This is a continuation of our series on how investment in food security poses some of the best opportunities for investment. This is post 6 in the series if you missed a post you can find them here: Part 1, Part 2, Part 3, Part 4, Part 5.
Last week we looked at some of the early investments into our space that failed. We looked at a number of aquaponic and hydroponics farms within the Controlled Environment Agriculture (CEA) industry. We assessed where there was an identifiable risk in each of these investments that should have informed investors these were not strong investments. However, those early mistakes allow us to better identify what makes up a strong investment.
Today we’ll look at investments that have been a success, and address the identifiable traits that indicate these were strong investments. That will allow us to better identify what to look for as an investor, but also give startups and producers insights into how to make yourself a strong investment opportunity as you look to grow.
Stories of Investment Success
Urban Organics converted an old and vacant brewery into an urban aquaponics operation in St. Paul, MN in 2014. They had all the qualifications of being able to succeed with their pilot farm. They planned to convert 8,400sqft of the old Hamm Brewery into an aquaponics operation that featured tiered deep water culture beds (or in some instances shallow water culture beds) to take advantage of the tall ceilings. They partnered with Pentair AES who has experience with aquaculture at a commercial level and had been experimenting with their own pilot aquaponics farm.
They created the Urban Organics Pentair Group. Urban Organics Pentair Group – a unique collaboration between Pentair and Urban Organics – has been created to help the world meet its growing need for protein and will leverage Pentair’s advanced technologies, world-class scientific expertise and global resources to help accelerate the development of commercial-scale modern aquaponics production facilities.
They created the pilot farm at 8,400 sqft. This was smart because it was large enough to subsist off of wholesale pricing but small enough that it didn’t need a large amount of upfront capital. Urban Organics took on $1 million in funding to build out their farm.
They tested their pilot for over a year and created a market demand for their product. Once they had established their brand, worked out the efficiencies and ensured a sustainable model they expanded with a much larger commercial operation.
They then opened up aan87,000 sqft, 10x the size of their pilot farm, in 2016. It remains one of the only commercial-scale indoor aquaponics facilities to have organic certification. It really has represented a model that others can look at in striving to reach commercial scale.
Urban Organics will use Pentair’s advanced pumps, filters, aerators, mineralization systems and more at the Schmidt site to raise 275,000 pounds of Atlantic salmon and arctic char fish each year. About 475,000 pounds of organic greens including kale, bok choy, and arugula also will be produced.
Indicators of Strength
There were two significant factors behind the success of Urban Organics. First was the strength of their Co-founder team, the second was the partnership with Pentair for expertise, equipment, and resources they would need to run commercial scale aquaculture as part of the aquaponics.
The Co-founder team had all the qualities needed for success. Fred Habberman was a marketing expert with business success with various brands and non-profits in the organic food industry. He knows how to sell a high-quality food product grown responsibly. So many startups lack the marketing talent needed to build a brand, no matter how sustainable the model is, you need to know how to get in front of people and sell them on it.
Dave Haider, the Founder, had experience in the construction industry and built almost all the parts of the farm himself. He also was passionate about aquaculture and had experience managing them. He managed the daily operations on the farm.
They also had experts in farming and organic certification as well as real estate and property development. The only thing they really lacked was experience with commercial-scale aquaculture and that’s what makes their partnership so crucial.
Urban Organics is still operational after 5 years, benchmark a lot of commercial aquaponics operations don’t meet. They seem to have found a sustainable model for commercial aquaponics.
Investors should be looking for startups with a similar executive team with proven experience in each area of the business needed to succeed. Marketing and the Farming being the two most crucial. If you can’t grow it you have nothing to sell, and if you can’t sell it you have no hope of lasting long term. You’ll also want to look for a company that has piloted their business model with a small commercial operation that is profitable. If they cannot make it work at a small scale, there really is no indicator that scaling would make them more successful. You want to be helping people accelerate their success, not fund their attempt at success.
Many people don’t know the history of AeroFarms as they only see the headlines of their big funding rounds but the company has been around since 2004. Founded by Dr. Ed Hardwood, who was a former Cornell University Associate Director and became fascinated with aeroponic technology.
Hardwood founded the Company and used his technology to grow for several years. With the system’s incredibly high yields and impressive economics, Harwood decided to transform the company into a technology and solutions provider for other growers and entrepreneurs in 2009.
The initial seed funding was for $500,000 which pales in comparison to all its subsequent funding rounds. This is again savvy investing, Hardwood had a proven model that he worked for years, but before going crazy with it, him and his first round investors were smart enough just to invest enough to get him to scale it to test it at a commercial scale before raising a bunch to build a large scale facility based on the technology.
Aerofarms is one of the oldest commercial vertical farms now as a result of this calculated approach. They recently just completed a Series D round of just over $34 million from international investors and look to start expanding into foreign markets. They are committed to expanding to over 25 farms in the next 5 years. To date, they have raised $95.8 million.
Indicators Of Strength
Now the one thing to note, Aerofarms is technically not a success yet as they have not made back their investment yet. That likely won’t happen until they have a few years operations at the 25 new farms they plan on expanding with.
What has allowed them to raise just under $100million since 2009 is their ability to take on investment, hit the benchmarks they promised to investors, validate the model at each scale and create and execute on their vision. They had a strong founder in Hardwood who brought the technology and growing expertise. He partnered with David Rosenberg a serial entrepreneur with the skills to manage a company from startup to scale, he remains the CEO to this day.
That’s what it’s all about. Can the company hit the benchmarks they set for themselves, when they do get investment can they manage the scale and the money. Finally, they proved that the market was there for their produce and they had the efficiencies to make it work from pilot farm to commercial warehouse facilities.
BrightFarms got its start originally as a non-profit in 2006 called New York Sun Works. In 2007 they created BrightFarms, a for-profit greenhouse consultancy business. They supported the development and growth of over a dozen farms in two years. They were establishing a reputation and the track record to go with it.
In 2011 they hired a new CEO Paul Lightfoot to lead their pivot from a greenhouse consultancy business to their current model of being greenhouse designers, builders and operators.
It was also at this time that Bright updated and refined their business model, the model they credit to making them so successful at getting investment. BrightFarms structures long-term purchase agreements with supermarkets. BrightFarms then finances, builds and operates the greenhouses at no cost to the retailer and no upfront costs to them. With the purchase agreements in had they can get the funding or financing needed for their operations.
Indicators Of Strength
The purchase agreement model, coupled with the fact that they strictly only work in greenhouses has made them very investment friendly as they went about raising capital. Taking advantage of the sun makes them have less operational overhead costs than their urban warehouse farm counterparts.
Couple this with their history of being able to help other greenhouse businesses scale and thrive during their years as a consultancy business and it’s pretty easy to see why BrightFarms was so attractive to investors.
They used a business model that investors understood. Long-term purchase agreements is exactly how much of the solar industry was built. In addition, having lower costs than most other companies searching for investment was going to set them apart even further. Couple this with their track record of success at their pilot farms and as consultants and it was almost easy for investors to say yes. Doesn’t hurt to have $100 million in assured income through purchase agreements to give investors a sense of security and a clear path to return on their investments.
Bowery came on the scene seemingly out of nowhere. It was founded in 2014 and quietly built a small test pilot system that was based on automation, machine learning, and vision systems to monitor and test its crops.
The cofounding team of engineers and agriculture scientists built the farm from the ground up to create a proprietary growing system that can scale as the farms grow in size. The machine learning component means the farm can learn to more efficient and at some point use the data being collected to inform them how to grow more and more efficiently.
By developing all the tech in house it allowed Bowery allows them to have control from the seed all the way through delivery to the store. They can monitor all points in the growth cycle and distribution chain and gather all the data at each stage that increases plant health and taste.
The company raised $3.5 million in seed funding in 2015. This afforded them the opportunity to fund all the sensors and computers and cameras and staff needed to develop and build their proprietary monitoring system. They built and tested the model for a year before seeking more investment to expand their farms.
Their second round of seed investment came earlier this year in 2017 in at 7.5 million. Their funding came from a combination of private investment and individuals with experience in the food space, including the CEO of Blue Apron.
They also recently just closed a series A worth $20 million this past August. So the company is rapidly expanding its team and its farms. The big differentiator between Bowery and other indoor vertical startups is the level of vertical integration and the amount of data points. Investors are betting on the Big Data and the level their data will allow them to increase efficiencies across the production chain, allow them to grow better tasting foods, and if they want, sell/license their findings and proprietary technologies to other producers as an alternative income stream.
Indicators Of Strength
Bowery has taken more of a Tech startup approach, and still very young. Their ability to maintain their sustainable model at scale, coupled with their ability to consistently increase their efficiency should set them on a path of success for the next few years.
They are also very tight knit so it’s hard to say how they compare to their local competitor AeroFarms and any of the other producers. They don’t release the size or production of their farm in Kearny, NJ but their ability to raise two rounds within the same year indicates that they are succeeding and are ready to expand their model with more locations.
We couple Bright Agrotech and Plenty together because one of Plenty’s Co-Founders, Dr. Nate Story, was also a Co-Founder in Bright Agrotech and will prove to be the linchpin to the success of both startups.
Bright Agrotech got its start in 2010 as a company but its history goes back even before that. The real start happened while Nate Storey was going for his Ph.D. at Wyoming University. It was during his time that he developed the ZipGrow vertical growing tower that would be the backbone of his company’s success.
Upon graduation, Nate and Co-Founder Chris Michael formed Bright Agrotech, LLC and joined a Wyoming business incubator. They had a focus on providing content around how to use their vertical grow tower for your own commercial farming operation. Since the beginning, they have been focused on supporting small producers reach commercial availability and have used the ZipGrow tower as the backbone of that success.
The company received a few grants and awards but never took on any institutional investment. They quickly grew to where they are today at an estimated $14.3 million in revenues to date. They were recently acquired by Plenty a Silicon Valley-based start-up that acquired Bright Agrotech and it’s patents on vertical growing to use in large-scale indoor farms in major cities around the world.
Plenty acquired Bright earlier this year. They did this right on the heels of a major funding round and then parlayed the acquisition into the largest investment Agtech deal to date. Plenty raised $200 million in a Series B round led by the Japan SoftBank Vision Fund, a $93 Billion, multi-stage tech fund. Plenty to date has raised over $226 million in three separate funding rounds.
Indicators Of Strength
These investments will accelerate Plenty’s ability to scale and put a farm in every world metro area with more than a million residents, about 500 cities in all. The decision to focus on scale and such a large funding round was due to the need to see these farms and the impact they can bring to food security, in this decade, not decades from now.
This calls back to earlier in the series when we were assessing who will be at the forefront of solving the over billion person problem of food security. Plenty now has the technology and expertise to scale thanks to Storey, and with these funds can scale to have an impact this decade, not decades from now.
Plenty is far from a success story yet, but based on the fast growth of Bright Agrotech, an executive team with years of success in closely related fields, the backing of a visionary fund like SoftBank, who is so huge they can easily put in more investment to help Plenty get over any roadblocks they face, it seems they are set up for success.
Conclusion: How to Invest In The Food Security Sector
As we wrap up this series it’s clear that there is legitimate interest from investors in this sector but there is also a legitimate risk, just like any investment sector. But what is also clear, is that given a few guiding principles, there is a ton of opportunity for both investors and startups.
It’s still the first inning for most of the sectors in this industry. As such we can expect a little bit of an investment bubble coming down the road, much like the dot-com era. Because of the growth numbers, we are seeing year over year in various industries, and the expected growth over the next decade or two. Investors are going to want to get in on that action and if the past two years are any indication, they are going to start coming with the type of dollars usually reserved for the advanced tech industries.
Those looking to either get investment or make an investment need to focus on a few core principles that indicate strong investments. Above anything else, the team needs to be strong. They should ideally have experience prior to their current company that shows they know the industry and can scale from small to big. In the absence of prior experience, a track record of at least 5 years of sustained growth as a startup is a strong indication that those founders have the ability to execute, have skin in the game, and have the vision to grow a company year over year. A strong board of advisors can also be a way to mitigate risk on first-time entrepreneurs and teams with little or no previous experience.
You also want to see an indication that the company can spend money wisely. Whether it’s through a loan, a grant, an award, or their own funds you want to see that the company has the ability to receive money, and spend it very efficiently. You don’t want to invest in a company that is going to be more focussed on getting snacks for the office than spending money on things like R&D, marketing or high level talent.
Another strong indicator of company strength is a proven model or product. Whether it’s a tech business with a product, or a startup farm, you want to see a working pilot. Don’t invest on an idea, invest on people that can take an idea and execute the necessary steps to make it a reality. If someone is really focussed and committed to their idea, they will find a way to make a prototype version of their idea and won’t let a little thing like money stop them. There are obviously exceptions to every rule, but overwhelmingly the businesses we saw be successful had already had a working farm or prototype before they took on money to scale.
In addition to a strong team, experience in the industry, smart spending history and proven ability to execute on ideas you want to see a company that has overcome obstacles. No one bats a thousand their whole career and you want to see a start-up that has faced challenges, setbacks or failures. It may seem weird at first to think this is an indicator of strength, but being able to overcome obstacles and come out stronger is a huge indicator that a company will be able to overcome the challenges of scaling and running a larger business.
Finally, make sure the business has customers. This was the huge factor behind BrightFarms success, they used purchase agreements to ensure that they would be profitable before they even broke ground on their farms. And if it’s a tech company you still want to see customer traction even on a prototype. If they are truly going to add value then they should be able to sell it to some customers even at an early stage. Early adopters are the best indicator that there is market potential.
It takes a lot of factors all coming together in harmony to make up a strong start-up or investment opportunity. You need an experienced team with a track record of success, especially in the face of setbacks, with a clear and focused vision. You want to see customer traction and growth year over year. Your goal whether start-up or investor is to accelerate the pace of growth for something that is already successful. You do not want to be funding a grand idea or vision. To use an analogy, you don’t want to help someone build a go-cart. You want to put the gas in the tank of a built go-cart so it can win the race.