AGFUNDER: AGTECH FUNDING DROPS 30% IN 2016
Feb. 1, 2017
Investment in agriculture technology startups reached $3.23 billion in 2016, a 30% year-over-year decline. But it was a tale of two halves as the number of deals closed increased 10% to 580 due to an uptick in seed stage activity.
After a record-breaking 2015, when 526 agtech funding deals raised $4.6 billion, we anticipated a pullback in 2016, particularly against the backdrop of a weakening global venture capital market.
According to KPMG's VenturePulse report, global venture capital deal activity dropped 24% year-over-year, while funding dollars contracted 10%. KPMG attributes the decline to investor caution on the back of a record-breaking 2015 contributing to weighty valuations and a record number of unicorns in 2015; some notable down-rounds; a few poor performing IPOs; and a dead IPO market for the first nine months of the year.
The dynamics of the global markets had an impact on agtech funding, and investor caution was particularly felt at Series A stage: 2016 posted a 43% decline in Series A deals in dollar terms and a 31% decline in the number of Series A deals. It's unclear exactly the reason for this pullback, but it's possible investors struggled with startup valuations getting ahead of revenues and traction, similar to the global VC market where Series A funding also contracted, as well as the drawbacks of having a limited pool of investors available to startups in the sector.
In contrast, seed stage deals contributed to the overall growth in deal activity with $230 million of investment, up 77% on 2015. This increase in seed stage funding is largely attributable to the growing number of resources, from accelerators to incubators, for early stage startups. Series B stage deals also increased year-over-year reaching $791 million, a 14% increase, and there were gains in some of agtech's subsectors, particularly Ag Biotechnology and Novel Farming Systems.
It's also worth noting that there were some large deals during 2015, such as Netafim's $500 million financing, which helped drive figures in 2015.
Drones, Delivery, and Bioenergy Drove Agtech Funding Down
Food Marketplace/Ecommerce startups raised $1.3 billion in 2016, a 25% year-over-year decline. Robotics, Mechanization & Other Equipment companies raised $109 million, down 89%, and investment in Bioenergy & Biomaterials businesses fell 75% to $123 million.
For the Robotics category, it was the 68% fall in investment to drones technologies that drove the decline. Drones were a hot technology in 2015, with great expectations for their ability to help farmers manage their operations. As they became more widespread, however, it became clear that providing farmers with aerial images of their farms did not automatically save them time or money and the technology has arguably moved into the 'trough of disillusionment' on the Gartner Hype Cycle. There could also be an element of cyclicality to the results, with some startups fully capitalized until this year, and we also saw some drones manufacturers move away from agriculture to focus on other industries. We expect to see a new wave of technologies coming into the category, such as improved drone sensors and better imagery analytics.
Another major area of decline was food delivery, where startups had a volatile year resulting in the closure of several, particularly in Southeast Asia. On the flip side, some investors placed big bets in the space, and five startups closed deals worth over $100 million each, driving nearly 60% of the category's total funding. We also had a turnaround story from Good Eggs in San Francisco, the e-grocer, that was forced to close operations in many of its cities in 2015.
While the category was certainly overheated, and arguably still is, it's here to stay. Rabobank values the subsector at $60 billion at least, and new research estimates it will be worth $100 billion by 2025, with a significant number of bricks and mortar stores moving online. Food retailers have typically been slow to provide consumers with the online options they want, especially in the US, providing an opportunity for entrepreneurs to continue to try and disrupt their space.
The dip in funding to Bioenergy & Biomaterials startups was understandable in light of the global decline in oil prices, and we saw some startups pivot away from bioenergy to other bio-based uses of their technology such as crop inputs.
Ag Biotechnology and Novel Farming Systems Grew in 2016
Agtech funding grew year-over-year in four categories: Ag Biotechnology (150% to $719m), Farm Management Software, Sensing & IoT (3.7% to $363m), Novel Farming Systems (63% to $257m), and Supply Chain Technologies (3% to $180m).
The funding climb in Ag Biotech was driven by the maturing of several startups including microbial seed coating company Indigo, which raised a $56 million Series B followed shortly by a $100 million Series C after the launch of its first commercial product for cotton. Apeel Sciences, a startup using food waste to manufacture a formula that can be applied to fresh produce to extend shelf life, also matured to Series B stage with a $33 million deal, while gene-editing startup Caribou Biosciences raised $30 million at Series B for its CRISPR-Cas9 technology. Across the category, nine startups that raised funding are utilizing waste of some kind.
A large $100 million Series C for microbe farming business Ginkgo Bioworks drove the Novel Farming Systems category along with funding rounds for greenhouse crop production businesses BrightFarms and Shenandoah Growers, and insect farming businesses AgriProtein and Ynsect.
Cause for Optimism
Funding support for seed stage companies grew as 580 companies raised $230 million, a 77% year-over-year increase, accounting for 57% of total deal activity. A large amount of this early stage agtech funding came from accelerators, which are part of a growing pool of early stage resources for food and agtech entrepreneurs. At least 20 new dedicated accelerators launched in 2016, and even more other resources including incubators and pitch competitions, as organizations recognized the potential for the sector.
SOSV, the venture firm behind the IndieBio and Food-X accelerators, was fittingly the most active investor of the year followed by a new fund in the space, New Crop Capital, which closed nine agtech deals during the year, and even more in the overall food space. The number of dedicated agtech funds is growing, but very slowly as LPs are taking their time to get up to speed with the sector. We count 14 active funds in the market today, worth a combined $850 million, and there are at least another eight fundraising for startups at various stages. Because there are so few dedicated funds, the sector relies on outside, generalist investors to provide funding and the number of unique investors active in 2016 remained on-par with 2015 (680 vs 682).
There are also a growing number of corporate venture funds in the sector, although more so at the consumer end of the food chain. In 2016, Kelloggs Campbell's Soup, and Danone announced new investment initiatives with eighteen94 Capital, Acre Venture Partners, and Danone Manifesto Ventures, and we expect more to come in 2017 including a fund from Archer Daniels Midland. We can also hope to see more corporate venture activity from agribusinesses after a survey we conducted with Boston Consulting Group revealed that they wanted to prioritize further investment in innovation. This might not always result in the creation of an in-house fund, but investment in third party funds like Bayer CropScience has done across Finistere Fund II, Radicle Accelerator, Trendlines, AgTech Accelerator, Flagship Ventures and a collaboration with Anterra Capital.
Investors and entrepreneurs across the globe are waking up to the opportunity, and need, for agtech innovation with US deals accounting for 48% of dealflow in 2016 compared to 58% in 2015 and 90% in 2014. While our reporting methods have broadened to capture more global investment activity across our network, activity is picking up in some markets. Large deals from China and India drove funding in Asia and activity picked up in Canada with 40 startups completing deals, up from 25 in 2015. Deal activity in the UK also increased from 19 in 2015 to 28. New accelerator programs opening up across other parts of the globe, such as Latin America, mean that funding activity is likely to continue to diversify globally into 2017.
Potential Pain Points in 2017
The lack of exits remains a talking point among the dedicated VCs in the sector. We recorded 38 agtech M&As in 2016, with the large agribusinesses conspicuously absent from the list of acquirers. Scotts Miracle-Gro was the most active acquirer after purchasing five companies, including providing an exit for Serra Ventures, an Illinois-based firm active in agtech funding.
As we found out in our report with BGC, the large agribusinesses understand that new innovation is key to their future, but the lack of M&A highlighted their uncertainty about how to approach it. They will need to make more acquisitions to ensure entrepreneurs keep innovating and VCs keep investing. There are other potential exit routes, however, as highlighted by the exit of Kleiner Perkins, Caufield & Byers from Farmers Edge. The global VC sold its shares to the investment company of Canada's Warren Buffet, Fairfax Financial, which sees synergies between the precision ag company and its insurance business. The recent investment from South African media group Naspers in FarmLogs also highlights the potential for large businesses in other industries to see value investing in the sector. We will also need to see a growth in Series A deals especially if seed stage activity remains strong.
To view the full report, click here.