The sound of inevitability: the coming consolidation in Agtech

September 8, 2021

It’s coming up on 10 years since the ~$1B acquisition of the Climate Corporation by Monsanto, an exit that some claim was the catalyst for venture capital’s entrance into agtech. In reality, since 2005 there has been a steady increase in the number of venture capital firms focused on AgTech.

Growth in the number of VC funds in this area is attributable to several factors, in addition to the potential for exits that the Climate Corporation deal heralded. For example, the advancement of technologies such as remote sensing, machine learning, and cloud computing have enabled applications such as remote analytics and robotic automation to be viable. The economic environment has also been favorable to the growth of the ecosystem, with record low interest rates in many countries pushing investors to seek higher-yielding asset classes. And most recently, the potential role that agriculture can play in mitigating climate change is attracting new impact-focused capital to the sector.

The last decade has seen the maturation of the agtech funding ecosystem in several key ways, yet large exits are still too rare. Looking ahead to the next decade, consolidation is something we can expect to increase

Drivers for consolidation

We are already starting to see more consolidation and believe this will accelerate. One reason is that venture capital fund lifecycles (usually 7–12 years) mean many of the funds that started investing post the climate acquisition are starting to seek exits. VCs need exits on the books to keep up the confidence of their LPs, and ultimately to deliver returns.

Another driver for consolidation relates to the growth of the sector overall. As the barriers to entry have dropped and the early-stage support ecosystem has matured (e.g., accelerator programs), more agtech startups are forming and raising early rounds.

More startups means more choices for farmers, and while more choices can be better, it also leads to confusion and heavy competition for the limited attention of the customer. This, in turn, makes it harder for later-stage startups to continue to grow and opens the door to acquisition as an alternative growth pathway.

Finally, consolidation will be driven by players more focussed on mid- and downstream supply chains who are waking up to the benefits that digital technologies can provide, and recognizing the need to incentivize the adoption of these technologies for upstream users.

What kinds of agtech acquisitions will we see?

The Climate Corp acquisition could be characterized as one that enables an incumbent to sell more of its current products. This and other types of exit will continue to increase.

  • The acqui-hire: the startup world offers access to talent pools that large companies may struggle to attract. Examples: John Deere’s acquisition of Blue River Technologies and Bear Flag Robotics, two companies with a deep bench of software talent.
  • The disruption antidote: as the startup world matures and technological advancements continue to unlock new business models, incumbent firms are under threat of disruption. One option is to innovate and disrupt themselves; however, cannibalizing an existing revenue stream or business unit is incredibly challenging for large companies. External innovation through acquisition is therefore a more likely path. We are seeing this today in the biologicals space, for example with UPL’s acquisition of Arysta LifeScience. Another early sign of this playbook is meat industry incumbents investing in alternative protein startups.
  • The expansion play: as successful later-stage startups seek to expand to new markets, acquiring early-stage companies with traction in these new markets may be cheaper than building the features and customer base from the ground up. A recent example of this was Semios’s acquisitions of Altrac, Centricity, and Agworld, enabling them to expand from specialty crops into broadacre.
  • The land and expand: midstream agri supply chain players are facing new pressures related to sustainability and climate change, driving opportunities for new business models to manage risk and capture consumer premiums. Data is required to underpin these claims, and again, consolidation of existing solutions will likely prove cheaper than building from scratch. Rabobank and TELUS Agriculture’s acquisition of Conservis is an example.

What does consolidation mean, especially for farmers?

While exits are often talked about as something investors will benefit from, consolidation in the agtech space can also lead benefit others, including farmers. For example, consolidation means the menu of choices is less confusing, and existing offerings are better-resourced to deliver new features and support. It also means there will be more vertically integrated offerings- comprehensive solutions that solve entire problems and unlock new opportunities (e.g., finance, insurance, etc.).

Additional agtech exits, especially those that fall into the “expansion play” and “land and expand” categories, may also pave the path toward viable independence for service providers. In other words, it will enable these companies to be profitable based on the services they sell, rather than as a loss-leader for another product being sold to farmers (e.g., seeds, chemicals).

The sound of inevitability

Though relative to other sectors that have attracted venture capital, agtech can seem early and relatively immature, the ecosystem is evolving rapidly and the consolidation ahead holds significant potential for all involved. The continued focus on supply-chain-oriented solutions and the desire from farmers for fewer, better-integrated offerings will ensure that the consolidation trends we’ve seen of late will continue at pace.

This post was co-authored by Agthentic Group co-founders Matthew Pryor and Sarah Nolet. Shout out and thank you to James Heaton for his research help. To get regular podcasts, research & insights from Agthentic, subscribe to our newsletter.