Guest article: Separating the wheat from the chaff in agtech

Robert Appleby is founder and chief investment officer at Cibus Capital, a London-based private equity platform investing in food and agricultural.

The views expressed in this article are the author’s own and do not necessarily represent those of AgFunderNews.

Agriculture is an industry with 11,000 years of lessons and yet, it is still willing to be taught. As a farmer and an investor, that humility resonates with me. Even the best laid plans bow to nature’s whims and very few variables are “fixed” in that sense, demanding determination, grit and—importantly—a great deal of patience from anyone involved in farming, including the providers of private capital.

One example of where this principle was perhaps forgotten was in the recent repricing of agtech. After a period of relatively cheap capital, the inflation that set in from early-2022, shook up an ecosystem of investors, advisers, banks and non-traditional lenders that had come to expect quick cash returns on investment, fueled by evermore delusional stories of “revolutionizing” agriculture.

Because venture capital had been willing to fund capital-intensive business models in agtech with long, expensive J-curves, more agtech propositions sprouted at this time. This is a textbook case of “market euphoria”, the likes of which were first documented in agriculture during the “tulip mania” of the Dutch Golden Age. Businesses with little-to-no product-market fit emerged to absorb the capital waiting to enter into the sector, reinforcing hallmarks of a bubble, which was waiting to burst.

‘Agtech should solve real problems, encountered by real farmers’

Pundits in the agtech sector might rightly say that a reset has now occurred, with some companies that never solved for unit economics and remained dependent on round-led valuations having fallen away. Capital expecting quick ROI has also exited the frame. Agtech for these reasons is now looking more focused and at the very least more mature. The wheat cut from the chaff, which should intuitively mean the best, most investible businesses have survived this cull.

But what does a best, most investible business look like? When some investors got it wrong before, how do the investors that are still active in this sector get it right going forward? In my mind, this is a relatively simple part of the equation and a thesis that has never really changed: agtech should solve real problems encountered by real farmers.

In this capital rotation that is now under way, it follows that the successful investors will be those that know both the real problems, and identify the real farmers. This sounds deceptively simple, but in practice this is knowledge that is difficult to acquire, mandating that investors not only be deeply involved in the detail of the sector, but are capable of combining financial and operational expertise, to add genuine value to agtech businesses.

Provided investors are engaged and informed, rather than being on the sidelines of the businesses they are providing capital to, this new chapter in agtech has all the ingredients to be exceedingly fruitful. High-quality companies are now available at attractive entry points, with some additional resilience inherited from navigating a period of exceptional volatility, enhanced competition for resources and market hype. They are also generally under-capitalized, with a clear role for private capital going forwards.

Having had the privilege of being an investor in the food and agtech sectors for more than 30 years, and in those years a not-insignificant amount of time as a farmer too, the period immediately beyond the trough of the cycle is where the best opportunities are found. In this cycle, especially so. The marriage of thinner liquidity and more battle-hardened companies is a potent mix for potential outperformance.

Capitalizing in this context does mean being more scrutinous and not falling into the common pitfalls that tourists to this sector did pre-2022.  In particular, agtech was at that time conceived of as a single dimension of technology investing despite there being stark differences between agtech companies, as well as the challenges they were tackling and their respective subsectors.

Enabling tech

Assessing our own priorities, Cibus sees enabling technologies as increasingly compelling as other exogenous factors like the advent of “physical AI”, compress computing and other input costs to open up a previously unviable pool of new lost-cost solutions for farmers.

Within this bucket, robotics—a famously difficult to exploit category of technologies—begins to look commercially attractive, especially in high-value horticulture. Having been out pipped by low labor costs, the economies of scale in repetitive greenhouse tasks depend on a lower of cost of optics, sensors and computing power, all of which are decreasing dramatically with innovation in microchips.

In another segment of agtech, advancements in genetics are also creating more weather and disease-resistant varieties of popular agricultural products, such as fruit, supporting the case for adoption. In contrast to agtech pre-2022 that centered on “revolution”, this might be better explained as an “evolution”, creating marginal productivity gains for farmers that are seeking solutions to wastage in yield, cracking in transit and diminution of end-product grading, which influence their bottom line.

Put together and extending the analogy, the wheat has been cut from the chaff across more than the agtech businesses themselves. The capital base is more serious and more targeted, guided by unit economics and what is technically and practically possible, as opposed to the blue sky thinking and a “one-dimensionality” to agtech, that dominated investment flows and decision-making late-cycle.

Rebuilding trust

Rightfully, this means that agtech businesses that have survived this recalibration will be as discerning of the credentials of potential investors, as the investors who are keen to not be taken in by animal spirits. Legitimacy was lost to the broad brushstroke of fair-weather investors on one hand and poor business models on the other, meaning that a lot of trust needs to be rebuilt on both sides.

Now more than ever, however, investors who bring together financial acumen with operational know-how are well-positioned to lean in, to differentiate and to strike lasting partnerships with businesses advantaged by solid fundamentals. Real skin in the game exists for capital providers that see their role as being active, rather than passive, shareholders, improving companies together with management.

As an investor with long-term ambitions in agtech both from a private equity and a venture perspective, we want Cibus as a value proposition to mirror the determination, grit and patience, that we believe is central to success in this asset class and the variety of investible business opportunities. Staying the course, yes, but also setting standards for what good looks like in private capital’s potential to support the food and agtech industry.

In this vein, the current moderation of agtech makes it, in our view, a better candidate for a wider range of investment portfolios. Its repricing is an essential and unavoidable requirement for its sustainable growth over the long-term, providing the foundations for the truly cutting-edge, commercially viable agricultural technologies of the future, supported by a more sophisticated capital base that understands the journey this asset class is undertaking.

This new dawn in agtech is by-and-large bringing with it positive change, the type of which we founded Cibus to seize upon.

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