Working the soil: What’s Driving India’s Agri-preneurs
Agriculture contributes to 14% of India’s GDP, and continues to be the source of livelihood for 3 out of 5 Indian households. A large part of Indian society, Bollywood themes post-independence, and even our collective history has some connection to the village life.
But, is it really a large business opportunity or is it just a mirage? The past speaks of a story where new, enterprising businesses have struggled to find their feet due to lack of direct access to farmers, broken supply chains, and highly regulated markets. Fatigued and spent, these businesses are either nowhere to be found or have become a mere shell of their initial grand vision.
Things have changed lately. More specifically, three factors have contributed to the renewed spark in entrepreneurship in this sector:
- The proliferation of the internet and the smartphone has enabled an entirely new and increasingly potent distribution medium for any entrepreneur looking to access the Indian farmer. At present, close to 10M farmers in the country have access to smartphones. This number will go up to 50M conservatively by 2020.
- The rise of Farmer Producer Organisations (FPOs) has created new aggregation points in the value chain for early-stage entrepreneurs, thus making it easier for businesses to go-to-market. FPOs were promoted by the government to help small landholders collectivize and gain from special access to cheaper inputs and services as a collective. There were close to 200 FPOs in 2014, and we already see 4000 FPOs as of now in the country.
- Government push in the form of de-regulation of sale of fruits and vegetables produce. This allows buyers of fruits and vegetables to purchase directly from the farmer and not depend on the APMC-regulated markets, thus opening possibilities for new business models.
In the past 5 years, close to 700 agriculture focused startups have set up shop in the country. We believe now is the time to take a fresh look at the industry. A good way to study is by a segmentation across the life-cycle of a farm into three buckets:
- Inputs
- Implements
- Outputs
Inputs:
All products/services that a farmer needs on a variable basis fall under this category of businesses. For e.g: seeds, crop protection, crop nutrition, credit and machinery rentals.
This is a $48 B market, $30B from the variable farm inputs (seeds, crop protection, and nutrition), $10B from credit and $8B from rentals.
Regarding farm inputs, the buyer faces a shortage of access to quality products. For example, organized retail is present only in 10,000 out of 600,000 villages in the country.
Suppliers have their challenges too: with very few sophisticated sales channels due to the last-mile issue, servicing the end user meaningfully is not easy.
When we met Agrostar (#AccelFamily), we liked that they were targeting the largest and most penetrated market segment in the inputs category; given their mission to be a full-stack solution for the Indian farmer, we resonated with their go to market strategy of building their base on the e-commerce engine.
The second largest market in Inputs is credit. Access to credit is a famously large challenge, which results in farmers’ dependence on unorganized lenders.
From the supply side, there are challenges across creditworthiness checks, collections and loan use monitoring.
Samunnati (#AccelFamily), identified an innovative model of delivering credit based on the value chain — they partnered with downstream buyers of prospective farmers to form a tripartite agreement, deploying money to the value-chain-linked farmers, and collecting from their buyers.
Implements:
All products/services that help a farmer utilize his variable inputs better to grow a better crop are under this segment. This would include infrastructural setups as well — covering equipment, automation and a new entrant, information services.
Unlike inputs, which could be classified as working capital deployment, this category of products requires farmers to have good reserves of cash, accrued over a period of profitable farming.
Farming isn’t viable for landholdings that are smaller than 1 hectare — and 70% of Indian farms fall into this category. The top 5% farmers of India hold 32% of the land, but it is key to remember that since a lot of the sale in this segment is a one-time sale, the market in that sense is shrinking.
Long sales and service cycles of the business are other factors that can hinder explosive growth that would otherwise attract venture capital. These dynamics are unique to India, visible in the interest shown by investors in the USA to the automation and precision farming sector — a factor of their average landholdings being 180 Hectares.
The information services segment in Implements is a new play, riding on the smartphone wave. While there is ample opportunity here, we see this as an allied offering that all players across Inputs and Outputs will likely utilize as an acquisition strategy.
Outputs:
All processes that follow post-harvest are bucketed in this segment, for ex: storage, market linkages and trade financing. This is definitely the largest segment across the three, with a market size of close to $250B of gross crop value. Due to the fragmented nature of the market, however, we see the opportunity for several players to co-exist, serving across different geographies and crops.
The problems in this space are largely around wastages and realization to the end-farmer.
Buyers (of the crop) are focused on reliability of procurement and quality of produce, whereas farmers desire fair realizations and commitments on procurement.
What we found interesting in Ninjacart (#AccelFamily) was their focus on Horticulture, coupled with precise execution. The dynamics of the horticulture business are as follows — premium farmers, regular harvests, and high-value crops in dense pockets, thus making it the most conducive sub-segment to focus on. Their innovation on market linkages, allowing for dynamic pricing above mandi prices (due to the disintermediation of several middlemen in traditional models) allows them to ensure satisfaction of both buyers and sellers.
Looking forward:
It is still early stages for the Agri-space in India, with only a handful of companies having raised >$10M in funding. The biggest players in the country today will open the floodgates of innovation in this sector, by educating the average farmer about options that are at their disposal. Distribution to the rural areas is being solved on a continuing basis, and we ought to see a significant simplification of market dynamics over the next 5–10 years. All these factors together, we believe, will create the perfect ingredients for significant innovation in the Agriculture space.
