Don't Go Chasing (only) Unicorns

We fundamentally believe that transitioning toward a climate resilient and decarbonized future of food and agriculture requires transformation of atoms and molecules, not just bits and bytes. 

So, while most venture capital investors focus solely on software companies, we significantly focus on deeptech opportunities (two-thirds of our portfolio so far!).

Time and again we are asked, “but is investing in deeptech really compatible with venture returns?” 

We believe the answer is an unequivocal YES. 

We talked about it on our latest pod; ICMYI here’s why.

Replacing market risk with technical risk

When we invest in deeptech companies, we look for opportunities to substitute market risk with technical risk. Often, companies developing deeptech solutions in ag are intervening in established and massive markets where existing players are facing disruption pressure due to climate. Take, for example, Jupiter Ionics intervening in the nitrogen fertilizer market or Goterra in waste management. In each case, customers represent a stable and proven base of demand that can serve to fuel massive growth. 

Investing in these deeptech companies at the early-stages, we believe, presents a unique opportunity to catalyze and de-risk the development of novel solutions that are well-positioned to quickly capture and increase market share. 

Leveraging a blended capital stack 

The funding pathways for deeptech companies can also look very different to traditional software journeys. Whereas software companies typically require more and more equity funding to sustain growth; deeptech companies are uniquely positioned to leverage non-dilutive sources of funding (e.g., debt, project finance) as they grow. 

When we invest in deeptech companies, our early equity is often funding the development of IP and removal of technical risk. Once technical risk has been removed and the technology has been proven, deeptech companies reach an inflection point where they unlock demand from large, industrial customers (who are often better insulated from market downturns!). 

Servicing this demand often does not require more equity funding- preventing early investors and founders from excess dilution. 

Opportunities for returns 

The combination of having a large, stable base of demand and being able to draw on a varied capital stack lays the foundation for how venture returns can be realized through deeptech investing.

On the one hand, the ability to serve large, industrial customers in already existing markets leads to high acquisition potential. These acquisitions may come from customers themselves, or from industrial incumbents who are otherwise at risk of being disrupted. And on the other hand, there’s still plenty of potential for category creation, which could lead to companies going public. 

Whether through acquisition or IPO, the potential for investors to earn venture scale returns is enhanced by the ability of deeptech companies to leverage blended capital stacks. Non-dilutive sources of funding to fuel growth help preserve equity holdings–meaning that attractive multiples can be achieved, even with modest exit outcomes. And this means that rather than hunting for a rare unicorn, there’s potential to earn healthy returns across many different opportunities in a portfolio. 

Being bold enough to venture beyond software

Ultimately, we can’t eat software. So we believe that building the future of food and agriculture needs more than software, too. 

In fact, a study by McKinsey estimates that we need to be investing $9.2 trillion in physical assets in energy and land use every year until 2050 to achieve net-zero. 

This is a massive commercial and impact opportunity for those brave enough to venture beyond software alone. 

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Key takeaways

  • Deeptech solutions are critical to the future of the food and ag system
  • Opportunities to replace market risk with technical risk and the ability to use blended capital stacks to fuel sales growth lead to potential for venture returns in deeptech investing

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