Agriculture is the next big thing in Silicon Valley. While, traditionally, a small group of familiar faces have led the charge, the community of people excited about innovation in ag & food is growing -- AgFunder’s latest publication reported that $2.64 billion was invested in Ag & Food tech in 2014.
We are excited about agriculture as well. Over the last few months, we’ve seen and met with a plethora of companies – many of which will become solid businesses. However, we start to wonder: what are the billion-dollar companies that can be built in this space?
Two questions come to mind when we think about successful venture-backed businesses -- how big can they get and how quickly can they get there? We have seen plenty of examples of scalable businesses in the consumer and enterprise worlds, which are now benefitting from existing IT infrastructure and strong distribution platforms that allow IT products to scale faster than ever before. However, finding scalable opportunities within the agriculture and food world is less straightforward.
So, how big can you get? -- In the US, there are over 2.1 million farms covering over 900 million acres of farmland (2), and because of farm diversity in size, crops, and systems, no startup can create “one-size-fits-all” products. For instance, entrepreneurs will need to pick between going after a small number of acres with a high-margin, premium product (e.g., specialty crop market) and going after a large number of acres with a low-margin product (e.g., commodity crop market).
There are two ways to drive and capture value in agriculture: improve yield or reduce production costs. Although we see fairly high percentages of theoretical potential yield being met, the average corn farmer yields 173 bushels per acre while the winner of the National Corn Yield Contest in 2014 produced 503 (3). Better traits, better soil treatments, better seed treatments -- all of these present a gold mine of potential. The other way to capture value is to reduce costs. Input costs represent as much as 40% of a corn farmer’s total cost to produce (4). The industry has not implemented ways to distribute inputs precisely, efficiently, and effectively. Precision irrigation, fertigation, and weeding are all interesting ways to capture this market.
And, how do you scale quickly? -- Unlike industries such as IT, e-commerce, and transportation, viral growth in agriculture may be difficult to achieve, especially because of the lack of a digital distribution platform. However, we believe new sensor systems and software plays can become the new distribution platform for agriculture. “Hacking this” requires three things:
1. Having a great product -- a great product is one that provides an end-to-end solution for a grower, gets to ROI quickly, and shows consistent value. These products will address the acute needs of farmers (e.g., manual labor shortages, input spend, etc.)
2. Building on existing channels -- leveraging existing distributors or evangelizing your product through key opinion leaders or trade associations will allow for quicker growth. Solutions need to take advantage of pre-existing infrastructure.
3. Reducing barriers to adoption -- lowering the adoption barriers requires that products are easy to use (farmers have varied process flows and IT infrastructure), integrate well with existing workflows and decision-making timelines, and limit upfront investment costs for farmers.
And so, what does this mean for us? -- We are excited about the “Google of Agriculture” -- the winner who collects, aggregates, and structures all of the agriculture data and acts on it. It will be an incredibly valuable platform for developing new solutions or services. We are also excited about the end-to-end solution provider that will become a new distribution platform on which others can build. Not only will these platforms be billion-dollar businesses, they will open the door for future large, successful businesses to be built.
Despite the initial hurdles and challenges within the industry, we are confident that the intersection of new data collection capabilities (e.g., sensors, imagery, equipment data, etc.) and smarter analytics will enable agriculture to become digital. This movement will create greater transparency across the value chain, enable smarter data-driven decision-making, and lay the foundation for the adoption of new technologies that will shift the agricultural landscape. We can’t wait to see this transition and what lies ahead.
-Dror & Sam
- AgTech Investing Report: Year in Review 2014, AgFunder, March 2015
- U.S. Farms and Farmers: Preliminary Report & Highlights, USDA Census of Agriculture, February 2014
- 2014 National Winners of the National Corn Yield Contest, National Corn Growers Association, December 2014
- Estimated Cost of Crop Production in Iowa – 2015, Ag Decision Maker, Iowa State Extension Program, January 2015