The Future of Food: Vertical Farming

Published in

Impact Edge

7 min readJul 20, 2022

This is the second in a series of impact deep dives on the future of food. Take a look at our previous blog on alternative meats.

Executive Summary

Why are we interested?

By 2050, the global population is expected to increase by 2.4 billion. With the same agricultural practices, we will need an additional 2.1 billion acres to cover global food demand. At the same time, climate change means we are losing existing agricultural land and existing farming practices take a huge toll on the environment.

Vertical farms aim to address some of these challenges. They are a type of indoor farms, where produce is grown in fully enclosed vertically stacked structures and the growing conditions are fully controlled. Today, the vertical farming sector is relatively small and produces a limited selection of produce — typically items such as leafy greens and herbs. There has been significant investor interest in the indoor farming sector, with $1.86 billion invested over 84 deals in 2020.

What do we like about the sector?

Vertical farms have the potential to be more environmentally friendly than conventional farming, because they use 90%+ less water, produce more food per square metre, and can be based in / near cities, therefore reducing transport emissions.
In the longer-term, vertical farms are a potential solution to food insecurity, as they can produce food all year round in areas which have not traditionally been arable and are more resilient to climate-related weather disasters such as droughts or floods.
There is some impact lockstep, with vertical farms incentivised to improve energy efficiency to improve margins.

What remaining questions do we have about the sector?

Vertical Farms are currently very energy intensive, with further R&D needed to bring down overall CO2 emissions.
Impact on its own is not enough to get customers to purchase — to scale, vertical farms also need to get the price (currently more expensive) and product selection (currently limited) right, and to do this in a way where the unit economics make sense.

Key Terms

Controlled Environment Agriculture (CEA): refers to indoor agriculture, where some aspect of the environment is controlled by technology, such as artificial light or hydroponics.
Vertical Farms: A type of CEA with fully enclosed vertically stacked structures, where growing conditions are fully controlled. Currently produce a limited selection of crops, including leafy greens and herbs. Crops are typically grown without soil.
Hydroponics: Method of growing crops where roots are immersed in nutrient solution.
Aeroponics: Method of growing crops where roots are suspended in air and nutrients provided via a mist.
Aquaponics: Combination of aquaculture and hydroponics where the nutrient-rich aquaculture water (fish waste by-product) is fed to plants.

Commercial analysis

The global vertical farming sector is small today. The FT estimates that vertical farming occupies 30ha of land worldwide versus outdoor cultivation which occupies 50m ha and greenhouses which occupy 500k ha.

However, there has been a significant amount of venture capital invested in the sector. In 2020, $1.86bn was invested over 84 deals. High-profile recent raises include Bowery raised a Series C of $320m (2021), 80 Acres raised $160m (2021), Plenty raised a Series D of $140m (2020). This investor interest is driving growth and experts expect the vertical farming sector to grow at 25% p.a. over the next five years. For example, in the UK, Jones Food Company is building one of the largest vertical farms globally and says that it aims to be able to supply 70% of the UK’s fresh produce within the next 10 years.

High production costs mean that players typically focus on high-value items such as herbs and leafy greens. Despite this, the sector remains largely unprofitable. Businesses need to pay for specialised labour and technology and have significant electricity bills as a result of electricity and heating, ventilation and air-conditioning use (HVAC).

Drivers of demand for vertical farms

Impact analysis

We use the Impact Management Project framework to assess impact. Vertical Farming can have a positive environmental impact (contributing towards SDG 12: Responsible Consumption) and impact on food security (contributing towards SDG 2: Zero Hunger).

Interaction between impact and commercial growth

We believe impact acts as a source of value for companies (see our recent blog). It can help in acquiring and retaining customers, attracting talent, improve access to capital, and reduce risk. More specifically, these four areas have the potential to drive commercial growth by (i) increasing the total addressable market (i.e., the number of units sold) and (ii) improving the unit economics (i.e., the value of the units sold). We unpack these below.

Total Addressable Market

As consumer preferences continue to shift towards more sustainable foods, the total addressable market for vertical farming should grow, assuming that the sector can demonstrate to consumers that it is more environmentally friendly than conventional farming. At the same time, the total addressable market for conventionally farmed food should grow more slowly. As further investment and R&D drives costs down, this should also result in an increased serviceable market.

Capital Providers

Given the potential for addressing major social and environmental challenges, vertical farming has attracted some non-dilutive funding from governments and foundations. This has helped to catalyse growth in the sector but also has attracted additional investor interest as this de-risks the investment.

Unit Economics

Unit economics is dependent on the cost of acquiring a customer, volume purchased per customer, profit from each purchase, and customer retention.

Customer Acquisition

As customer preferences shift towards healthier and more local foods (e.g. the ‘eat local’ movement), customers are more likely to want to try vertically farmed produce, which is likely to bring customer acquisition costs down. As the price of produce falls over time (due to increased investor-enabled R&D), this should also accelerate customer acquisition.

Margin

Many consumers are willing and able to pay a premium for natural / organic / pesticide-free food. McKinsey estimates that US consumers will pay +51% for cage-free eggs, +149% for organic eggs, and +83% for organic milk. While this is not exclusively tied to vertical farming, it suggests that consumers may be willing to pay a premium for this type of produce.

Currently, one of the largest areas of cost for vertical farms is energy use. Reducing this (e.g., through developing more efficient processes) will improve unit economics as well as vertical farms’ carbon footprints.

Retention

While customers are likely to try vertically farmed produce, they are only likely to continue to purchase these products if they are affordable and of comparable or better quality.

Achieving quality is unlikely to be an issue. Vertical farms should be able to produce high-quality produce, because they can control the entire environment in which produce is grown. In addition, food can be produced closer to consumers and so has to travel less.

However, affordability may be more difficult given that vertical farms are currently significantly more costly than conventional farms and produce is currently sold at a premium. While some consumers may be willing — and able to — pay this premium, this may lead to higher customer churn.

Additionally, for impact motivated consumers, it’s important that vertical farms are able to demonstrate their impact credentials over time. The CEO of Intelligence Growth Solutions suggested that there “are far too many unsubstantiated claims about energy use, the environmental benefits, and quality of crops” and 70% of farm operators believe that vertical farming is susceptible to excessive greenwashing. Consumers are becoming more savvy here as a result of being misled in the past.

Final Thoughts

In the longer-term, we are excited by the sector’s potential to contribute to addressing food insecurity. In the shorter-term, vertical farms may have potential for environmental impact, although further R&D is needed to reduce farms’ energy usage. Here, there is some impact lockstep — vertical farms are commercially incentivised to improve their environmental performance by reducing energy use, given this is a large portion of their operating cost base. Success will rely on vertical farms being able to demonstrate their environmental performance relative to conventional farming. We are interested to see how the sector develops over the next few years.

We would love to hear your views about vertical farms. How do you expect the sector to develop? What are your thoughts on the lockstep between commercial and impact growth?

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