California-based Agfunder is a novel platform investing in farming tech start-ups and has raised more than US$34m (£27m). Its co-founder, Rob Leclerc, talks to Future Farming about his enterprise.
I graduated in the middle of the financial crisis in 2009 and the general sentiment was that the real economy needed to do more, and if anything is the real economy, it’s agriculture. I also wanted to be ahead of the game.
One way of doing this was to bring together investors and tech companies in the food and agriculture sector, because the two groups don’t know each other well enough. And because of that sentiment about the financial crisis, I thought tech companies would be interested in doing business without banks and investors, dealing with the real economy, rather than the stock market.
The sector accounts for about 10% of global GDP, but attracts only 2-3% of venture capital. Compare that with the health sector, which represents some 12% of GDP and gets 12% of investment.
I’m not suggesting that food is less important than medicine, but it does make you think that food and agriculture should get more money. We set up AgFunder as an investment platform to facilitate this process.
Small tech companies that need money apply to us, and we carry out due diligence on the information they give us. This is not just for the investors’ benefit – it also helps the companies to think things through.
Start-ups are often good at technology, but not at selling themselves or getting their financial ducks in a row. We also look at whether the investment is really attractive. Less than 2% of applications actually get onto the platform, so it’s a pretty tough process.
You can choose to invest directly in a company, and build a portfolio. That starts from US$10,000 (£7,825).
Or you can invest in a fund that finances start-ups and is managed by investment professionals working with AgFunder, in which case you have to put in at least US$100,000 (£78,250). Institutions such as banks and pension funds can also pool funds with other investors via AgFunder.
Yes, we recently began investing ourselves. We set up a US$20m (£16m) investment vehicle and we’re aiming to provide capital to 20-30 companies. If we provide funds ourselves, this can bring in other investors, make larger projects more viable, and create more trust.
The Californian agricultural sector is still worth around US$45bn (£35bn) a year. Dairy and horticulture are important there, and some investors love technology aimed at crops with a high yield per hectare.
But that’s not the main reason. We’re in California because of Silicon Valley, and the size of the population, and the affluence. There’s a whole lot of money in California, and that helps when you’re looking for investment.
Most investment goes to US companies, but the figures aren’t totally representative.
Americans are good at selling, whereas Canadians and Europeans are quieter if we invest in them: they don’t shout it from the rooftops.
Also, generally speaking, it’s less of a taboo and less expensive if your business fails in the USA, so the risk threshold is lower.
The really big venture capitalists, the ones who put in tens of millions of dollars at a time, very often choose hard technology such as robotics. The more middle-of-the-road and small investors prefer software aimed at farmers and consumers. E-commerce is still very popular.
I think genetics and the like are developed more by big, long-established companies than by start-ups. And some of the biggest growth in biotechnology over recent years has come from new companies.
According to AgFunder, the volume of investment in agricultural start-ups fell by some 30% in 2016, to US$3.23bn (£2.53bn). In precision agriculture, it decreased by 39%. These numbers are not wholly representative, because 2015 was a record year, and the market is still somewhat bigger than it was 5 years ago.
Investment in drones did decline slightly, though this was partly a correction following a big rise in investment in 2015, with a massive inflow of money from venture capitalists.
People were becoming increasingly disenchanted with the stock market, and there was a feeling that if you don’t go high-tech, you die. So generally speaking, a lot more money went into tech start-ups and precision agriculture. As a result they were overvalued, and they came down to earth with a bump in 2016.
That wasn’t the only problem. Farmers aren’t always the fastest to adopt new technology, and of course they distribute their products in a very different way to the rest of the economy.
There is literally a lot of space between businesses, and farming is a lifestyle in its own right, where people form co-operatives and are sceptical about suppliers. Also, a lot of products have got cheaper, and traditional suppliers and companies with new technology are noticing this.
Companies can apply for funding from Agfunder online and it is a three-stage process.
(1) If a mutual fit is possible, there will be an introductory call with a deal team member to kick off the process.
(2) If successful, the next stage is due diligence. Companies will become more prepared for investment through constructive feedback, advice and coaching.
(3) The third stage is the fundraising itself.