Investing at the Intersection of Farming, Finance, and Technology

Kenneth Scott Zuckerberg, AIF® AFA®, Wells Fargo Sector Manager, Agrifood Technology and Packaged Foods

The past decade has been interesting in Food and Agriculture with growing investor interest in what historically has been viewed as a mature, capital-intensive, low-growth, and highly cyclical commodity industry. Following the global financial crisis, investor interest accelerated based on rising grain prices, driven by China imports and ethanol demand, along with rising food demand from a growing middle class especially in emerging markets.

Since the Ag commodity price bubble burst in 2013, several interesting things have happened:

1. Billions of dollars have been deployed by venture capitalists, impact funds, and family offices into new food concepts, ideas, and technologies geared towards producing and distributing food more efficiently, sustainably, and locally sourced.
2. Precision farming has evolved into prescription farming and/or decision farming driven by big data and the explosion of data collecting sensors, drones, satellites, algorithms, and artificial intelligence.
3. A new cottage industry of “Ag Tech Conferences” has been born with more than 150 events taking place globally and focusing on food system innovation, technology, conservation, and other related themes.
4. Incubators and accelerators can be found throughout the world supporting an increasing number of start-ups.
5. Land grant universities such as Cornell and UC Davis are dedicating substantial resources to digital agriculture. Cornell’s initiative is somewhat unique in that it crosses numerous academic departments and disciplines including life and agriculture science, environmental science, technology, and engineering.
6. A major technology player, Amazon, with superb expertise in data mining, analytics and logistics technology, has developed deep inroads into grocery retailing and alternative food distribution.

Ag-Tech has strong momentum, but something key is missing

While the AgTech ecosystem is growing, something very important is missing from the conversation. Specifically, the current crop of start-ups, from vintage years 2012 – 2018, have not followed a path to public ownership. Instead, most have sold to strategic parties before developing meaningful revenue streams, or been forced to restructure or alter their business models.

So why are start-ups and their venture capital owners selling out early to strategic parties, rather than doubling down and growing their businesses on the path towards an initial public offering (IPO)? Following are five possible explanations:

• Adoption of new disruptive technologies by farmers has been very slower than expected.
• Investors are disillusioned by the lack of customer adoption.
• Selling farm data service on a business-to-consumer (B-to-C) level is difficult; perhaps business-to-business (B-to-B) selling would bear greater results.
• Scaling a startup is harder than it looks.
• All of the above

I think “all of the above” is the correct answer, and also takes into takes into account Amara’s Law governing the “hype” cycle in technology. Additionally, something even more basic is going on. When technology solves problems, enhances a user’s experience, and provides economic value, people buy in spades.

What is Amara’s Law?

Roy Amara, a former Stanford research scientist and Ph.D. in Systems Engineering, used an adage about the “hype cycle” in technology that has been affectionately coined as Amara’s Law. The “law” eloquently states that people tend to overestimate the benefits of technology in the short run, but underestimate its power in the long run.

One of my favorite examples of this involves computer storage. In 1956, IBM’s first hard disk drive – found in its RAMAC 305 System weighed 2,000 pounds, and held 5 megabytes of data at a cost of $50,000 for that storage, according to PC World Magazine’s September 13, 2006 issue. For perspective, the 5MG equates to the file size of a typical song downloaded from Apple’s iTunes Store. Now, fast forward to 2018. A typical iPhone weighs less than 10 ounces, has 64 gigabytes of storage, equivalent to over 12,000 songs from the iTunes Store, plus numerous apps and costs less than $1,000. Could anyone have estimated the magnitude of technological advancement back in 1956? Probably not.

A new thesis is born

The convergence of farming, technology, and finance is a new and actionable investment thesis for several of the emerging on-farm technologies. Following are the key points supporting this thesis:

• Technology has the ability to be the most effective tool for measuring and managing financial risk.
• If emerging farm technologies can deliver solutions that reduce waste and lower processing costs for parties with financial exposure to farming/food production, then such technologies have value in the marketplace.
• And if this happens, the buyer of such technologies is not the farmer who may use it, but will not need to buy it, but rather the capital provider, (debt, equity, or insurance) that has a vested interest in risk reduction.

Conclusion: In the near-term, the winning AgTech software and data analytics business models likely will be the ones that focus on serving agricultural lenders, insurers, and farmland equity investors. These parties have a vested financial interest in driving customer adoption, and in my mind, will be key specifiers and influencers, or alternatively pay and install such services on the farm.

Following are some of the key benefits to lenders, insurers and investors associated with the adoption of value-added, applied data analytics services and technologies.

• Improved monitoring of a farm’s operational performance and cash flow position through real-time financial reporting
• More accurate valuations of farmland as collateral for farm real estate loans
• Improved visibility of crop health during the growing season
• Better insurance pricing models – the better the data, the better the actuarial modeling
• Improved risk management

Parting Thoughts

There are several lessons learned from other industries that can be readily applied to the AgTech software and service space. The new product or service must be easy for buyers to understand and deploy, save time and money, or both, and integrate easily into existing daily workflows. I believe that partnering and/or selling through financial partners is a greater, value-creating exercise for many new AgTech SaaS companies, rather than trying to sell directly to growers.