Agritech investment in Africa: Challenges and opportunities
Agritech investment has the potential to create a significant positive impact in Africa from both a financial and socio-economic perspective, with agriculture representing 17% of Sub-Saharan Africa’s (SSA) GDP and accounting for the employment of 53% of its workforce. The sector has attracted increased attention of late from the broader investment market, with Venture Capital (VC) investment, in particular, resulting in rapid growth of the vertical, an increased number of new entrants, as well as innovative products entering the market.
To date, investors have largely focused on solutions geared towards improving farm productivity, reducing overall input costs, providing financial access, and improving participant quality of life within the agricultural value chain.
The status quo
While the African tech investment environment has attracted record levels of capital in recent years ($4.5bn in 2021), the Agritech sector continues to lag behind Fintech (including e-commerce) and Healthtech from a total funding perspective.
In 2021, Agritech startups attracted $95.1m in investment, representing a 59% increase from the 2020 total funding amount of $59.9m. While impressive, the total funding received by the sector only accounts for 4.4% of the total funding tally.
The Kenyan and Nigerian markets remain the leaders in attracting Agritech focused capital, accounting for 97% of the investment received, with common themes being: marketplaces, process optimisation, and financial services. Other emerging themes include the data economy, and farming and process optimisation plays.
The challenges
Based on relative funding flows and the number of transactions completed, the Agritech sector continues to experience mixed fortunes, with investors citing the following challenges:
- The distribution of outcomes is typically long-tailed, with business models taking longer to validate relative to other sectors
- Valuations in the Agritech ecosystem are priced at a premium for relatively low levels of traction due to the broader market sentiment/successes being achieved and the “Africa Rising” narrative
- Business models often have unclear paths to scale. Either the business models are hardware intensive with no clear pathway to positive unit economics, and exponential growth, or the sector has significant infrastructural gaps to overcome
- Significant externalities in the business ecosystem, with factors like weather playing a large role in achievable outcomes
- Hardware is not yet ubiquitous in Agritech, making pure SaaS platform models unfeasible. Startups must often combine some kind of asset or hardware to enter the market, build farmer trust, and layer on software value propositions
What excites us about Agritech at Founders Factory Africa in 2022
As a sector that we believe has pivotal importance on the continent, we have continued to invest in Agritech, with exciting startups like Rural Farmers Hub, Offgrid Finance, and Winich Farms recently joining our portfolio. Going into 2023, some key themes which we will be actively investing in include:
- Data economy: We have noted an exponential increase in demand for on-the-ground data points by corporates and NGOs. As a result, there is a growing interest in data access and data infrastructure plays, as well as alternate use cases for collected data. However, one of the key challenges is the significant volumes of data required for the business models to be commercially viable. Leading startups in this theme include the likes of Digifarm and StellaApps
- Marketplaces: There has been continued growth in the marketplaces segment due to the need to optimise the journey from farm to fork and remove “middlemen” from the process. However, there is significant complexity in the management of the supply chain — such as storage and logistics — and typically a high cost to acquire customers on the supply side and demand side. Our current focus is on startups solving for traceability and quality assurance in addition to linking buyers and sellers. Some exciting businesses in the space include Twiga, Foodlocker, and Marketforce
- Farming optimisation and mechanisation: Solutions for resource efficiency are on the rise through interventions such as precision and data-driven farming. Some of the business model challenges we anticipate include the target market being better aligned to mid-large sized farms, excluding a majority of farmers in the SSA context (outside of South Africa, which is characterised by large commercial farms producing the majority of produce). Leaders in the vertical include the likes of Aerobotics and Hello Tractor
- Financial services: Providing a range of financial services to farmers who are often unbanked and excluded from the formal financial system remains a key priority. Innovations around alternative credit models, insurance models and partnerships with liquidity partners (underwriters, debt partners) are also of interest. Leaders in this vertical include Ensibuuko and OKO Insurance
- Process optimisation: There is a definitive drive to leverage bespoke IP-driven technology to improve farming processes and practices within unique high-margin value chains. In addition, the use of IoT-powered hardware and software to introduce efficiencies within processes. Key growth areas on the continent include high-value cash crops, aquaculture, and sustainable protein, among others. Leaders include Victory Farms and Good Nature Agro
Where to from here?
Agritech investment may not create exciting short-term outcomes compared to more mature investment verticals. However, those willing to take a long-term position (like Founders Factory Africa, which is still accepting applications to our Build and Scale Program Agritech intake) and collaborate effectively with Agritech founders, will likely be those to help Agritech realise its full potential as a source of both financial and social dividend.
