Aidan Connolly is the President of AgriTech Capital, a food/farm futurologist. Download here his new book ‘The Future of Agriculture’.
The zeitgeist of the moment suggests that tech leaders will need to use different evaluative criteria when deciding where to spend their money in 2023. Recession or not, money will be more expensive. Looking for value may mean looking to sectors such as food and agritech, which have traditionally attracted less capital than other investments and probably remain undervalued. So, how can you evaluate a possible expenditure?
For decades, tech leaders have marveled at firms such as Amazon and Tesla, famous for their growth without ever making a profit. Next-gen startups like Uber, Airbnb and Snapchat have now surpassed Amazon’s cumulative historic losses without any indication of a turnaround. This grow-at-all-costs strategy, and disregard for profitability, was tolerated by their investors while cheap money was supporting lower discount rates and higher valuations. However, as money gets more expensive, tech companies are shedding jobs by the thousands, and as anxiety about the economy continues, tech leaders need new guideposts. As an investor in a dozen startups through AgriTech Capital, and with an advisory business evaluating hundreds of investments each year, I see three themes for analyzing tech spending in the food and agribusiness sector in 2023
1. Pathway To Profitability
Venture capital and seed investors are now asking tech companies questions using traditional metrics, in a way that seemed foreign just a few years ago. Revenue is a reality check: No revenue means that customers don’t buy your value proposition. It has been a bucket of cold water over those aiming for moon-shots, disruptive technologies who think that the incumbents just don’t see it. The return to metrics will help reduce irrational exuberance, but it will also affect valuations. As the pendulum swings back, rather than simply focusing on top-line growth, tech leaders should look for companies with improving fundamentals, strong unit economics and value generation.
For example, Chewy, a large online retailer of pet food and other pet-related products, generates more than eight times the revenue of its next closest competitor in the online pet supplies segment. Their focus is on improving fundamentals through autoship sales as customers sign up for automatic reordering and delivery for recurring pet needs. They have invested in a distribution network with additional fully automated fulfillment centers to lower overhead costs. Their new pet insurance business should lead to a higher margin recurring revenue stream, adding additional value for the business and giving them a clear pathway to profitability.
2. Burn Rate Management
Start-ups always are clear on one date: the day that the money will run out. The challenge is that the Thelma and Louise movie moment of racing towards the cliff is based on the expectation that there will be a white knight who will step in to save the day. In the current market, white knights are few and far between. One of my startups has just raised $10 million with a compelling product, but also with a team of just four permanent employees. If the worst-case scenario evolves, and the market conditions don’t improve, they have the ability to extend their runway by reducing discretionary spending. Many startups with teams of 40-100 permanent employees may wish they had the same latitude.
Companies often run into trouble by entering multiple value chains with different customers all at the same time, adding to the overall complexity and costs of the business model. Prioritizing one to two applications and driving customer adoption is a better approach. Tech companies may also be better off by licensing some of the intellectual property (IP) to streamline their go-to-market timeline, while they focus on their core business.
An example is Gramophone, a full-stack intelligent farming platform that works directly with farmers to guide them throughout the crop life cycle—from seed selection, sowing, nutrient management and fertilizers to harvest management and selling. Using Gramophone, farmers can improve yields by 30%-40% while reducing input costs by 20%. Rather than tackling every challenge themselves, Gramophone partnered with the leading seeds and agrochemicals providers, and corporate buyers, to create a network of 4,000-plus traders to enable market linkages for farm outputs. Gramophone user base now exceeds 2.5 million farmers, quadrupled revenues last year, reducing their burn rate from 30% to 15% of EBITDA. In turn, tech leaders have had the confidence to raise a further $10 million.
3. Clarity On The Exit Strategy
To misquote the movie Field of Dreams, “When you have built it, will they come?” Without a clear idea of who will buy the business you are building, the innovation, the startup journey becomes a jaded one for leaders very quickly. Of course, it is challenging because the motivations of the acquirers can be opaque, reflecting stock values, internal politics, operational needs, etc. Nonetheless, it is amazing how many innovators are unclear as to who is going to want to buy the technology at the end. Identifying specific targets early on, and engaging with them as early in the process as possible, is useful right from the start.
Although Agritech exits were down 25% in 2022, the sector still performed better than other sectors. Acquirers in this space are eager to integrate potential acquisition targets with good platforms, products or technologies, especially as valuations have come down. For example, FMC Corporation, one of the largest chemical manufacturing companies, acquired BioPhero for $190 million. BioPhero is leading the development of pheromone-based products from yeast fermentation to replace insecticides for row crops. The acquisition shows how well-designed products and technologies with clear exit opportunities can be extremely valuable to the right acquirer, even in challenging market conditions.
Startups that want to raise money in 2023 will need to have clarity on their road to profitability or clarity over who they expect to sell to. Otherwise, survival will depend upon extending the runway by reducing the burn. No other options exist in what promises to be a challenging year for fundraisers.
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