The Next Phase For Agriculture Technology

The Next Phase For Agriculture Technology

September 2016

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Agriculture technology is no longer a niche that no one’s heard about. Agriculture has confirmed its place as an industry of interest for the venture capital community after investment in agtech broke records for the past three years in a row, reaching $4.6 billion in 2015.

For a long time, it wasn’t a target sector for venture capitalists or entrepreneurs. Only a handful of funds served the market, largely focused on biotech opportunities. And until recently, entrepreneurs were also too focused on what Steve Case calls the “Second Wave” of innovation, — web services, social media, and mobile technology — to look at agriculture, the least digitized industry in the world, according to McKinsey & Co.

Michael Macrie, chief information officer at agriculture cooperative Land O’ Lakes recently told Forbes that he counted only 20 agtech companies as recently as 2010.

But now, the opportunity to bring agriculture, a $7.8 trillion industry representing 10% of global GDP, into the modern age has caught the attention of a growing number of investors globally. In our 2015 annual report, we recorded 503 individual companies raising funding. This increasing interest in the sector coincides with a more general “Third Wave” in technological innovation, where all companies are internet-powered tech companies, and startups are challenging the biggest incumbent industries like hospitality, transport, and now agriculture.

Annual Agtech Financing 2010 – 2015

Source: AgFunder's AgTech Investing Report: 2015

 

Source: AgFunder’s AgTech Investing Report: 2015

There is huge potential, and need, to help the ag industry find efficiencies, conserve valuable resources, meet global demands for protein, and ensure consumers have access to clean, safe, healthy food. In all this, technological innovation is inevitable.

It’s a complex and diverse industry, however, with many subsectors for farmers, investors, and industry stakeholders to navigate. Entrepreneurs are innovating across agricultural disciplines, aiming to disrupt the beef, dairy, row crop, permanent crop, aquaculture, forestry, and fisheries sectors. Each discipline has a specific set of needs that will differ from the others.

The technologies for the subsectors do have similarities and can be divided into a few clear categories.

Those aiming to impact the industry “on the farm”: input technologies (encompassing all inputs such as fertilizers, pesticides, soil amendments, genetics, seeds, and feed); precision agriculture (including drones & robotics, big data, smart equipment & sensors and farm management software); new production and new business models (indoor or controlled environment agriculture, cellular agriculture, input and asset sharing).

And the technologies looking to disrupt the supply chain after the farmgate: traceability and packaging; processing technologies; waste reducing technologies such as biotechnologies producing biomaterials from food and agricultural waste; farm-to-consumer distribution; e-grocers; and food nutrition transparency.

These technologies are being applied globally across developed and emerging markets, although the vast majority of the activity is taking place in the US.

How quickly we get there

With these different technological subsectors laid out, each with its own growing ecosystem of startups and investors, now all eyes are on how quickly these technologies will be adopted by the industry. Depressed commodity prices have raised concerns about the spending power of farmers and agribusinesses in the short-to-medium term but, at the same time, a survey recently showed that one in four Midwest farmers are planning to purchase new technologies in the hope of increasing efficiencies, and with them, profits.

The rate of adoption for each subsector will differ, and each will face a different set of challenges. The same can be said for agtech being developed for the emerging markets, where innovators are often meeting different needs and creating business models to fit the even more disjointed ag industries in these countries.

Some of these challenges have been recognized by investors, and some have not. What most agree is that the positive impact of a technology on the bottom line of a farmer, agribusiness, or food company needs to be obvious immediately if they’re to adopt it.

The most high profile and best-funded subsectors to date include those using digital, precision, biological, genetic, and big data technologies to help farmers improve efficiencies on the farm and use fewer resources. (Precision agriculture, the act of using resources more precisely and efficiently to increase agricultural yields, encompasses a series of different technologies including farm management software, drones, satellite imagery, sensors.)

In an incredibly complex industry, it’s relatively easy for investors to understand the potential for these technologies to help reduce reliance on declining water resources, damaging chemicals, and a stable climate.

There are some clear challenges ahead for these technologies, however. I’ve addressed some of these below.

Sensors: Startups producing sensors were some of the first to emerge in the nascent digital agtech scene, mostly offering farmers insights on the level of moisture in their soils, but it soon became a case of too many me-toos. Rolling out sensors across thousands of acres of farmland can be a challenge, as well as interoperability with existing software. The cost of hardware production is offputting to venture capital firms, too. Expect consolidation in this segment and some distressed roll-ups, although we do hear that farmers want to see more hardware options.

Drones: Robots are heralded as the solution to labor shortages and limitations on the farm. Drones are a part of this and are seen as having huge potential to help farmers monitor their fields, make timely decisions to avoid yield losses, and even help with applying inputs onto the land. Many farmers were quick to purchase drones, but few have found them more than a nice-to-have. The challenges include: limited battery life, inability to analyze the imagery data in real-time to provide real decision-making benefits, time-consuming and labor-intensive to launch and fly under regulations, and lack of clear customer base — is it the farmer himself, or his agronomist or consultants? Entrepreneurs are constantly innovating in this space, however, to bring better sensors, analysis, and flight tools. There is no doubt drones will revolutionize agriculture and become widely adopted, it just might take a bit longer to iron out some of the kinks and provide immediate value on the farm.

Farm management software: Startups that are aiming to capture, integrate and analyze all the data coming off the farm, whether from sensors, drones, machinery, or imagery, stand to significantly improve the decision-making process and business management for farmers. The ideal outcome is that farmers can be given recommendations on how much of an input to apply, and when. The amount they use is then measured and set against their expenses, yield predictions are made, and the farmer can get insight into how her end-of-year earnings will look in advance. There are some big hurdles to jump to get here and prove the real value of these products to farmers: ease of use, connectivity, interoperability of data-capturing devices, data standardization, and price are just some.

Biological inputs: This segment — of fertilizers, pesticides, and other inputs made through biological means as opposed to more traditional chemistry — has been on venture capitalists’ radars for a much longer time more than other agtech subsectors. It was responsible for some of agtech’s first venture capital exits — Bayer acquired AgraQuest for $425 million and BASF acquired Becker Underwood for $1 million — but the segment has suffered a reputational crisis as biological products have failed to perform as expected. While bio-pesticides and bio-fertilizers cannot completely replace their chemical counterparts, they can reduce the amount of chemicals needed and thereby reduce costs. Research around the plant microbiome and how that can be harnessed to increase crop yields is still in its infancy, but is a hot topic for investors and has a huge amount of potential. There are some concerns that companies operating in this space have been valued too highly before they are even close to producing products, however.

Gene editing and big data in biology: While much of the discussion around big data has focused on on-farm data capture and analysis, biotech startups are also harnessing big data to make genetic and molecular discoveries at a never-before-seen speed. One of the most high-profile uses of this technology, which often involves machine learning, is gene editing. Through a range of different tools — CRISPR and TALEN are the most well known — tech companies are disrupting both the livestock and crop industries, without the burdensome label of being genetically modified (GM). This classification is still up for debate, and it would be hugely detrimental to these amazing discoveries if regulators changed their mind on gene editing. There are also some issues around the intellectual property of some of the processes that still need to be ironed out.

Staying power

It’s certainly not plain-sailing for many agtech startups out there. Agriculture is the world’s oldest and most entrenched industry that’s survived centuries. It’s not easily disruptable. It’s tied to regulatory schemes; influenced, and in many ways controlled, by the incumbent seed and chemicals companies; and has worked through the same distribution channels for decades. There are onlookers wondering if much of this sci-fi like technology can really deliver on its promises and whether recent funding activity from the venture community and interest from entrepreneurs, is a bubble waiting to burst. It’s a good question.

When we consider the future of agtech, it’s useful to think about the expectations of a technology’s lifecycle and how technology actually evolves. One proxy for our expectations is the Gartner Hype Cycle. Developed by the IT research and advisory firm Gartner, the cycle follows the pattern of people’s expectations when they’re exposed to a new idea or technology. Essentially, a new idea/technology is introduced, it demands a huge amount of hype, the hype goes beyond the technology’s current capabilities, the crowd is disillusioned until the tech climbs out of the barrel and shows its usefulness.

While these expectations are moving up and down and up again, the actual technology is building steam in the background, according to a version of Moore’s Law, which states that technological innovation increases exponentially over time.

For much of agtech, we are still climbing the hype, and it largely hasn’t delivered on its technological promise.

In other words, there’s a lot of technology that’s exciting to the public, but it’s only in its first innings and iterations. We’ll need to wait for the real innovation to come, but once it does, it will be transformational.

Until that point, the agtech startup scene will continue to attract the attention of forward-thinking investors who are compelled by the macro drivers that highlight the need for technological advancement of the world’s least digitized industry — consumer trends, environmental and resource challenges, increasing populations.

The oldest industry in the world has so far to go to catch up with the world’s other industries; it’s inevitable that agtech adoption will boom. We are just at the beginning.

 

This article was written by Rob Leclerc from Forbes and was legally licensed through the NewsCred publisher network.

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