In on the Ocean Floor, Aquaculture VC Firm Sees Opportunity for Sustainable Returns
March 5, 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 and aquaculture. Last week’s post focused on the reason for a lack of venture capital investment in sustainable agriculture.
Like many a software guy, David Tze was flipping through Wired magazine back in 2004 when an article caught his eye. It described the overfishing of the world’s oceans and painted a grim supply picture going forward. The article piqued Tze’s interest and he through himself into learning as much as he could about sustainable aquaculture; “I became a little obsessed,” he admits.
A couple of months later, he began discussing the issue with his college classmate JaredPolis, the bluemountainarts.com, ProFlowers entrepreneur and current Congressman representing Colorado’s 2nd Congressional District. Polis was equally fascinated by aquaculture and eventually invited Tze to join his family office to focus on finding investments in the sector and Aquacopia, “the first and only aquaculture venture capital firm,” was born. “Our goal was to prove that you could make venture returns in aquaculture just as well as in technology,” Tze adds.
Non-traditional VC Target
Aquaculture isn’t an obvious venture capital target. Though it’s a large industry – US revenues alone were $2 billion last year – it suffers from slow growth and high capital intensity. Global production growth is pretty tame by venture capital (VC) standards as venture capitalists would typically look for at least 30% annual growth in a target market. Many VCs still look for investments that they can visit in a day trip. They also look for large markets, and the US is not the largest aquaculture market. In fact, it’s only about a tenth of the size of China’s market. Yet, it’s an industry in the process of substantial transition as demand continues to outstrip sustainable supply. There is urgency to find sustainable aquaculture solutions as a 2006 study found that all species of wild seafood would collapse within 50 years without intervention.
The bulk of the Aquacopia fund is in investments that help to address this issue. Its 5 portfolio companies range from OceanFarmTechnologies, a designer of deep-water finfish net and open ocean aquaculture systems, to sustainable fish brand OpenBlue, to a sustainable seafood distributor LitchfieldFarms that applies a proprietary sustainability rating to its products.
Sustainable Aquaculture Investment Opportunity
Part of the allure of the sector for Tze was that he saw opportunities in technology and operations that were being ignored by institutional fund managers. “I figured that the fund would split a third each into production, technology and supply and marketing” he added. Indeed, the sector lends itself well to defensible intellectual property and scalable technology-based businesses, one example of which is Aquacopia’s investment in FutunaBlue, which is working on domesticating the Northern Bluefin Tuna, the most valuable, common sushi fish. The technology that the company uses in its cleantech aquaculture operation has been under development since the 1970s, and still has some hurdles to overcome, but the Spanish company has been able to build up a decent patent portfolio.
The fund signed its first deal in December 2005, so its investment portfolio is now complete as the investment period of a fund is typically around 3 years from inception. Though most exits will be in the 2014-2016 period, the fund has already seen a follow on round from a long-established Chinese venture fund for OberonFMR, a company that produces high quality sustainable fishmeal from farm and food manufacturing waste. Trial volumes have been available, under the brand name Profloc, since the 3rd quarter of 2008. Oberon is targeting 70% protein content for the resultant meal, which is higher than existing products, and the feedstock for its process are waste streams. Tze points out that “some of their potential feedstock suppliers are paying $50-200 per ton in tipping fees for waste that Oberon could turn into meal.” Oberon FMR’s first commercial scale plant will be co-located with a brewer, as the waste water streams contain nutrients that work well with the company’s digestion process.
Aquacopia has primarily focused on seed and early stage investment deals; only 1 of its portfolio companies was close to profitability at the time of investment. Increasingly, Tze is seeing later stage opportunities and his focus is now on raising an incremental fund.
With Polis busy in Congress, Tze’s next fund will be raised with two new partnersL: Morgan Stanley alum Justin Willmott and former Booz consultant Mattia Pipino. Named OceanisCapitalPartners, Tze describes the fund as “the world’s first aquatic resource focused private equity vehicle with a global mandate.” Aside from looking at larger deals, the new fund is also looking towards major seafood producer markets in Asia; Willmott and Pipino are based in Dubai to facilitate this. With interest from the family office, sovereign wealth funds and publicly traded investment trust communities, Tze is hoping to hold a first close by mid-year.
When the clean energy industry began to gain momentum, it was the passion and persistence of small specialist VC funds that illustrated to their larger brethren that the industry was a viable investment destination. Tze shows the same passion for his chosen sector; “one of my proudest moments was hearing a friend say they’d bought OpenBlue Cobia from Fresh Direct” he recalls.