Investing in Ag 2.0
The fields of venture capital investing and agriculture share a plot of common ground: tolerance for risk.
Wrong seeds, wrong conditions and investment can wither. Right seeds, right conditions and profit can abound.
Now a stable of ag-upstarts are sowing those fields together, pitching venture capitalists to plant cash in technologies that could revolutionize how farmers produce, move and sell what they grow.
“We’re in a boom time for agriculture,” said Jason Henderson, vice president of the Omaha branch of the Federal Reserve Bank.
The agriculture economy is projected to grow by 20 percent this year. And Henderson said he’s seen an uptick in venture capital interest.
While the recession hurt the venture capital industry, a rebound in 2010 was partly attributed to investors making deals outside of their traditional comfort zones of information technology and health care. The total number of deals for companies involved in food and fuel production grew only slightly and accounted for less than 3 percent of the total, according to Dow Jones VentureSource.
But venture capitalists invest in tomorrow, and experts say an expanding ag-economy is ripe with opportunity.
This little startup goes to market
Grain prices twitched across on a bank of monitors in Jason Tatge’s office at Farms Technology’s headquarters in Overland Park Kansas.
The spiky haired Tatge donned a stylish untucked collared shirt and blue jeans, looked more dot-com than dot-ag.
“Today we basically had, on the March corn contract, 5,912 different ticks,” Tatge said. “That means different prices.”
About a decade ago Tatge cooked up an online solution that lets growers set their own asking prices for grain and soybeans, sort of like Priceline.com. So a farmer can look at what the market’s doing, put in an offer to sell x-number of bushels for say $5 each, and if a buyer like the local ethanol plant is interested they can take the farmer up on the his or her bid.
Boiling down the whole process to a couple mouse clicks.
In 2008 the venture capital wing of Dupont thought Tatge was on to something and purchased a minority stake in Farms Technology. Then the chemical giant with agribusiness subsidiaries came back in late 2010 to cut a check for the majority share.
“We had built a product, we were out there marketing it, you know, we were growing the business the old fashioned way.” Tatge leaned back in his chair and recalled. “And suddenly Dupont came along and said, look, we like what you’re doing and here’s some capital and let’s do it bigger and faster.”
Since Dupont’s initial investment, Farms Technology has grown from 3,000 to 10,000 farmer accounts like the one held by Gary Briggs.
“I’ve used this for the last five years,” said Briggs, who farms corn just outside of Kincaid Kan. “Before that I would try to find buyers and market over the telephone. A lot of times you’d try and call a buyer and they wouldn’t be available or they wouldn’t call back for quite some time.”
Little by little over the last five years Briggs began marketing more of his crop on Farm Technology’s Dynamic Pricing Platform. Today he sells almost all of his corn using the online tool Tatge’s company produced.
Even though it’s become a welcome part of his operation, Briggs said there was at least one drawback to having real-time market data and the ability to set prices any hour of the day – or night.
“It kind of gets in your blood,” Briggs said. “I’ll get up at two or three o’clock kind of curious what the nighttime trade’s doing. I’ve made sales doing that.”
“My wife says I’m obsessed,” he said with a laugh.
Jokes aside, Tatge thinks farmers’ growing desire to have instant information and access to markets will drive demand for his product and bring more venture capital dollars to ag-focused startups like his.
“Most of the new combines and the new tractors all have auto-steer so when you’re planting you don’t have to steer anymore,” Tatge said. “If a farmer doesn’t really have to drive his tractor anymore but he sits in there for eight hours a day, you know, what’s he gonna do?
Tatge laid out a scenario in which a farmer is riding in a tractor that’s being steered by satellites through a corn filed. Hands off the wheel, all of a sudden the yield estimate being pumped into the digital dashboard starts to plummet.
“The odds are if they have lower-than-expected yields than their neighbors probably do, and their neighbors’ neighbors probably do, so we’re probably going to have less supply than anticipated, which means they should all be raising their price,” Tatge said. “We want to give them tools to adjust the prices on what they’re expecting to get for their grain.”
Out of the valley, into the field
California’s Silicon Valley was paved on top of agriculture.
The region went by the name Valley of Heart’s Delight and was spotted with orchards during the first part of the 20th century.
In the early 1950s a little creative wheeling and dealing by Stanford University helped lease the farmland to house a burgeoning tech industry. The move created an epicenter for the digital revolution and plowed fertile ground for high-risk, high-reward venture capital investing.
The venture capital industry at a glance
A small piece of the venture captial pie
From 2007 through 2010, ag-related companies generated between 80 to 90 deals each year, out of an average total of 2,849, according to San Francisco-based Dow Jones VentureSource. Still, six of the investments (all involving biofuels) were for $100 million or more.
Today, the challenge facing ag-entrepreneurs is getting big money investors to dig under their traditional comfort zones in information technology, web or biotech and unearth opportunities in agriculture — much of it in the Midwest.
“The best returns venture capital investors get are in areas where people aren’t looking,” said Jessica Canning, an analyst with San Francisco-based Dow Jones VentureSource.“The fact that it’s such a significant market and there’s not as much movement right now leads one to believe that there’s a lot of opportunity in this area.”
VentureSource tracks venture capital investing, and Canning said she’s started to see investors stray from the coasts to make deals with ag companies in the Midwest.
“This is the only sector that I’ve seen that be the case,” Canning said. “(Venture capitalists) prefer to invest within about three hours of their office.”
But getting into agriculture requires firsthand knowledge that many venture capitalists currently lack.
“There are two gaps,” said Jim Schultz, founder and managing partner of Open Prairie Ventures.
Schultz works a little like a Johnny Appleseed, spreading capital to grow Midwest ag companiesfrom his firm’s headquarters in EffinghamIll.
“One is trying to find managers who understand the space,” Schultz said.
The other, he said, is how a company will be sold off. It’s usually how venture capitalists make their money and the problem is ag startups don’t have the same kind of established buyers as their counterparts in things like IT or web.
In 2008 Open Prairie launched a $30 million fund that was split about 50-50 between agriculture and biotech. Now an expanding and increasingly profitable agriculture market has meant Schultz has had more opportunities to make his pitch.
Schultz is looking to raise a new fund that solely deals with agriculture, and said he’s been getting interest from investors as big as Goldman Sachs. Though the new fund is still in the concept phase, Schultz keeps a big number in his mind’s eye.
“We’d like to think that it’s a nice nine figure number, approaching $250 to $300 million,” Schultz said.
That may seem a pie-in-the-sky notion, but companies like Kalamazoo Mich.- based Vestaron Corp. have Schultz feeling optimistic.
Vestaron makes a pesticide based on the venom of the Australian Blue Mountain Funnel-Web spider.
“The reality is that more firms will pick up the phone and talk to an agricultural company today than they would have back in 2005, 2006,” said John McIntyre, chief executive officer of Vestaron, which has raised more than $7 million from a confluence of funding streams including venture capital from Open Prairie.
But continued development takes more money, and convincing venture capitalists addled by the global recession to wade into largely uncharted waters takes some serious coaxing.
“There is still a discomfort as the discussions progress as to trying to get a grasp of and better understand what agriculture means,” McIntyre said.
That’s not a problem, though, at many Midwestern universities, which can serve as important conduits between ag-tech innovation and early stage investment.
A simmering Midwestern boom?
Purdue University senior Neil Mylet moved into his own apartment and promptly hung white boards on all the walls.
An Indiana farm kid studying economics, Mylet needed loads of dry erase space to endlessly mock up his big idea to make an iPhone app that controls how grain was loaded into the back of a big-rig.
“My last semester I was starting the process of getting patents and starting this company,” Mylet said. “I would miss a couple days of class a week to meet with my attorneys. I couldn’t tell my professors what I was doing; I think a lot of them maybe thought I was skipping class.”
Mylet eventually launched LoadOut Technologies and sunk his own money (earned from working on his family’s farm) into its development. Today his company has a home in Purdue University’s Research Park in West Lafayette, Ind., which Mylet said has been instrumental in LoadOut’s development.
Research centers at Midwestern universities, encircled by farmland, are natural breeding grounds for ag-tech innovation. And this may ultimately be where venture capitalists unearth the next big idea.
“Five years ago we saw virtually no interest in the institution venture capital industry in ag-technology, and that has shifted significantly,” said Steve Carter, director of Iowa State University’s Research Park in Ames, Iowa.
Around 2005 there were two venture funds that had periodic contact with Carter, today he said that number is between 12 and 15.
“They’re looking for opportunities and a couple of them have made investments,” Carter said.
Carter said the nature of the deals prohibited him from giving specifics, but in most cases it was early funding in the neighborhood of $1 million or $2 million.
That’s a nice sum of money, but putting together the infrastructure it takes to demonstrate how ag-tech can be applied in a large-scale production is very expensive.
In this regard, incubators like the one at Iowa State, can serve as launching pads for ag-entrepreneurs by helping offset some of the upfront investment costs associated with getting big ideas off the ground. The idea is that using public money like this will ultimately generate an economic boost.
Carter is especially excited by things like new kinds of biofuels processes or products made from agricultural waste material, all of which have an inherent need to be located near Midwest farmland.
“Hauling massive amounts of feedstock long distances has a tremendous effect on the economy of these things,” Carter said. “As a person living in central Iowa, I’m very hopeful and very positive about the potential for these new industries in rural America.”
Proximity to the raw materials grown at mass and managerial talent that understands the field is hard to find outside the Midwest.
And for Mylet and his grain loading phone app-company staying close to the farm makes good business, for now.
“We have started to receive interest from an array of angel investors, private equity and venture capitalists,” Mylet said.
The lingering question, though, is what would happen if an investor backed up a truckload of cash and told Mylet it was his if he relocated to be closer to a funding source.
“That’s the question that nobody wants to answer,” Mylet said.
Mylet paused again, then added: “In all reality the resources exist in Indiana to operate a company that is comparable to any in California.”