Though each potential investor meeting is different, there are a few common questions. Some are about Tenacious (e.g., How’s Fund I doing? How do you assess and measure impact?). Others are about the agri-food tech landscape and opportunity more broadly.
In fielding the latter set of questions, perhaps more frequently than I had expected, I’ve realized that there’s still a lack of understanding and appreciation for the sector. One perception that’s been implicit is a concern that agri-food is not a fit for venture, and won’t deliver returns.
So for this week’s fundraising out loud, I want to bust this myth and share where we believe returns will come from in agri-food.
In terms of IPOs, and, more recently, SPACs, performance to date in agtech has not been particularly successful. Our view is that this has more to do with the comparatively young sector and overinflated initial expectations. With greater track record, and a larger number of public examples of companies in this space, we expect the volatility of public market pricing will settle.
In parallel while this evolves, we believe that acquisitions will continue to play a key role in delivering returns. Equipment manufacturers and OEMs are seeing the potential of an autonomous future. Ag chem companies are realizing they need new tools and products to respond to pressures around sustainability credentials. And animal health companies are looking at new, digitally-enabled ways to add value to their customers.
We’re also seeing companies previously working tangential to, or entirely outside, agriculture turn to acquisitions in agri-food tech. This includes banks, service providers (e.g., accounting, consulting), and even technology companies. Perhaps the leading example of these “new entrants” today is Telus, the Canadian telecommunications company that’s investing in and acquiring agtech companies as they seek to repeat their successful healthcare innovation playbook.
To date, these acquisitions have varied in their performance against venture capital metrics. Again, our view is that the sector is only getting started. The pressures and opportunities to scale up ecological sustainability, decarbonize, and adapt to climate change are massive and won't be ignored.
We believe they will increase the pace, volume, and performance of exits of all kinds in agri-food tech, especially given the five drivers below.
Autonomy will be key in responding not only to climate pressures, but also to current and emerging challenges such as labor availability and the pending generational land transition. We believe autonomy in agriculture will happen in two ways.
As we’ve already started to see, equipment companies and OEMs will introduce automation as native functionality. To do this, they will continue to need to make acquisitions.
But the opportunity for autonomy in agriculture is larger than just equipment. Humans currently do plenty of things that today’s big machines won’t do, but that autonomy can. Shearing. Picking. Milking. Harvesting. Weeding. Pruning. Thinning. The list goes on and on. The size of the autonomy market is far bigger than just the size of the agricultural equipment market and, as it emerges, will easily support whole new category-creators with strong potential to IPO.
Today’s common farm inputs account for a significant amount of the emissions profile of agricultural production. They’re also getting more expensive, and are susceptible to global shocks. Looking forward, there’s an opportunity and imperative to transition toward lower-intensity production, including biological and digital replacements for synthetic inputs.
This transition will be far from straightforward, and agchem incumbents, such as manufacturers and retailers, will be significantly impacted. As cells and bits replace molecules, incumbents will need different types of expertise to transform not only product development, but also to shift from margin-capture to service delivery. We believe this expertise is mostly likely going to come via acquisitions.
In addition to incumbents transitioning, these shifts may also create opportunities for novel kinds of digitally-native retailers to gain market share– companies that could easily get to IPO-scale focused on inputs alone.
Climate pressures and novel technologies have unlocked new methods of production such as controlled environment agriculture and precision fermentation. These new methods are driving the creation of new categories, such as plant-based milks and cellular meats, and the rise of entirely novel products within them.
Though early movers in these spaces have reached IPO and SPAC stages, their track record has not been great. But as with many new-to-the-world opportunities, the success of initial entrants is often not the best indicator of the long-term opportunity (think: Friendster, Myspace).
Looking forward, we believe that companies developing novel foods (and ingredients) and novel production methodologies, backed by aligned capital, will be able to generate scale and revenues that support larger valuations, and ultimately lead to successful IPO and SPAC opportunities.
Transaction volumes across banking, finance, risk, and insurance in agriculture are already massive, and will continue to increase. However, while these industries are increasingly data-driven, they largely still operate at coarse-scale in farm and field terms.
As digitally-native business models emerge, the lines between traditionally segmented categories will blur. Real-time, low cost, and high resolution remote sensing and direct measurement technologies will mean we no longer need physical access to commodities to quantify agricultural outputs. Smart, digital contracts will unlock efficiencies, dis-intermediate, and improve transparency in value chains, and eliminate existing constraints imposed by today’s infrastructure and relationships.
We expect this to drive acquisitions, as we’re already seeing, as well as support category-creation opportunities that unlock the potential for IPOs.
As climate pressures mount across the public and private sector, there’s an increasingly urgent need for economic incentives that enable practices along agri-food value chains to transition toward lower emissions-intensity models. We believe these incentives will come in the form of both carrots and sticks.
The sticks will take the form of increasingly mandatory disclosure reporting requirements. While it’s unclear whether existing compliance and accounting tools will evolve and remain status quo, or whether climate-native and agri-specific solution providers will win, it is clear that the impacts of misreporting could be huge. Given the economic significance of these looming requirements along the value chain, the resulting technology categories could be very large.
The carrots, on the other hand, may look more like payments (and other incentives) for recognized ecosystem services. The scale in terms of potential market size and significance of market evolution from today will also, we believe, drive both M&A and category creation opportunities.
For many venture investors, there’s a singular focus on investments that have the potential to “go all the way” (i.e, to an IPO in the US). While we certainly believe that many of our portfolio companies do have what it takes to become public companies, as a sector-specific investor in the food and agriculture system, we have a nuanced view on returns pathways.
Thus far, agri-food has been considered niche, even challenging, in terms of venture-scale returns. But as the world starts to tackle decarbonization and the above transformations continue to materialize, we think opportunities for those who focus on the systemic-shifts and unlock codes will be abundant... and that the time is now.
To learn more about investing in Fund II and our vision for a digitally-native and climate resilient food system, get in touch here. Early-stage agri-food tech startups looking for funding, reach out here.
This is the fifth post in our “fundraising out loud” series. Catch up on the first here, second here, third here, and fourth here.
Disclaimer: The information in this post is not investment advice or a recommendation to invest. It is general information only and does not take into account your investment objectives, financial situation or needs. Before making an investment decision you should read the information memorandum and seek financial advice from a professional financial adviser. Whilst we believe Information is correct, no warranty of accuracy, reliability or completeness is given, except for liability under statute which cannot be excluded.
Tenacious Ventures Management Pty Ltd (CAR 001275760), Tenacious Ventures Management Partnership, LP (CAR 001298484), Tenacious Ventures Fund II Management Partnership, LP (CAR 001298483), and Tenacious Ventures Fund II Staple Co Pty Ltd (CAR 001298487) are Corporate Authorised Representatives of Sandford Capital Pty Ltd (ABN 82 600 590 887), Australian Financial Services Licence No 461981, and are authorised to provide advisory and dealing in connection with investments to wholesale clients only.