Two years ago we wrote about how agtech hasn’t seen many IPOs, and tackled the question of whether venture capital (VC) is a fit for the sector. We toyed with calling the article “How Silicon Valley (nearly) killed agtech.”

In short, our argument was that VC is a fit - i.e., outsized economic returns are possible - but that purely applying the common “Silicon Valley-style” template of venture investing is not the answer. Agtech needs a different playbook. 

Fast forward to this week where Indigo Ag’s valuation allegedly plummeted from $3.5B to $200M, and people are again asking, “is agtech a venture sector?” and “will there be venture returns in agtech?” 

Our answer to these questions still an emphatic yes. In fact, agtech is uniquely positioned in that it can be uncorrelated to macroeconomic cycles, and has a massive opportunity to tackle climate change while also unlocking returns. 

Yet, if we continue to build and invest in agtech startups as if they were all software companies with traditional SaaS business models, we will not see venture-scale returns. We will instead see piles of cash basically set on fire, and we’ll fail to deliver much-need commercial solutions to bring climate resilience to farmers and the value chain.

The Indigo Lesson

Indigo is just one of many examples of agtech companies that have followed the Silicon Valley venture playbook, and suffered the consequences. While Indigo has explored several business models and revenue streams (check out this excellent analysis from Shane Thomas at Upstream Ag Insights), looking at their biologicals play is illustrative of the dynamics we’re so wary of. 

Like many other venture-backed agricultural input companies today, Indigo was pursuing a classic VC template: throw huge amounts of money at adoption and promise investors outside returns via IPO. 

But the adoption (and therefore revenue) has not eventuated. Blame has been thrown around. Maybe farmers won’t change. Maybe agriculture doesn’t want more sustainable solutions. 

Or maybe, the issue is that vast amounts of capital will not solve for farmer adoption, nor unlock software-level (~80%) margins and pave the path to an IPO. 

Vast amounts of capital will, unfortunately, inflate valuations well beyond where incumbents - who are indeed hungry for similar kinds of innovation - can pay for acquisitions. This closes off the potential for returns through acquisitions, a unique attribute of the uncorrelated nature of agtech.

Indigo, and many other agtech startups and their investors, seem intent on learning this the hard way.

So what does work?

While the transition from widespread use of chemical inputs to biologicals will be challenging, there’s plenty of evidence that biologicals are valued by both farmers and incumbents, and that there’s money to be made (like Corteva’s acquisition of Stoller and FMC’s acquisition of BioPhero). 

This is true of agtech more broadly- the agriculture industry is under pressure, and there’s massive demand for new solutions. 

But these solutions - which will be far broader than just software - must be delivered via business models that appreciate the complexities and nuances of agriculture. 

The Silicon Valley playbook is still killing agtech

It may seem crazy for a venture capital firm like Tenacious (that’s actively fundraising!) to write about this. Won’t we scare off potential investors?

Not the right ones.

Not investors who believe what we believe: that there are venture scale impact and return opportunities in agri-food, and that unlocking them will take an industry-specific approach, not a copy/paste of what’s worked for venture capital investment in other industries.

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