"There’s no hiding that the vertical farm funding environment has been tough over the past year. The bad news is that there is likely more bad news on the way. Sadly, we’re not out of the woods on indoor farm closures. The two largest costs that vertical farms face – labor and electricity – are forecast to remain high in 2024. The U.S. Energy Information Administration (EIA), a government agency that tracks such matters, forecasts relatively unchanged electricity prices, but this may well change with increased tension in the key Middle East oil-producing region," says Nicola Kerslake, Founder and CEO of Contain Ag, a company that secures lease financing for indoor growers.
Though 2023 saw a slump in vertical farm funding, as Contain has covered elsewhere, the team expects this year to be better. Industry consensus appears to be for a pickup in activity, though valuations have reset from the highs of 2021 and 2022. Private equity consultant Cambridge Associates says that implied multiples on invested capital fell from 3.2x in December 2021 to 2.2x by June 2023.
In the face of these headwinds, how do you up your funding odds in 2024? Nicola sees a couple of strategies:
Consider interesting crops and approaches
90%+ of the pitch decks Contain sees envisage growing leafy greens for local sale and then developing crops like berries. By and large, private investors are no longer interested in this model unless there’s a specific angle, like being a way to help their local community or repurpose their commercial real estate.
"Increasingly, we’re asked for models that involve innovative ways to domesticate crops like saffron and berries not growing leafy greens. Others are looking for ways to reach profitability faster, such as fixing the energy challenge using renewables or waste heat," Nicola affirms.
As she continues, Nicola explains that if you’re wavering between farming or developing your tech, now’s the time to pick a lane, as venture capitalists have tired of the farm/tech hybrid that they primarily funded through the last investment cycle. The good news is that private investors are now more open to funding agtech, especially if it boosts farm economics from the jump.
Work AI into your pitch deck
If you’re already using AI in your farm, whether to optimize growing or to fuel R&D, it’s time to highlight that in your pitch deck. Research firm CBInsights recently noted that early-stage AI startups commanded a 20% premium over others that raised in 2023. The premium was larger at later stages. "Venture capital moves in waves, and AI is everything right now. Enthusiasm will probably move onto something else within the year."
Focus on capital discipline
As Nicola explains, venture capitalists scrutinize cash flow during downturns, making cost-cutting and illustrating a path to profitability all the more important. The rise of generative AI and synthetic humans helps on this front, especially in keeping a lid on PR, marketing, and customer service costs. "Mixing pre-owned farm equipment from a reliable source Equipped with equipment from established vendors, like the 70+ ones that Contain works with, helps keep a cap on capital costs."
One final consideration, Nicola shares, is whether chasing venture capital is the right choice for your business at all. Securing investors takes time, especially in downturns. Servicing investors takes time, they will likely require regular updates on your progress and financials. Venture capitalists generally target 30%+ returns on their investment, and that may drive your business in directions that you wouldn’t otherwise choose.
"You might want to take a look at alternate funding instead. We can help you find lease financing for your indoor farm equipment, for instance. The lenders we work with generally offer lower interest rates than the returns expected by VCs. They have fewer reporting requirements and get to decisions faster. In some cases, there are tax advantages. Grants, SBA loans, and personal loans from your bank are some other options," Nicola concludes.
For more information:
Nicola Kerslake, Founder and CEO