How Does A Young Industry Fund Itself?
Indoor agriculture — farming in warehouses, containers and greenhouses using soilless growing methods — has a chicken and egg problem. Like many a young industry, it lacks the quorum of investment activity that would reassure conservative private and venture capital investors looking to participate in the industry, but can’t build that track record without their participation.
To be clear, indoor agriculture is not doing badly by a long shot; venture capital-led investment into the produce side of the industry was up 2.5x in 2015 over 2014. High profile entrepreneurs are entering the sector, most recently Kimbal Musk’s new Square Roots venture announced an accelerator-like business model utilizing Freight Farms’s container farms. Investors such as Goldman Sachs and Prudential Financial have committed funds to the sector. Indoor agriculture entrepreneurs are understandably positive about their prospects; nearly three quarters of respondents to our recent survey expect higher profits this year than last. But investment remains tiny in comparison even to other sectors of the food and agtech sectors. One food delivery service, Munchery, raised nearly as much in a single round ($85mn) last year as did the entirety of the publicly-announced indoor agriculture sector, at $88mn.
For all of their many benefits, indoor farms are hampered by higher initial capital costs than outdoor farms, and the need for funding is accelerating as the industry transitions from a niche activity to a commonplace companion to outdoor farming, another tool in the commercial farmers’ tool kit. 30%+ growth — according to MarketsAndMarkets — is driven by consumer demand for year-round local produce that can’t easily be met by other means, and by better competitiveness thanks to the rapid application of Moore’s Law to the sector’s key technologies. For instance, LED light prices have fallen by 85% in the last five years, and are forecast to fall from over 60% of capex costs in 2011 to under 15% by 2026. Still, we guesstimate that it would take a capex spend of $42bn to move 40% of two crops — lettuce and strawberries — into indoor farms, a goal which is less daunting when we consider that the tomato industry moved from 10% under glass to 40% within the space of seven years.
In our recent survey, more than half of respondents said that finding sufficient funding to operate or expand their firm was their greatest business challenge. Self-funding remains the largest source of startup funds for new indoor farms and technology companies, and just under three quarters of indoor agriculture entrepreneurs are currently seeking external funding according to our recent survey. The industry’s closest comparison is probably to the solar industry, another technology-led revival of a long dormant industry, where a wave of funding preceded rapid industry growth.
As long term industry observers — we own one of the largest event businesses in the space, Indoor Ag-Con, and work with indoor agriculture clients in our investment practice — we’re regularly approached by those looking for venture capital or private investment even though we don’t act as brokers. The odds of any given company obtaining venture funding are slim, and we are asked about alternatives sufficiently often that we decided to compile a list of them. We spent a fun summer researching, collating and analyzing results from crowdfunding platforms and from numerous industry, academic and media sources as well as conducting our own survey of industry financing needs and drawing on discussions with more than fifty industry stakeholders. The resulting white paper — which will be released in full on October 5 — looks at the rationale for investing in indoor farms and their technologies, and catalogs 70 potential funding sources, the most comprehensive listing of indoor agriculture funding sources yet published.
One theme that became apparent as we did so is that “new finance” has been a good deal friendlier to indoor agriculture than far larger traditional funding sources. For example, 14% of our survey respondents used bank loans compared to an all-sector Kauffman Foundation study that found about 40% of the initial capital in a startup is bank debt. Anecdotally, some indoor farmers report issues with bankers comprehending their farming approach.
This has been less of a struggle in newer areas of finance such as crowdfunding. Equity crowdfunding platforms allow some of the general public to own a part of a startup along with many other online investors. The best known of these in indoor agriculture circles is AgFunder, which has hosted campaigns for Canadian indoor grower TruLeaf and farm management startup Motorleaf. Other notable campaigns include “farm-in-a-can” creators Back to the Roots at CircleUp, container farm tech company Freight Farms at Wefunder and vertical farmer Green Sense Farms at StartEngine.
More surprising has been the success of indoor agriculture — and especially home-based systems — on donation-based crowdfunding sites, such as, IndieGoGo and Kickstarter. The average indoor agriculture raise was $39k and the largest over $400k.
As each new industry has risen, it has adapted existing funding structures to meet its own needs, and added a few of its own along the way. For instance, the solar industry not only attracted sufficient capital to allow it to become a significant part of the energy supply chain but also helped to popularize financial instruments such as crowdfunded solar farms and green bonds. We expect no less of the indoor agriculture industry as it matures.
The full version of Newbean Capital’s “The Investment Case for Indoor Agriculture” white paper will be available in exclusive hard copy to participants in Indoor Ag-Con Gotham on October 5, 2016 and will be available for download later in the month at indoor.ag/whitepaper.
 “Entrepreneurship Policy Digest”, Kauffman Foundation, June 2, 2015