The Mystery Behind the Lack of Venture Capital Investment in Sustainable Agriculture
February 28, 2012 | Nicola Kerslake
The following post is part of a new column by real assets investor Nicola Kerslake that will focus on topics related to investment in sustainable agriculture. Sample topics will range from venture capital investment in sustainable agriculture and what VC investors look for in a startup to advice for entrepreneurs on obtaining government funding for agriculture projects and the benefits of joining an incubator.
A couple of times a week, I get a call from an agriculture startup with the same complaint: “We have a brilliant idea and customers ready to go, but no venture capitalist invests in agriculture”. By and large, they’re right. Despite mainstream media reports – notably in the New York Times – that predicted a wave of venture capital (VC) investment into sustainable agriculture, only $6.4 billion was plowed into the entire food and agriculture sector by private equity investors in 2011. This amounts to a mere 3% of total investment.
Most venture capitalists manage funds that last for 10 years; this gives them 2-3 years to make investments in companies, 3-5 years to nurture them and 3-4 years to find them buyers. Their investors – usually large pension funds, endowments and foundations – expect to see at least double their money returned to them at the end of the 10 year period. This means seeking out the best business plans, technologies and teams. A typical VC will see, maybe, 500 business plans a year, will meet with about 100 teams and will invest in 4 or 5 at most. As one world-weary VC pointed out to me, “most of the job is saying no”.
One of the easiest ways of culling the pile of business plans is to ignore industries that are unfamiliar. The bulk of VC investment is in technology – especially software – and biotech, so few VCs have agriculture backgrounds. A notable exception is Amol Deshpande of famed Sand Hill Road firm Kleiner Perkins Caufield & Byers. His remit at the firm includes sustainable agriculture, and he previously ran an agricultural biotech firm and invested in the sector for Cargill. One of his better known deals is biomass firm Harvest Power, which uses anaerobic digestion and composting to create biochar, soil, compost, mulch and engineered fuels.
While we think of certain areas of sustainable agriculture – organics, aquaculture, precision farming – as high growth, their growth rates are tame compared to those of the social media firms with which they compete for VC dollars. Organic fruit and vegetable consumption is growing at about 12% per year, whereas social media network Google+ took only 16 days to reach 10 million users. “I know if my social media deal is taking off inside a few days, I’d have to wait a couple of years to see if an organic fertilizer was viable,” argued one investor.
Indeed, one of the more common complaints from sustainable agriculture investors is that the market has adopted their portfolio companies’ products far more slowly than they anticipated. In particular, VCs are skeptical of the potential for speedy returns in fields such as roof top farming and local food systems. “It’s just hard to see how they fit with the venture capital model,” commented one biotech-focused VC to me. It’s worth noting that generalist VCs said much the same about the clean energy sector before finding religion 5 or 6 years’ ago.
Anecdotally, I see a higher proportion of women-led startups in sustainable agriculture than in other sectors, yet VCs are notorious for favoring male management teams with Ivy League educations. My research found that only 5% of management backed by the top 10 clean energy VCs are women. This trend has extended into some sustainable agriculture investments; for instance, one of Khosla Ventures’ first forays into the sector is Solum, a soil nitrate measurement firm whose male management team is made up of Stanford University physics and engineering graduates. For the record, VCs generally argue that they would be happy to fund women-led teams, they just don’t see too many of them.
On the upside, we are now seeing a new generation of impact investors and specialist VCs stepping into the breach. Typically, they look for the same features in deals as general VCs – strong management teams, low capital intensity, a defensible business model, a large market with high growth potential – but have specialized sector knowledge and a different investment perspective than their generalist brethren. “Agriculture is a huge industry and it’s undergoing exciting transitions to sustainability, transparency and better productivity” is a typical argument. Examples include Open Prairie Ventures, an Effingham, IL based VC whose portfolio companies include Vestaron, which is developing insecticides based on spider polypeptides.
In reality, less than 1% of startups receive VC funding and plenty thrive without it. It’s perfectly possible that the nurturing of these ‘non-traditional’ investors will be sufficient for a thriving sustainable ag entrepreneurial community to continue to develop.