Venture capitalists see a budding opportunity in one of the oldest industries: farming.
From big data to drone technology, Silicon Valley investors are pouring money into “ag tech” companies at every level. And while their investments aim to create a more efficient and ecological solution to the problems that plague farming, VCs also see a huge opportunity to make money.
“We are talking about a multitrillion dollar global market that is ripe for improvement with new technologies at all levels,” said Randy Komisar, a partner at the venture capital firm Kleiner, Perkins, Caufield & Byers.
Kleiner is no stranger to investing in ag tech companies. Since its first such funding about six years ago, it has about half a dozen ag tech investments.
“We were very early in this space and very quiet about it,” Komisar said. “When we talked about it then, people thought we were crazy.”
But Komisar’s peers must not think they are crazy anymore because many have hopped on the bandwagon.
In 2013, U.S. venture capitalists invested $55 million in the “ag tech” sector, and this year, investments have spiked more than 170 percent to about $153 million, according to PitchBook.
Other big VC firms that have participated include Khosla Ventures, Andreessen Horowitz and Otter Capital, according to PrivCo.
“I’ve been looking at this since mid-2009 and I would say in the last year I’ve seen tremendous activity relative to the past. At the beginning there was almost nobody doing it, there were two or three firms around the country,” said Paul Matteucci, a partner at U.S. Ventures Partners and founder of Feeding 10 Billion, a nonprofit organization focused on helping ag tech startups.
While some established firms are invested in the space, most of the growth stems from new firms being formed that are specifically focused on investing in technology related to agriculture.
“A lot of the established venture capitalists moved into clean tech and got burned so they are much more cautious, ironically, about moving into other new areas, whereas people are setting up entirely new firms just to focus on things like ag tech and health information technology and those sorts of new fields,” Matteucci said.
With a growing demand for higher protein diets in developing countries and the world’s population expected to reach nearly 10 billion people by 2050, there’s mounting pressure to rethink how the farming process works so that there is enough food to feed the masses without destroying the planet, Matteucci said.
“It’s not just population that is causing this, it’s also the increased wealth of a lot of highly populated countries,” he said. “In fact, that is actually a bigger factor than population growth. Diets … are changing in places like China and India and are demanding higher protein diets—they are demanding more meat and because of the calories conversion that is putting a lot more pressure on the food and ag system today.”
Meat consumption alone is expected to increase worldwide to more than 99 pounds per person in 2030 from 79 pounds in 1999, according to the USDA.
The boom in food consumption is driving investors to place bets on technologies that help farmers grow crops and livestock more efficiently and ecologically, Matteucci said. And one way startups are doing this is by applying different types of data to the farming equation.
New ways to do old business
While farmers are often perceived slow to adopt change, VCs are betting new technologies that provide useful data will be embraced more quickly by the industry.
“These are very, very smart people. A lot of people just think farmers are old, conservative, stodgy business people that operate the way their fathers and grandfathers do,” Komisar said. “But these are very sophisticated people who can use the data if they can get the data, but they haven’t been able to get the data before. So clearly we are seeing big demand.”
Farmer’s Edge Laboratories, one of the ag startups that Kleiner invested in, uses satellites and drones to monitor activity on fields and collect specific data to enable the farmer to better understand how to fertilize the land.
The Farmer’s Business Network, which was founded earlier this year by a partner at Kleiner, provides farmers with public data about land, and shares information between farmers on the network. Komisar said that in the five months the system has been around, it has seen huge demand.
“We now have over half a million acres under management, meaning we are getting data for half a million acres in just five months. That is beating our expectations. Farmers are lining up to get ahold of this data and these analytics,” he said.
Demand for software that helps farmers manage their crops and overall business is also on the rise. In the first half of 2014, venture and corporate equity firms participated in 16 deals for data and software for farm management, the most of any other category in the food and agriculture space.
Michigan-based startup FarmLogs, which is backed by Hyde Park Venture Partners, falls into this category. The company builds software that allows farmers to monitor crops, costs, revenue, weather and other factors of their business.
In the two years it’s been around, the company has already managed to gain customers in every state and has around $11 billion worth of crops under its management. FarmLogs also estimates that 15 percent of U.S. farms are using its services.
Barriers to a boom
Even though some ag tech startups are gaining traction, some risks still must be weighed, Matteucci cautioned.
Two big issues could halt growth in the space. First, there’s the challenge of getting highly qualified entrepreneurs involved. The second is having enough interest — and money — in the sector to support a high level of M&A activity, Matteucci said.
“In order to make a venture model work you have to have your big winners, your Googles that can IPO, but you have to have acquirers for those other companies that have really good technologies but for some reason don’t quite make it to the IPO level,” Matteucci said. “Until recently, the large ag companies have not been all that excited about mergers and acquisitions. I think that is changing now, but it still has a long way to go.”