Why Food Security Is The Best Investment Opportunity Of The Decade: Post 5 Examining Failed Investments For Lessons


The market conditions are showing all the right indicators for investments in food security businesses to have payoffs for investors. However, that does not mean that each opportunity is equal. As with any investment, there is always risk involved and there are ways to go about mitigating that risk.

 

Today we are going to look at a few investments that didn’t pan out, and identify where the warning signs are that indicated the investment was too risky. Then we’ll take a look at some investments that have been successful and identify what factors are attributable to their successes.

 

How To Identify The Risk Factors

 

First we’ll start with one from our niche industry, aquaponics. Aquaponics is an interesting area because you have a couple dozen highly successful commercial producers, but very few of them a what the industry would consider large-scale commercial. The juggernauts of the industry, Ouroboros Farms, Chatterson Farms,  Colorado Aquaponics, to name a few all got there starts without upfront investment. They started small, expanded as profits allowed and created models that are sustainable and have years of profitability under their belts.

 

You’ll see that’s not the case with our aquaponics failures. The failures come from people who tried to throw money at a problem and did not have a sound understanding of the capabilities or limitations of aquaponics first hand. We’ll finish with a few examples from the hydroponics industry to showcase, these risk factors are common across all niches in the food security sector.

 

Global Aquaponics

 

Our first, and most well known in the industry, is Global Aquaponics. There’s a lot that goes into why this investment failed but the failure was not the aquaponics. In fact, they never even built a system. They raised funds before ever breaking ground or running an aquaponics system. They aimed to raise $5.3 million through a private equity offering that sold individual units of the company for 25,000 and planned to sell 215 units.

 

Global Aquaponics has stated that it planned to use these funds to build a system that would produce 2.5 million pounds of food a year and that construction would start in Spring 2017. We’re into September and ground has not been broken. One investor requested financials from the company and couldn’t get any response. Since that news broke a former employee has filed a lawsuit against Global Aquaponics. The suit alleges that majority owner Tobias Ritesman and former executive Tim Burns misrepresented the company’s long-term viability and that Ritesman knowingly misled the plaintiff about the truthfulness of investment proposal documents used to solicit investors. Unfortunately this project is very well known in the industry and insiders were dubious about production claims from the beginning. Now it is looking more and more like this project was using the hype of aquaponics and its potential for a quick money grab.

 

Here’s where investors went wrong.

 

First, they invested in an aquaponics business but never saw the owners or operators with a running system. They put faith that people who had never built or designed a system before would be able to make one that would produce 2.5 million pounds of food every year. For me, if you are going to make that claim I’m going to need to know that you know how to grow food at volume like that. There would be no blank check so you could figure out the model as you go. I’d need to see that you were competent at aquaponics at some scale prior to thinking you’d be able to pull off a project like that.

 

Second, the investors did not perform enough due diligence on the management team before investing. For one, Tim Burns who was formerly the COO on the original executive team has a trace record of failed projects. One of his companies, Concrete Contractors, Inc., lost millions of dollars in the Northern Beef Facker’s Plant in Aberdeen. Another one of his companies, Oakwood Equity Group, was at the center of a controversy in the same town, Brookings, as the Global Aquaponics project. It defaulted on nearly $450,000 with the city. That’s not a track record any respectable investor would objectively back. The quality of the team is paramount to your investment being a success. If anyone is less than spectacular, especially at the executive level, that is not a formula for success.

 

Finally, the people in the company had no skin in the game. All the executives had other companies, other projects and other focusses outside of this project. They also did not have any personal investments into the company. They didn’t have anything but time at risk, and they weren’t even dedicating all their time to this business. That speaks volumes to me and should’ve to investors as well. I’m not saying the only good investments are in people who roughed it out on Ramen for 5 years before their company started to become sustainable, but betting on that horse is a lot more likely to work in your favor because you know that person is committed to their vision and seeing it through. If no work has gone into something prior to asking for funds, what basis do you have as an investor to gauge how someone will perform with your money. Someone who bootstrapped their business, or took a small loan and got themselves to a certain level before raising money can prove that they know how to be fiscally responsible and are going to use your money smartly to scale quicker than they could from revenues alone.

 

In addition, someone who used a loan or grant to start their business or technology idea, and used those funds appropriately is also showcasing they have money management skills and can hit milestones that they set for themselves. There was just no evidence that the Global Aquaponics project or its team had any of these traits. It, unfortunately, has put a blemish on the industry as now investors are weary of big claims but it has at least given us a lot to learn from and can help us make better quality investments in aquaponics with people with proven track records.

 

As it stands, no work has happened at Global Aquaponics since they finally got their land this Spring. They have said the project is moving forward but all signs indicate the opposite and multiple articles state getting no answer to reaching out for more info about the company and its current status.

 

Viridis Aquaponics

 

Viridis Aquaponics seemed like it had the potential to be the first big project in aquaponics that was actually going to succeed. One of the partners, John Parr is one of the oldest industry experts and well respected within the Aquaponics community. He also worked with SchoolGrown a startup that puts aquaponics systems in schools around the country. So he had a track record of being a known good grower at scale and had a business that he had already started.

 

His partner, Drew Hopkins, was a former resort executive with the Rolodex to bring the capital and necessary connections to the project.

 

They bought a massive greenhouse that used to be Obertello Nursery for around $2.4 million in 2013. By the start of 2014 they were producing. They were among the first to grow sturgeon (their eggs are caviar eggs) as well as tilapia and koi. They were also growing tomatoes and greens and baby greens. They had the media attention, you saw plants in their system, you saw a healthy system and you thought that nothing was going to stand in the way. It took a while but finally, we will have a successful model for large scale commercial aquaponics.

 

However, the two founders could not agree on a vision and direction for their company Parr preferred to keep things pure and as sustainable as possible while Hopkins wasn’t against a few inputs to get better-looking produce for big retail consumers.

 

It’s one of many reasons that factor into the failure but Parr ended up leaving the company to focus on SchoolGrown full time.

 

Viridis held on for a few more months and the exact date of closure is unknown but by the start of 2016 the doors had closed and the company is defunct. If you try to visit the old site, it redirects to Jon Parr’s new consulting company for aquaponics projects.

 

Takeaways

 

First, Jon and Drew never saw eye to eye on their vision. Jon wanted to keep the systems as pure as possible with no outside inputs. Meanwhile Drew was fine with adding supplemental nutrients to get a more uniform product that would help him sell large contracts to suppliers. That vision ultimately meant that Viridis would lose their in house aquaponics expert and designer.

 

Second, Viridis had an awful rating on Glassdoor. They were called out by almost every reviewer for taking advantage of employee’s, withholding payment and creating a hostile work environment. This led to high turnover and likely less than stellar employee performance. A lack of previous leadership is a strong indicator to investors that the leadership team may not be fit to manage a large team.

 

Finally, Viridis lacked a clear path to profit. There were simply too many first time experiments happening all at once at a large scale. Their idea to do sturgeon for the eggs seemed like a great idea at the time, but no one had raised sturgeon commercially before in aquaponics and they did not determine the market demand before deciding on that fish. In addition, while they were able to secure a few nice large contracts in the beginning, they didn’t have a claer sales strategy, and like many large scale operations that have failed, they were better at raising money and doing aquaponics than they were at selling their produce and maintaining necessary cash flows to keep the business afloat.

 

PodPonics in Atlanta (Hydroponics Operation)

 

PodPonics got its start in Atlanta. It was one of the first commercial operations at a large scale and excited the industry at a time when examples of commercial aquaponics was few and far between.

 

In 2012, the Technology Association of Georgia named PodPonics one of the most innovative tech companies in Georgia.

 

It seemed like they were on the path to success and had a great future ahead of them. Fast forward to May 31 this year and they failed to liquidate assets in federal bankruptcy court in Atlanta.

 

Takeaways

 

Once again we see leadership as a large problem to sustaining company growth. The company cycled through multiple CEOs and former executives cited a lack of strategic vision and inability to execute as issues that led to their ultimate demise.

 

The company underwent several pivots, going from a producer and selling low-margin produce to then becoming a seller of shipping container farms like the ones they used on their own farm. To fuel its growth, the company raised $15million from New Ground Ventures based out of CT.

They then again pivoted to setting up a pilot farm in the middle east and trying to break into that market selling its containers with their proprietary software. Now they had split focus between their Atlanta farm and this new pilot farm, and were trying to break into an international market without the expertise and connections to do so. Which plays to the earlier quote that they had a lack of strategic vision and an inability to execute.

 

Court Documents offer no insights into why they had to file bankruptcy but they had a clear inability to scale their farm and break into their international markets. All the while the demand for locally produced foods has been surging. When you have an industry that is growing very fast you will lose some companies that are not able to keep up.

 

Despite the bankruptcy, the company still plans on moving forward. They are able to eliminate on past debt, and allow them to focus on just developing and selling their systems and technology. Who would buy from a bankrupt firm may be another issue they face moving forward.

 

FarmedHere, Chicago (Hydroponics, Aggregator)

 

Farmed Here is an interesting example to look at because depending on who you ask, they haven’t “failed” yet. However their business today is not the one they received investment for, and because they weren’t able to make their commercial growing model scalable and sustainable, they are looked at as a blight on those in the industry wary of large scale and funded operations failing a few years after investment.

 

The company originally planned to use its flagship facility in Chicago as a means to showcase the commercial indoor warehouse hydroponics model and expand it to cities across the globe. Even as recently as early last year, then CEO Matt Matros announced a $23million 60,000sqft indoor farm that they were to open in Louisville, KY.

 

Those plans fell through. Part of this was due to a change in leadership as Matros was replaced by current CEO Nate Laurell. Laurell was weary of the operational costs of farming, the increased competition they were seeing in Chicago and the huge turn around it would take to see profit from the Louisville facility. So that project got put on hold. Then a few months later, Laurell announced that they were also closing the doors on their Chicago farm. The company was instead to transition to food aggregation for local producers and value added production. Laurell cited better margins and business models as justification for the changeover.

 

Takeaways

 

Once the company underwent change over and through multiple CEOs the mission and the vision behind the initial investment got watered down and current executives prioritized shorter term higher profit models over the challenges and hurdles of personally pushing the indoor farming industry forward. Their trailblazing efforts will not be without a positive impact and legacy with plenty of lessons for future investors and indoor farms to learn from.

 

FarmedHere will inevitably lead investors to be more wary about indoor farms, especially in Chicago where competition is high and competitors are profitable. But worth noting is that they technically didn’t fail. They just pivoted. The original farm in Chicago was thin margins but it was working. A little perseverance and you could see new technologies like automation and robot harvesting lead to increased profits. It would not surprise me to see them return to indoor farming in the future as the costs of start up and labor is reduced thanks to technological advancements.

 

FarmedHere will leave a legacy of being the first USDA Organic Certified Vertical Farm and a trailblazer for others in the industry. They created the model that led to others getting investment and had years of providing jobs and local food to Chicago residents.

 

Local Garden, Vancouver, Rooftop Hydroponics

 

The final case study we will look at is Local Garden out of Vancouver. They ran a mechanized greenhouse operation that was created off an initial $2million investment. In early 2012 they had grown to be traded on the Canadian National Stock Exchange and has a market capitalization of $9.5million but later that same year they went back to the market for $500,000 in operating capital after posting over $400,000 in losses. In the end, the company stated that it had accumulated $53million in losses during its development stage.

 

The company had a promising model and was delivering produce to local high-end Vancouver restaurants getting the premium on their crops they thought they needed to succeed. However, their revenues were not covering their costs and the company was forced to file for bankruptcy. At the time the total liabilities in the Bankruptcy of Local Garden Vancouver were about $4million.

 

Takeaways

 

Local Garden came under the issue many early adopters face in this industry. The cost of research and development along with initial start-up costs for systems and equipment ballooned out of proportion before they were able to start taking in revenues. Investors should instead focus on companies that have created models that are already showing sustainability and help them in scaling those models quicker than they could

 

In addition, they were not able to sustain enough periods of revenues being greater than expenses and as a result never were able to climb out of their debt that they took on early on. Outside of Silicon Valley and tech startups, it is very rare for companies to receive investment on the promise of future revenue with no track record of revenue on the books. The case with a lot of these startups is that they sold themselves as tech companies while their revenues were based on their ability to farm. If farming is the core of the revenue model, invest in that revenue model, not on some unproven tech that has yet to see market demand for the product.

 

Conclusion: What Leads To Failed Investments

 

We see a couple of repeating factors that make up our examples of failed investments. The first among all of them is the fact that they were the first of the first movers in the industry trying to take indoor/rooftop/warehouse farming to a commercial and scalable place. This came with inherent risk in and of itself. First movers in any industry are always going to be at risk, those without proven pilot farms or beta customers are even more at risk and the majority of our pool falls into that description.

 

In addition to the lack of sustainable models, we see a lot of investment in teams that are better at fundraising than they are at actual farming. It’s a bit of a head scratcher to see so many investments into companies whose ROI is dependent on their ability to grow and sell food but has no experience in doing so. Yet what we see in the companies, specifically the aquaponics companies that are commercially successful is a staggered growth approach. They start with the minimum they need to sustain a living, test their local market, and get proficient at the efficiencies they need to establish to expand. Then they expand as revenues allow and grow their business smartly, able to adjust to market demand and not outgrow it before reaching economies of scale.

 

We also see a lot of inexperienced or inadequate leadership. In some cases, it is due to high turnover of the executive team which leads to too many changes over short periods of time. In other instances, it’s a lack of vision and experience from the founder team that leads to trouble as the team tries to grow but can’t handle their expanding managerial role. In some instances, we also see executives with questionable track records full with failures.

 

In addition to questionable executive characteristics, there are questionable executive employee relationships at a few companies. Hostile work environments, not paying workers, over promising and under delivering and others have all led to dissension among the ranks in a few of these companies led to workers not to put their best efforts forward which can be the death of a startup.

 

Finally, the biggest and most common mistake of these investments is they were actually too big. They had these companies scale beyond what they knew the local market could handle. In many cases, they were basing pricing models off of high margin sales but because of their volume they then had to go the wholesale route and their margins got drastically reduced and put a few in the whole. Some were also not prepared for the trials and tribulations of farming. It’s not like a manufactured product where a known number of inputs leads to a known number of outputs. There’s a lot of variables between disease, pests, weather, and so much more that can cut into our bottom line. If you lose a crop cycle you lose that revenue for good. You can just input another widget. Plants take to germinate and grow to get back into a system and margins are already small enough you can’t just be planting an extra couple hundred every week as an insurance policy.

 

Both investors and founders need to recognize the overall risk of farming and account for crop loss into their expected returns. If your model cannot accommodate that, or alternative revenue streams cannot make up for farming, you need to rework your numbers. It’s still farming despite all the technological advances and at some point, you will experience a crop loss. Don’t let that be the reason your investment or your farm can’t see itself through to the next quarter.

 

Whether you are a farmer that needs investment to start or scale or an investor looking to capitalize on a growing sector these are the risk factors you need to be able to have or see answers for. In next week’s post, the final in our series, we’ll go through examples of successful investments, and new large investments and what characteristics led to that outcome.


Leave a Reply