Mitigating Risk in Agtech Investment
April 27, 2017
Content sponsored by Pontifax AgTech
Written by Dr. Phil Erlanger
Phil Erlanger is the Managing Partner of Pontifax AgTech, a growth capital investor in the global food and agriculture technology sector.
Despite the huge opportunities for growth and return on investment that it offers, the agriculture technology (agtech) sector remains underserved by private capital investors. This is in no small part due to the risks associated with investments in this area.
As a relatively young sector, many of the opportunities in agtech are early-stage investments which present significant risk to investors. While the elevated return potential of investments in brand new start-ups aspiring to revolutionize agricultural productivity and sustainability can attract more speculative financiers, research by Bluefields Associates has found that only 2.4 percent of seed-stage agtech companies survive to profitability. The survival rates of agtech companies raising series A funding rounds from venture capital investors are better, but still barely reassuring at 17 percent.
By the time a company within the food and agriculture technology sector has demonstrated its commercial viability and reached the growth capital stage of its developmental trajectory, the risk level for investors has declined sharply again. The same research found that 56 percent of agtech companies that reach a series B funding round achieve commercial success and provide a return on investment. It is for this reason that Pontifax AgTech targets growth capital investments in companies with proven technologies, growing sales, a clear value proposition, established distribution channels, and strongly aligned management teams with clearly defined business plans.
Despite the superior risk-adjusted returns of growth capital, however, investors need to find ways of further mitigating the risk of a 44 percent expiry rate. Partnerships represent perhaps the single most important mechanism for doing so. Only by developing an extensive proprietary network of growers, technology experts, and strategic corporate partners, can an agtech investor ensure they are making the most well-informed investment decisions possible.
It should never be forgotten that agtech first and foremost serves the growers, or farmers and agricultural producers. As the end user and ultimate arbiter of a technology’s efficacy, growers can offer unique insights that allow an agtech investor to validate the value proposition of potential investments with far greater precision than would otherwise be possible.
In real-world terms, this means creating partnerships with a network of growers, as Pontifax AgTech has done with the likes of The Wonderful Company, one of largest vertically integrated producer of permanent crops in the world, which allows for direct feedback and on-farm testing of technologies. These networks of growers also provide valuable insight into the technology gaps at farm level, allowing Pontifax AgTech to pinpoint the opportunities for which we expect a market to develop in the near future. In leveraging this network, we can make well-informed risk-adjusted investment decisions accordingly.
Aside from growers, it is important to develop and maintain exclusive partnerships with leading research and educational institutions. By furnishing access to key academic researchers and technological experts across a variety of investment themes, these relationships provide two major avenues for risk mitigation. Firstly, they ensure that the investment team has access to best-in-class due diligence on technological capability and competing technologies, reducing the risk of technology failure or another company beating your investment to the punch. Secondly, their theoretical expertise can be leveraged to aid portfolio companies, giving them a further edge against competitors and ensuring they do not fall behind.
Additionally, investors in agtech benefit significantly from corporate partnerships with market-leading agrochemical and biotechnology companies such as Syngenta or Monsanto, in Pontifax AgTech’s case. Developing these relationships can further contribute to the pool of knowledge provided by growers, and active dialogues with the executive team can provide critical insight into industry trends and demand.
From a direct risk mitigation perspective, corporate partners can aid portfolio companies significantly through business development, operational support, sales, distribution and marketing. In return, these partnerships are worthwhile to the corporates as they present mutually beneficial co-investment opportunities with relatively low risk profiles.
The complex nature of the agriculture industry is such that a hands-on approach, informed by proprietary insights and an established understanding of the landscape, invariably yields better returns for investors. This is even more true of the niche and specialist agtech market. By actively engaging in partnerships with growers, technology experts, and strategic corporate partners, investors in the sector are able to back investment propositions with greater confidence and realize higher risk-adjusted returns.
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