Hot Topic: Agri/foodtech Trends (part 1)

In this blog series, Dr. Will McKay takes a closer look at one of the hottest sectors in VC at the moment – agri/foodtech, that is everything at play on the fields, farms, and factories where food is produced, to the final consumer via their favourite app.

Global Food Setting
The global population of 7.8B people consumes 2.7B tons of food a year, accounting for 10% of the global economy. The large majority of this is in horticultural products, with traditional terrestrial agriculture amounting to roughly US$2T in market value.

Although forecasts vary, by 2050 the global population is expected to increase in the order of 20%. Subsequently, the lift in food production needs to be significant, however, it will not be the same across all food categories. The simultaneous rise in socio-economic status will bring about a general shift toward the middle class, and with it a much higher demand for protein rich foods i.e. meat.

These dual drivers come at a time when understanding and commitment to both environmental and ethical values are at their highest. Frighteningly, Earth Overshoot Day, the date at which natural resources exceed what the planet can replenish in the year, is now the 29th of July. For context, food production contributes 40% of global greenhouse gas emissions with meat production requiring an order of magnitude more water, energy, and land area to produce than horticultural products (per kg). So, to put it plainly, if we are going to feed the world with a sustainable, equitable, and robust supply chain, then investment in innovation and scaling of new technologies and processes are required at a speed never seen before in this sector.

A Step Change in Investment Interest
For decades, VC has been lost on agri/foodtech, where the practicalities within long, seasonal growth cycles do not align with the fail fast and iterate approach of high risk capital. Unsurprisingly, this has severely inhibited the proliferation of technologies into agriculture as has been seen in other aspects of society.

This all changed in 2020. A total of US$22.3B (agritech $5B, foodtech $17.3B) was committed across 1047 deals. This was no flash in the pan, 2021 had already smashed these figures in the first three quarters with agritech startups raising US$8.3B and foodtech US$28.8B.

COVID-19 has highlighted weaknesses in the current food supply spurring the opportunities to redevelop food production systems – and for investors – to profit. Additional factors include record levels of dry powder and global fiscal policy combining to ignite a perfect storm of investment in agri/foodtech investment with Fear Of Missing Out pouring gas on the fire. FOMO has been driven largely by the reemergence of SPAC listings and the maturation of technologies and companies in the sector as a whole. Shortened exit windows, matched by an explosion of retail investors searching for positive ESG stocks through new platforms (and lack of places to otherwise spend disposable income) has dangled the carrot to wholesale investors for remarkable returns. The result – a positive feedback loop which is driving more and more money into the agri/foodtech space right down to the earliest VC rounds.

Subsectors of Note
Foodtech generally encompasses the later end of the supply chain where a significant portion of value is captured, hence the focus on investment in these subsectors, particularly ecommerce and meal kits/food delivery. In many of these subsectors, businesses are built around customer interface/UX, convenience, and pricing models. Subsequently, the critical aspects of these businesses are in their app/software, brand strength, marketing strategy and speed – investment verticals that have attracted otherwise non-traditionally agri/foodtech investors.

Alt-proteins have become the most hotly discussed investment sectors in foodtech, off the back of Impossible Foods and Beyond Meat which have spurred incredible interest in novel meat, be it plant based or biotech (i.e. fermentation or cell cultured). Although there is significant space for multiple players in this space, surviving (let alone winning) in this category will require significant scientific excellence, cutting edge technology, IP creation and protection, and viability to achieve incredible scale. While the consumer market is largely primed and ready for these additions to the table, the regulatory landscape is not yet set, nor is the cost of manufacturing or scale even close. The rate of explosive growth in alt-protein across meat, dairy and fish, is opening the doors of opportunity for specialty supplementary businesses that look to enable their success.

By contrast to foodtech where a few subsectors saw incredible increases in investment dollars over the last two years, agritech achieved strong growth in almost all subsectors. These technologies, which operate on-farm (think IoT, crop protection, animal wearables), face several key challenges. First, the significant challenge of working within the seasonality of production cycles; second, the fragility of these production systems and subsequent averseness of producers to try innovations; third, in many scenarios capitalisation of technologies is a major barrier to uptake; and fourth, the fact that the transaction models which make up current supply chains often do not result in increased returns for the producers who assumed the switching costs and risks. It is unsurprising that not as much money and hype has flooded into these subsectors as a result, however, those investors with sound understanding of the technologies and market place will be rewarded for their diligence. Success will also be found where new business models and concepts break the shackles of traditional farming approaches. One such example is in indoor-ag which enables local year round production (largely of vegetables) sold directly to consumers.

In the next part, we’ll look at the local scene in Aotearoa New Zealand.

Will McKay is an Analyst in Matū’s research team. He is an aquaculture technologist whose PhD research focussed on enabling the commercialisation of whitebait farming and is currently developing farming systems for native shellfish species. Will chairs the Return on Science Agritech and Foodtech Investment Committee and is a member of Auckland Momentum.

The information contained in this blog post is published for educational purposes only and is only intended to provide general information or opinions. It does not constitute financial advice or a recommendation of any financial product and should not be relied upon as such. You should not use any information in this blog to make financial decisions and we highly recommend you seek professional advice from someone who is authorised to provide investment advice. While all reasonable care has been taken in the preparation of this blog post, no member of the Matū Group accepts any liability for any errors it may contain.