Uncovering the Potential for Food and Agriculture Tech Startups in the Venture Capital Space
With an ever-growing global population, climate change effects, political instability, outbreaks of new diseases (think: COVID-19), and a long list of other environmental and societal shifts and stressors, providing food has become increasingly complex.
In response to these challenges, the food and agriculture sector has heightened its efforts to transition and use more digital tools and advanced technologies.
To introduce innovations in this space, venture capital funding plays a pivotal role in fueling the growth and success of the startups building them. As these ventures strive to tackle pressing global challenges, ranging from food security to environmental sustainability, securing investment is paramount.
However, despite this technological revolution and the immense potential to address the issues, many agrifood startups struggle to access the necessary funding.
Featuring insights from Marlise Hunter, Director of Platform at Tall Grass Ventures, we’ll dive into the intricacies of the hurdles agrifood tech startups often face in securing capital for their groundbreaking initiatives and why.
Bridging the Education and Awareness Gap
As is the case with so many issues rooted in economic and social challenges: the solution starts with education.
Considering the world’s population is on track to reach nearly 10 billion by 2050, demand for food is growing while the supply side faces constraints in land and farming inputs. According to McKinsey & Company, figures to note at this rate include:
Requiring a corresponding 70% increase in calories available for consumption;
By 2030, the water supply will fall 40% short of meeting global water needs;
Only about one-quarter of arable land is degraded and needs significant restoration before it can again sustain crops at scale.
From supply chain, crop cultivation, food processing, distribution, and more, the food and agriculture industry is highly complex with diverse subsectors that may not be familiar territory for all investors. Without a deep understanding of the opportunity and a lack of awareness of the impact of potential solutions, investors have been hesitant to invest in agrifood tech startups.
Marlise shares:
“We’ve heard time and time again that agriculture is too niche of an area for investment or that there is a perceived hesitancy for technology adoption across the industry. The irony is that agriculture and food is one of the biggest industrial sectors globally ($86 trillion USD GDP) and has been a sector that is no stranger to innovation for generations.
There is a tremendous opportunity to reframe the impact that innovation adoption across agriculture and food can have on people and climate. By bringing more visibility to the various stakeholders that are reimagining our food system, we as a collective stand to be more engaged and educated on where and how our food gets to us.”
Providing education and awareness to the transformative potential of innovation across the sector is crucial for enabling various stakeholders, including investors, to make more informed decisions about emerging technologies.
Waiting On Patient Capital
Due to the complex nature of the agrifood sector, the capital needs for early stage companies in this space tend to look different from how venture capital has traditionally been deployed. Oftentimes longer research and development cycles, regulatory uncertainty, higher infrastructure capital requirements, and seasonality of natural systems influencing sales cycles makes investing in this sector more daunting.
There needs to be a clear return on investment, a deep understanding of the customer, and a recognition that it can take time to realize the real potential of innovation in this sector.
Unlike software-based startups that may require comparatively lower initial investments, operate at lower marginal costs and have potentially massive customer bases, agrifood tech is often more complicated. It is likely to require more scientific research, both hardware and software components, technical infrastructure, and a varied customer base.
This exposes investors unfamiliar with the space to too many unknowns, unfamiliar business models and a potentially longer return timelines then they are used to.
“The reality is that innovation in agriculture doesn’t have the luxury of following a more traditional venture model of failing quick and failing often. Stakeholders already face significant uncertainty due to weather and the impacts of climate change, rising costs, and fragile global supply chains, so incremental improvements to a product may never outweigh the risk of adoption,” Marlise shares.
“This means that there needs to be a clear return on investment, a deep understanding of the customer, and a recognition that it can take time to realize the real potential of innovation in this sector. But as we continue to see more founders deliver profitable and scalable business models, we will see more patient investors who understand the global scale of opportunity attached to new technology in agriculture.”
Sophisticated investors in the industry have the potential to truly make an impact and generate sizable returns. In some instances, food technology startups operate in markets where a 1% or 0.5% market share represents significant dollar value in the trillions for food services globally.
Returns will undoubtedly vary within the sector, but opportunities in agrifood gradually become more attractive as early pioneers in the space reach maturity and more exits are realized. The global food supply is home to some of the world's biggest challenges, of which technology is set to solve for. This puts startups and investors in a position to influence health, resiliency, and sustainability while also making significant returns.
The Power of the Supply Chain and Knowing Your Customer
The diverse stakeholders involved in agriculture and food (farmers, suppliers, distributors, retailers, and consumers) present a unique challenge for technology adoption due to the fact that the end customer may not always be clear. Counterintuitive to many other sectors where innovation typically targets end consumers (think: technology, healthcare, e-commerce, etc.), the value in agriculture often accumulates in the middle of the supply chain.
So although it may appear that agriculture innovation has been slow to be adopted, the reality is that value for new innovation in the sector is often derived at multiple points across the supply chain. Understanding which stakeholders at what point in the supply chain stand to benefit most from new technology is key to long term adoption across the sector.
As explained in this article by AgThentic:
“Business models that align the power of the supply chain to create incentives for adoption upstream (i.e., on-farm) can truly move the needle on industry transformation. We’re seeing this today in the carbon space: asking farmers to change practices or adopt more tools for data collection is expensive and unlikely to work; however, dangle the carrot of a carbon neutral branding opportunity to a CPG company alongside the stick of ESG pressures, and it’s easy to see why they’d subsidize or outright pay for the practice change and toolsets for their grower-suppliers.”
On knowing your customer, Marlise says:
“We often see entrepreneurs building $10 dollar solutions for $1 dollar problems and that is often because they didn't take the time to ask the question of, is this a problem that actually needs to be solved for, who is the actual customer, and who will pay for this technology. Oftentimes, what makes innovation adoption in agriculture more complicated is that there could be three different stakeholders that hold the answer to those three questions.
This is why we are seeing a clear shift moving away from single problem solutions to more vertically integrated platforms that often utilize combinations of hardware, software, services and analytical capabilities. These solutions are pushing more value through the supply chain to drive additional purchasing power and support more informed decision making.’
Companies like Ground Truth and Vivid Machines are doing this by democratizing data for producers to unlock additional on-farm value while simultaneously providing more transparent and objective data upstream to marketers and packhouses.
We are seeing a clear shift moving away from single problem solutions to more vertically integrated platforms that often utilize combinations of hardware, software, services and analytical capabilities.
Precision agriculture and innovation are key enablers to a transition towards a more sustainable food system. Knowing who will truly realize the benefits from an innovation being adopted is crucial to creating lasting digital transformation across the sector.
For agrifood startups, demonstrating the power and impact of their innovations across the supply chain and being clear on who stands to benefit is paramount to building profitable businesses, driving innovation, and attracting investor interest.
Overcoming An Uncertain Regulatory Environment
Unsurprisingly, because this sector directly impacts human health and natural ecosystems, food and agriculture are subject to a myriad of regulations and policies that drastically vary across regions and countries. Navigating the regulatory landscape can be daunting for agrifood tech startups, and regulatory uncertainty can play a role in significantly impacting investment decisions.
Around this, Marlise says:
“The regulatory environment associated with agrifood can ultimately make or break a business. Especially as we look to harness the true power of biology, understanding the pathway to commercialization and the potential regulatory roadblocks is a necessity for early-stage companies and their investors.
Regulation can dictate everything from go to market strategy to research and development spend. For example, many cellular agriculture and precision fermentation companies look to Singapore as a market to launch initial products due to their progressive stance on alternative forms of protein. While companies utilizing genetic modification to develop more resilient crop varieties have traditionally avoided the European Union for their hard regulatory stance on GMO products.
Navigating a complicated regulatory environment can require significant time and money, both things that startups don’t typically have in abundance. Having a clearly defined commercialization pathway and a deep understanding of the potential timelines and roadblocks is an absolute necessity when trying to raise capital and instill investor confidence in the long term vision.”
Be it regulations around food safety, biotechnology applications in gene editing and modification, environmental, trade, IP, animal welfare, labeling and marketing—working through regulatory hurdles requires careful planning, compliance expertise, and often collaboration with regulatory agencies to ensure that startups can bring their innovations to market efficiently and responsibly.
Understanding the pathway to commercialization and the potential regulatory roadblocks is a necessity for early-stage companies and their investors.
Although the complexity of the food and agriculture sector can make it difficult for investors to gauge risks and opportunities, it is clear that it is also a space that is brimming with infinite potential.
Critical to acting on this opportunity are the growing number of initiatives and capital providers specialized in food and agriculture that are essential for agrifood tech startups to succeed. Including but not limited to:
Programs and Accelerators: Venture-Capital Ready: Investment Training for Women Entrepreneurs by SSFPA, CDL-Rockies’ Ag stream, SVG Ventures|THRIVE, Plug and Play Food, Cultivator by Conexus
Venture Capital Funds:Tall Grass Ventures, The51 Food and AgTech Fund, Carrot Ventures, Emmertech, Ag Capital Canada
By bridging knowledge gaps and fostering collaboration, innovation, and a shared commitment to addressing global food challenges, we can create a future where food and agriculture tech startups not only thrive but also contribute meaningfully to building a more sustainable and resilient food system for generations to come.
About Tall Grass Ventures
Tall Grass Ventures is a venture capital firm based in Canada investing into the future of agriculture and food. Leveraging their deep industry knowledge, connectivity, experience and passion for agriculture, they support the transformational entrepreneurs who are changing our world’s relationship with its food, fuels and fibers. Learn more here.
About Our Partnership with Small Scale Food Processor Association (SSFPA)
Aligning the intention of impact investing to our mission of affording people of underrepresented genders opportunities to learn about and activate their investing and entrepreneurship potential, we’re thrilled to partner with the Small Scale Food Processor Association (SSFPA) on their Venture-Capital Ready: Investment Training for Women Entrepreneurs program.
Venture-Capital Ready is aimed at food industry women/intersectional entrepreneurs ready to present themselves and their business for investment and scale up to meet market demand.
Within the two-year program, M51 is facilitating a four-module investor curriculum to guide participants through the fundamentals of early-stage investing with a focus on impact investing and the Canadian food and agriculture sector.
Keep an eye out on our blog and social media to follow along with the modules and as we share more resources around impact investing, food and agriculture, and building the world we want to live in—today and for future generations.
