June 23-24

Insights from the Indoor AgTech summit's investors

Key investors from Catalyst Investors, Ceres Partners, CITI and Equilibrium will be joining the Indoor AgTech Innovation Summit in New York (June 23-24) to discuss the right type of finance to grow the industry and opportunities for collaboration and success stories. Below, speakers will shortly talk about what role they play in the CEA space. 

Dave Chen, Principal & Chairman at Equilibrium:
Agriculture is shifting from a land, soil and climate-centered sector, into one centered on tech, infrastructure, and capital access. That means a shift in business models, competencies, scale, and the kinds of capital needed to grow the sector in the coming decades.

Agriculture has historically been made of a highly fragmented group of growers and increasing consolidation as you move down the value chain towards the consumer. Consolidation is moving into the farm and on-farm value add, in part driven by the need for market scale and to support the emerging need for on-farm food safety, value add, capex, technology use, layered ‘natural capital’ uses of the farm (including energy), and climate adaptation infrastructure. For a century, ag only needed the basic capital tools of cash flow supported equity and ag bank debt. These tools are giving way to the entire set of capital instruments from VC, growth equity, PE to public equities, project financing, and securitization.

Adam Bergman, Managing Director & Global Head of AgTech Investment Banking at CITI:
Billions of dollars of capital have been invested into indoor farming companies during the past couple of years. There also have been some interesting collaborations, including between Plenty and Driscoll’s around strawberry genetics and indoor production. I expect that we will see continued investment to scale many of these indoor farming companies from regional players to a national food print. I also expect that more outdoor farming companies will initiate collaboration agreements with the larger, better capitalized indoor farming companies.

The indoor farming sector should be looking to follow the path that solar companies achieved almost two decades ago. It begins with venture capital funding, followed by growth capital, mezzanine debt, bank debt to refinance existing indoor farms and, ultimately, project finance. The quicker that indoor farming companies are able to finance hard assets with lower-cost bank debt and project finance rather than higher cost equity capital, the likelihood of long-term success grows.

There is still an opportunity for newcomers to enter the indoor farming sector today, but that will likely last for just a short time. Once incumbents achieve meaningful commercial traction and achieve profitability, even at an individual farm rather than the corporate level, they should be able to access lower-cost capital, including project finance, putting newcomers at a disadvantage they are unlikely to overcome.

As long as indoor farming companies have the capital on their balance sheet, these companies will be able to execute their growth strategy. The challenge comes for those indoor farming companies that have not achieved the expected milestones from previous financing rounds and are forced to raise capital with questions about their technology, market traction or unit economics. Overtime, these companies will begin to run out of money and be forced either to raise capital at lower valuations that previous rounds or to sell their business, likely at much lower prices. Today, investors are willing to give companies more time to execute their business plans, since this is a large market and there are no dominant players, but that is likely to change during the next 24 months as we see the emergence of more national brands in the indoor farming sector.

Brian Rich, Managing Partner at Catalyst Investors: "I think up and down the food chain, pun intended. Capex heavy models will be out of favor and investment going forward will focus on technology to make indoor ag more efficient (robotics, climate, software). There undoubtedly will be more room for heavy capex like building greenhouses, but the cost of capital will increase." 

Venture will be largely available for new technology as well as for new business models. Growth equity will be available for expansion capital in proven business models. There will also be an increased ability to borrow money once models are proven out and this will be the most substantial amount of capital available.

Andrew Howell, VP, Private Equity at Ceres Partners:
As investors who are focused solely on food & agriculture, there is an important distinction to be made right now between producers (e.g., greenhouses and vertical farms) and technology providers. The market for producers is highly competitive right now with companies continuing to arm up with more capital for the race to grab market share. Regardless of who the winner(s) might be, we believe that there is a lot of opportunity to invest along the value chain that is helping support the overall growth of the industry. We believe the biggest area for collaboration that we are seeing right now are for producers of produce in different categories (leafy greens, vine, strawberry, etc) to co-locate to share infrastructure, processing, cold storage, logistics, technology, and personnel.

The start-ups in the production space that have completed large raises at high valuations have a lot of runway. Investors at this stage expect a large return (5x-10x+) and our opinion is that on the production side, companies should be valued as a sophisticated manufacturing businesses rather than a tech company. They all certainly utilize technology to enhance growing and overall efficiency but do so in order to grow a product (leafy greens, strawberries, tomatoes, etc). At the end of the day, produce is all about the highest quality at the lowest possible delivered cost. We believe that some of the companies that have raised large sums at tech-like valuations will not be able to operate profitably as the industry matures.

While there is always room for newcomers who can bring something unique to the market, we believe that on the production side, especially for leafy greens, the market has become very crowded in the last few years. We anticipate there will ultimately be 3-5 national players with scale efficiencies in production, logistics and retail relationships. Retailers want to work with scaled operators who can service multiple distribution centers and consumers don’t need 10 choices when picking their next salad.

To date, the ‘winners’ have been the ones who can raise the most money and make the biggest PR announcements. In the long run companies will have to build long term sustainable and profitable businesses that can generate a return to investors in a very competitive marketplace. The winners will be companies who can consistently grow and deliver the highest quality produce at the lowest cost.

Dave Chen from Equilibrium will join the Investor Debate to discuss which finance models work best in scaling CEA on Thursday June 23 at 4.50pm ET. Adam Bergman from CITI will join the Crystal Ball Session to discuss how the industry will shape up in 5-10 years on Friday June 24 at 3.35pm ET.

For more information:
Equilibrium 
+1 971 352 8430
info@eq-cap.com   
www.eq-cap.com 

 
Indoor AgTech Innovation Summitwww.indooragtechnyc.com

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