio-fertilisers have been particularly disruptive within this sector.

The largest investment in the microbial space was recorded last September, when Indigo received $250m in funding from several backers, in a deal that valued the business at around $3.5bn.

A month later, Breakthrough Ventures and Singapore-headquartered Temasek led the $70m investment in Pivot Bio, which develops nitrogen-producing microbes for corn farmers.

"This biological and microbial trend is expected to become particularly strong in Europe, where a lot of chemicals have now been taken off the market by EU regulation," says Benjamin Belldegrun, managing partner at growth equity fund manager Pontifax Agtech. "To replace these products that play an important role in agriculture, scientists have found new solutions through microbial technologies able to restore the original soil content that crops need, and work around the roots of the plants to protect them and stimulate their growth."

While the US has authorised gene editing, resistance to GMO in Europe is much stronger and the main hurdle remains obtaining consumer and social acceptance" – Alexandre Biau, Unigrains

Gene editing is another very promising area of innovation within the agriculture biotech industry, especially following the discovery of CRISPR (clustered regularly interspaced short palindromic repeats) technology and its application to agriculture. Precision BioSciences, a gene-editing startup, raised $110m from ArrowMark Partners and several co-investors, including Pontifax Agtech and Ridgeback Capital. In the UK, Pontifax AgTech and Five Seasons Ventures recently invested $10m in Tropic Biosciences, which uses gene-editing technology including CRISPR to optimise coffee and banana crops. New York-based tech VC Tekfen Ventures, Swiss VC Emerald Technology Ventures, and Chinese agri-food accelerator Bits x Bites also took part in the investment.

Despite the attractiveness of the sector, the future of gene-editing in Europe appears particularly uncertain, following recent regulatory developments. In July 2018, the European Court of Justice ruled that gene-edited crops should be subject to the same stringent regulations as conventional genetically modified organisms (GMO). The ruling is a major setback for the application to the agri-food sector of precise gene-editing technologies such as CRISPR/Cas9, which involves DNA changes but not the insertion of foreign genes from different species.

"Gene editing is extremely promising, because it allows structural modification on plants through a low cost and very effective process able to target, enhance or suppress specific traits within the plant's genome," says Alexandre Biau, economic research officer at Unigrains. "However, while the US has authorised gene editing, resistance to GMO in Europe is much stronger and the main hurdle remains obtaining consumer and social acceptance that could lead to changes in the regulatory framework."

New frontiers in the agri-food industry have also opened up, with the introduction of digital tools, software, big data and analytics aimed at improving and guiding farmers' decision-making processes.

This intensive use of data, combined with sensor technologies and innovative software, can optimise the production process, increase resource efficiency and reduce costs, as well as minimising environmental impact. Investments in companies developing farm management software, sensors and Internet-of-Things products recorded a 65% increase to $945m in 2018, according to AGFunder.

"The agri-tech wave began with precision farming and with the introduction of digital tools in agriculture, which continue to represent a significant trend within the industry," says Unigrains' Biau.

Operating in the weather sensors field, Demeter-backed Sencrop recently received $10m in funding from BPI France. The French company develops connected rain gauges, anemometers and leaf wetness sensors able to measure temperature, humidity, wind speed and wind direction. This allows farmers to access real-time climatological data and local weather conditions specific to their plots directly from their smartphones or computers.

Ceres Imaging, a specialist in aerial spectral imaging for agriculture, is able to measure plants' transpiration levels by using thermal imagery. The company raised $25m in funding last year from Insight Venture Partners, while satellite imagery and analytics providers HyperSat and PrecisionHawk received $85m and $75m, respectively.

Says Pontifax Agtech's Belldegrun: "Building a stats-based business model by using farm management software and analytics can improve optimisation and operational efficiency across budgeting, planning, work processes and transportation and logistics."

We have seen an increasing number of competitors entering the sector, including generalist funds and traditional venture capital firms" - Benjamin Belldegrun, Pontifax Agtech

Alongside precision agriculture, sectors attracting large investments in 2018 were farm robotics, mechanisation and equipment automation, which recorded a 56% increase in deal value year-on-year, according to AGFunder. Several startups closed significant funding rounds during the year, including a $90m investment in Bowery Farming, which uses robotics, LED lighting and data analytics to grow leafy greens indoors.

Precision farming, robotics and automation have proven particularly profitable for investors and have recorded some of the largest exits within the industry. The deal with the highest value was the sale of France-based digital animal tech specialist Antelliq.

BC Partners, Canadian pension fund PSP Investments and other minority co-investors sold the business to NYSE-listed pharma giant Merck in a €3bn deal. Merck made a cash payment of approximately €2.1bn and assumed the company's €1.15bn debt, with the intention to repay it shortly after the acquisition.

Prior to this record exit, one of the most successful trade sales within the sector was inked by Pontifax Agtech, which sold Blue River Technologies to Deere and Company for $305m. The GP had led a $17m series-B funding round for the business in 2015, attracted to the potential of its disruptive robotic and management system.

Despite a slight decrease in the aggregate value of investments, several large deals were also recorded in the novel farming sector, which focuses on producing insect-based protein for the feed industry.

AgriProtein, a startup that breeds black soldier flies to produce a high-protein blend of essential amino acids used in the poultry and fish farming industries, raised a $105m equity and debt round. More recently, French insect-based food specialist Ynsect raised a €110m round from Astanor Ventures with additional contributions from BPI France, Talis Capital and Idinvest Partners.

Cultured meat, and plant- and fungi-based proteins startups were intensively targeted by investors last year and attracted numerous rounds of funding, including a $114m investment in Impossible Foods from Temasek and Sailing Capital; and a $50m round for its peer Beyond Meat, which is planning to list on Nasdaq this year.

Growing competition
In addition to the burgeoning volume and value of investments, the number of investors in the agri-tech space has also steadily increased in the past five years, reaching 1,776 active players in 2018, according to AGFunder.

Furthermore, the investor base has started to diversify and differentiate, as generalist VC houses and private equity funds seize the opportunities offered by the agri-tech industry and join the list of specialised sector-focused funds and accelerators.

"We have seen an increasing number of competitors entering the sector, including generalist funds and traditional venture capital firms that have realised they should build a team specifically dedicated to the agri-food sector to capture the potential offered by this big blank canvas for technology," says Pontifax Agtech's Belldegrun. "Furthermore, we have seen corporations that are focused on technology in general use their venture arms to invest in the sector, as well as large food companies launching venture funds to target the industry."

In addition to a plethora of VC funds, some private equity firms have also eyed the sector, despite it being mainly composed of early-to-late-stage startups and companies not yet able to generate EBITDA.

One such example is Cibus Fund, a €450m private equity vehicle raised by ADM and closed last year that invests 90% of its capital in already profitable companies operating in the agri-food sector, and only 10% in startups and VC rounds. To do so, Cibus acquires companies specialising in healthy food production and subsequently introduces new technologies and innovation in the production process.

A typical example of this strategy is Innoliva, an olive oil production company based in Spain acquired by the fund in January 2018. Following its acquisition, Cibus introduced state-of-the-art irrigation sensors, data analytics, predictive analytics, drones, and irrigation management software.

"We can take a company operating in mainstream food production such as Innoliva and introduce the latest technological advancements within the production process thus increasing revenues, reducing costs and improving our returns," says Alastair Cooper, head of early-stage investments at Cibus. "This strategy allows us to potentially enhance the value of the agri-tech startups we invest in, as we are able to provide them with a platform to leverage their disruptive technology."

Despite the increasing number of players active in the sector and the impressive growth recorded in the past few years, the disruption brought to the agri-food industry by technology and innovation has not been without its challenges.

"The biggest hurdle is understanding what the speed of technology is, how fast growers or corporations might be able to adopt a new technology, and how quickly it can be deployed on the market and scaled up," says Belldegrun. "This is particularly important in the current phase of the commodity cycle, which is affected by low prices and a consequential lack of spending on new technologies."

If the challenge for adoption and commercialisation of new and disruptive technologies is the first obstacle to face, there is also a need for a broader and more persistent change of mentality and perspective in order to overcome the resistance towards innovation inherently ingrained within the sector.

"The change has to involve both investors and consumers," says Unigrains' Biau. "Many investors come from other sectors and lack a deep understanding of this industry's dynamics, while we need a new generation of entrepreneurs, who are innovative, have awareness of the sector's challenges and have the ability to drive a team from concept to market reality and commercialisation. At the same time, consumers have to become aware of what it takes to combine their expectations in terms of nutritional values, traceability, freshness and environment protection with cost efficiency."

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