The agtech sector is booming. Through the first six months of this year, companies in this newly dubbed agricultural space have continued to attract capital at the same torrid pace as last year when they attracted about $2.6 billion through private equity investments, including acquisitions. Rightly so, as the promise of agtech to increase farm productivity, bring greener, more environmentally-friendly practices and products to farming and deliver better nutrition to the world is seemingly limitless.
The sector’s potential lies in developing more disease-resistant seeds, bio-based crop inputs, more targeted nutrients for plant growth, data-driven farm management applications and robotics and processing efficiencies. Farmers, consumers and investors all stand to gain.
Nonetheless, for a sector that is still in the process of defining itself, investors would do well to recognize the risk of a potential financial bubble. A key warning sign: The oversold promise of “disruptive” business models that some agtech startups are touting. Regrettably, the term “disruptive innovation” very nearly has become a meme in agtech.
Indeed, the agricultural economy is not so sclerotic that it needs to be disrupted. In the past 50 years, plant yields have more than tripled, resulting in more crops produced from less land. More recently, crop inputs have been reduced, hunger resulting from food scarcity is being eliminated, better nutrition has been delivered to hundreds of millions of people worldwide, and the environment has benefitted from the new advances in life sciences and information technology-driven precision agriculture.
What about this record of achievement needs to be disrupted?
Too many newly funded agtech startups have yet to offer convincing evidence of expected commercial success. Investors would do well to consider three key principles that will define success in the agtech sector.
First, the commercial opportunity lies in supplementing, not substituting, what’s already working in agriculture. Too quickly brushed aside is the fact that the global agricultural economy successfully provides food, fiber and renewable energy to more than 7.6 billion people. Agtech’s role isn’t to throw that baby out with the bathwater. Rather, it should be to catalyze further efficiencies in this multi-trillion-dollar global industry.
Second, big returns will come from small changes. Agriculture is, and will remain, a commodity-based industry, one that has operated with thin margins on large volumes. Even modest gains in productivity and efficiency, spread over the scale of commodity production and processing, can generate enormous value.
Third, novelty isn’t value. The crown jewel of too many agtech business models is some kind of new, whiz-bang scientific breakthrough developed in the confines of a sterile laboratory that otherwise is not yet ready for commercialization. Again, that’s a symptom of a misguided obsession with disruption.
Corn, wheat and dairy farmers won’t and can’t adopt an endless array of complex systems with each and every new crop cycle. Ease of use, technical advice from trusted advisors and long-term vendors, and proven performance through collaborative field testing and technology development is fundamental to commercialization. Rushing the latest discovery to market and bypassing agriculture’s resilient and effective distribution infrastructure serves no one.
I started my career in the biopharma industry, which serves as an object lesson of sorts for agtech. The human genome project, backed by massive government research funding, opened up a new world of scientific discovery through the accurate sequencing of DNA. History tells us that bioscience venture capitalists, Big Pharma and public investors put the proverbial cart before the horse. Ultimately, the biopharma investment boom that started in the late 1980s was not targeted to creating value and produced only a limited number of commercial drugs. On the whole, the space remains unprofitable today, and relatively little value was created for shareholders.
Agtech must be mindful to avoid this same fate. Rather than conceiving new business models, our challenge is to revolutionize agriculture’s economic structure from within, by supplying new technologies that build sustainable companies and help feed future generations.
