Venture Capital Putting its Mark on Global Agriculture

Building a smarter food system requires the adoption of technological innovations throughout the global food & agri complex. The opportunities these innovations bring are being recognised by venture capitalists and the allocation of venture capital to agriculture has increased greatly in the last couple of years.

Tech innovation

Technological innovations upstream in the various F&A value chains mainly focus on ‎improving farm productivity. Such innovation aims to increase production while minimising agriculture's claim on (natural) resources through sustainable intensification of farming practices. Besides the contribution to society—helping to alleviate hunger and further decreasing agriculture's environmental footprint—these innovations represent a huge value-creating opportunity for both farm input companies and farmers.

Disruption has caught the attention

This opportunity has certainly been spotted by farm input companies and universities. ICT, big data, life sciences, and robotics have all penetrated the private and public R&D budgets that were traditionally spent on chemistry, biology and mechanical engineering.‎ The concept of applying non-traditional know-how and technology that potentially creates substantial value by disrupting traditional farming has also caught the interest of venture capitalists. The allocation of venture capital to agriculture has rocketed in the last couple of years.

Venture capital invested USD 4.6bn in Food and Agtech companies in 2015, according to AgFunder. This is almost double the amount of (USD 2.4bn) invested in Food and Agtech companies by venture capital in 2014, and ten times more than spent in 2010, 2011, and 2012. And, comparison with the healthcare industry learns that there is still significant upside. Anterra Capital calculated that 12% of the total venture capital wallet is spent on healthcare. This mirrors healthcare’s 12% share in global GDP. Only 3.5% of the total venture capital wallet is spent on Agtech, while the industry is responsible for 10% of global GDP. Furthermore, it is ripe for disruption, as agriculture is the least digitised industry, according to a McKinsey study.

Digitalising agriculture

The emergence of substantial venture capital in an industry more often than not has transformed the industry. Digitalising agriculture is likely to change farming operations globally and as such has an impact on farmers’ spending behaviour. Rabobank’s proprietary row crop model shows that the seed, agrochemical, and fertiliser industries collect 40-45% of the crop value in US row crop agriculture, with equipment using 10-15%. The digitalisation of agriculture has two main direct implications: it facilitates the implementation of precision agriculture and it increases the relative value of farming extension services (farm consultancy). This, in turn, will likely put pressure on the historical share of inputs and equipment in the crop value. Fertiliser and herbicide commodities will probably lose wallet share, while ‘decision support technologies’ and biologicals will gain wallet share. The introduction of drones and robotics might provide upside for equipment’s share in the wallet.

So, the disruption of global agriculture represents a huge value creation opportunity for some but will be a threat for others. Venture capital plays an increasingly important role in driving the disruption, and, as such, in farm input industry dynamics and the long-term future of existing farm input companies. Collaboration between venture capital and existing industry players is likely to increase.