Jim Schultz Sees Green in Agriculture Technology Startups
May 13, 2011 | Robert Puro
Venture investment in agriculture startup companies is not yet commonplace, but J.M. “Jim” Schultz, Founder and Managing Partner at Effingham, Illinois-based Open Prairie Ventures, believes wholeheartedly that it soon will be. So as to be a front runner and not a follower, in 2008, Open Prairie Venture’s launched one of the first early stage venture capital funds (OPV II, LP) to invest primarily in agriculture technology startups.
I recently interviewed Schultz to learn more about his farming background, Open Prairie Venture’s investments in agriculture technology, the key criteria that the uses to evaluate ag startup companies, his opinions on sustainable agriculture, and his predictions for the future of venture investment in agriculture.
Q: How does your background relate to and inform Open Prairie Venture’s investments in early stage agriculture technology companies?
J.M. “Jim” Schultz: At a very early age I was educated at the dinner table by my father who ran a seed and chemical business, with mainly domestic operations, but also with some export business to the Middle East, Europe and Asia as well as a farming operation down in South America. As a teenager I went to South America, and worked to prepare our first planting of soybeans in Brazil back in the late ’70s. So I had a very early introduction to agriculture from a production standpoint, from a processing standpoint, and grew up around the ag business.
That segued into us in the ’80s buying a lot of farmland at a time when it was depressed and we bought at extremely low values, basically at about 1/10 of what the same land is selling for today. Then we created our venture fund in the late ’90s, because we inflected off of a situation in the Midwest where an individual took a company public, but couldn’t raise any money locally and lamented to the world that the Midwest was the wrong place to start a business. So we said: “that means it’s underserved and an opportunity.”
We started our venture fund when Marc Andreessen took Netscape public back in the late ’90s. Marc will tell you there was no capital here and he still to this day says nobody does anything here. So we decided, well, we’ll turn that to our advantage and we became one of the few funds in the Midwest that focused on early stage technologies and, more specifically, on agricultural technologies.
Q: Do you feel that your location in the Midwest and your farm background give you an advantage when it comes to investing in agriculture technology?
J.M.S: Not only inherently, but explicitly it does. What I mean by that is that the number of people that I meet with that are in the fund management business trying to get into the ag space are extensively clueless on what it takes to build an ag company; and probably more importantly to build an ag company, it’s not about the technology. It’s about the people and we think we have the best technology global leadership people and personnel within my backyard that I can tap into that don’t exist in Boston or California. That gives us a real competitive advantage. I can pick up the phone and talk to people at ADM. I can hire people from Monsanto. I can hire people from DuPont and Dow and a number of other companies that have their global headquarters located within a couple hundred miles of my office. You can’t do that in Silicon Valley. It doesn’t largely exist. You can go into the Central Valley and find some players, but the predominant players that exist in the ag space are here in the Midwest.
Q: Why do you believe that the agriculture technology field presents such a great opportunity for investment?
J.M.S: There are many people that throw this quote around and I think it’s a poignant expression of why this is the best opportunity maybe for the next decade or so, and the quote is: “100 – 50 – 70 – 32.” We’re going to see a 100% increase in the amount of food produced on this planet over the next 50 years because of the macroeconomics, demographics and population explosion. 70% of new food produced will be driven by new advancements in different types of technology. And it’s going to be done on 1/32 of the land mass. Today we’re producing on 1/20 of the land mass. So as we shrink the amount of acreage we produce on and let’s say that we think in an ideal scenario a 180 – 200 bushel per acre corn production is appropriate today, we’re going to see that will have to increase to 300 – 400 bushel per acre, not as a mandate or a specific outcome, but as an example of where agriculture will go. It’s going to be driven by advancements in new technologies and new ways that we can produce food more efficiently.
Q: What agriculture technology companies does Open Prairie Venture’s have in its investment portfolio?
J.M.S: We currently have one investment that we have and one that we’ve already sold. The company that we have in the portfolio is a company named Vestaron. Vestaron is an insecticide technology that is a green tech technology. What I mean by that is that it has the ability to kill insects, but has no mammalian toxicity. Every insecticide in the market today that’s being used by major chemical companies kills mammals. What that means is that it kills mice and rats and other things in the field, and arguably if a human got enough of it in their system it would kill them too. The way it kills is by attacking the central nervous system.
Vestaron has developed a calcium blocking technology that will kill insects, but not have impact upon mammals. From all the experts I have talked to there has been no new novel insecticide technology that has come to market in over 20 years and this will be the first.
The other company we have is iCyt Technology. iCyt, we sold last year to Sony Corporation. It had human health and animal husbandry applications.
Q: What criteria do you use when evaluating whether to invest in an early stage agriculture technology company?
J.M.S: I think the three key things for us are: 1) Do you have a strong management team around the table that can add the value to build this to a credible and good potential business long-term; 2) Do you have multiple channel opportunities that you can take the product; 3) Do you have a syndicate that’s around the table that can support building this company out to the next two or three stages of the future.
Let me circle back on the channel thing. As an example, Vestaron has three channel opportunities: it can go into traditional insecticide applications and on growing crops; it also can be used in animal health to control flies and mosquitoes; and it also can be used in public health to control insects inside of buildings. We look at that as being opportunistic in that it’s not a one channel, one-dimensional type of product. We like things that have multiple channel ways of growing and building out so you can be agile and nimble enough to seize opportunity as the markets change.
Q: What does the macro environment for early stage investment in startup agriculture companies look like today?
J.M.S: We’re seeing a handful a week of deals in the ag space. It’s largely because we’re one of the few in it. I am getting calls globally. I talked to companies this week in Argentina, Uruguay and Romania. Last week I talked to a group in New Zealand. In almost all of these cases we’re looking at moving these companies to the US to try to build them out. And because there are so few of us in this space – going back to the Andreessen comment – that gives us a very high and competitive advantage.
Q: What are the challenges for early stage ag-tech companies in terms of obtaining increased private investment?
J.M.S: It goes to my third point of what we look for, and that’s the syndication part of it. Do we have the necessary partners around the table that can help us build out the technology and the company so that we’re not the solo investor in the A round? We’d like to make sure that we have a good syndicate around the table and that we’re looking at the deal as joint venture partners of sorts. Kleiner Perkins is starting to do stuff in the space as well as Sofinnova and Venrock. We look at them as being critical partners and we’ve developed a reputation where they too see the value add in having us at the table.
Q: What advice would you give to agriculture startups out there that are looking for funding for their ventures?
J.M.S: They need to hit the three points that I mentioned earlier: first, that we have a great team that knows how to get this product to market or this technology to the different development stages; second, we have more than one channel strategy. We’re going to focus on one channel initially, but if this target channel doesn’t develop or the technology doesn’t evolve as we anticipate, we have other options here; and third is that we have the necessary parties around the table, whether that’s other venture funds or strategic ag-partners that are prepared to invest in the technology with the A round investor.
The other thing would be, do we (Open Prairie Ventures) add any value? Everybody has dollars, but they need to be strategic dollars. We tend to focus with our fund, as an example, in what we call the higher level of the production process, that is, in the input side. We don’t tend to do very well when you get down into the production side of the business such as grain handling, or GPS technologies, or things that deal with more in-the-field. We like to be in the seed, chemical, and fertilizer space in what we call the input side. As an aside, however, I was looking at an equipment deal in Decatur, IL that has a way for basically resulting in about the half the fuel use for a tractor because of a new technology they’re developing – this technology goes beyond agriculture. Those are things that are interesting to us.
Q: When you look at investments in agriculture is there a consideration for sustainable agriculture?
J.M.S: I think it’s naturally what we’re looking for. I think the definition of sustainable is pretty broad right now. I don’t think anybody’s got a very concise way of saying what that means. We think, for example, this chemical we are developing at Vestaron is sustainable. I talked to some people that are more toward the heavier green-side of the equation and they don’t see it as sustainable, because they see it as still killing things with a petrochemical application.
I tend to be a conventional farm advocate and believe that you are going to have to do things with GMO to grow the crops we’re going to need to feed the planet. We may not like that. We may want to say, “that’s Frankenfood,” but I think the reality is we don’t have enough acreage to produce the food we need to feed the planet and people will go hungry and it will create massive problems such as we have seen in the last three or four years in Southeast Asia and in Egypt. If we don’t have food, it creates major problems. So I think we’ve got a real challenge today with carryover stock projections in major grains. I tend to think that sustainable means a different thing to me than what it might mean to someone in San Francisco.
Q: What is your prediction for the future of venture investment in agriculture technology companies and startups?
J.M.S: I think it’s still developing. I think in the next five years there will be more funds getting in this space. We have seen a lot of the large funds start to put their toe in this. In the last 18 months I have had four West Coast funds come to the Midwest to visit us to talk to us about our fund and how they might partner with us. I think there’s still a couple year educational curve we’re going to go through, but I think there’s an acknowledgement from a macroeconomic perspective that they better be playing in this space because it’s going to have some pretty interesting things develop.