“Legacy is a collective effort”: Why agtech must persist despite VC investor mismatch

An implied message at a special agtech and food security panel discussion at SOUTHSTART yesterday was that venture capital (VC) investors ought to do the same, or risk missing out on the enormous untapped potential that Australian innovators have in spades.

Amidst an often mutual lack of understanding between entrepreneurs and financiers, particularly with misaligned timeline expectations for returns, the agtech industry faces an uphill battle with funding down and many investors spooked by high-profile collapses such as US vertical farming group Bowery and French insect farming pioneer Ynsect. 

"The game is you have to increase your company’s value every 18 months to two years for a fund to believe that you're investable," said Goterra founder and CEO Olympia Yarger - a feat she claims is "incredibly hard" to achieve in Australia.

"We've got s*** tonnes of cash at the idea on a napkin stage, and nothing in the middle, and then suddenly a billion-dollar fund that wants to own you from the beginning to the end," she said.

"That’s the reason why none of Australia's successful agtech companies get to scale."

In the early days of Goterra, it was a struggle to explain the financial benefits of physical hardware in a world of venture capital so accustomed to decades of making money from "zeros and ones" in software. 

"I didn't understand how they're expected to get their returns, and I didn't understand how to tell the story of what we do in a way that made them believe that if they gave me $15 I would make them $1 in ARR (annualised recurring revenue)," she said.

"We have a disconnect between the funding source and the innovation source, and the two are not dating. They’re just sort of like flirting and not using the right emojis."

Yarger's company has raised $18 million since inception and has been on a roll with deals secured to turn insect waste into protein with partners including Woolworths, the Hyatt Regency and fish feed giant Skretting. But getting to this point has meant overcoming substantial financial hurdles in a capital-intensive sector.

"Debt wasn't possible by the time I realised I needed it; even if I'd gone earlier it wouldn’t have mattered because I didn’t have any contracts. By the time I got contracts, the amount of capital I had left in the bank was not sufficient to draw any debt. And so now you're in a circle."

Compounding the issue of financing challenges, Agri Digital co-founder and CEO Emma Weston emphasised agriculture customers did not generally have the capital to help build the products agtech companies were looking to sell.

"We don’t necessarily match the capital model as it currently exists," she said.

"When we were first raising capital, actually the word agtech did not exist so we did not even know how to describe ourselves, let alone be able to tell our story. We did not fit in a niche at all.

"Relying on ARR growth only is actually very, very difficult because proving value takes a while, and you burn a lot of goodwill on key participants as you're building that value."

Weston's company, which digitises the grain supply chain as a kind of enterprise resource planning (ERP) solution for farmers, brokers and traders, is involved in around 35-40 per cent of all grain grown in Australia. Agri Digital raised $25 million in 2022, but since then the leadership has held back from further external cash injections.

"One of the things that we have done recently in not raising capital is to buy our freedom of the capital model. That has short-term hurt our growth, but long-term given us optionality we think," Weston said.

"These decisions come at a price, but we had to be level-headed about that and actually run the company and prove that there are successful companies in this space that are worth investing sizable amounts in at all stages, not just at seed.

"The problem is not ‘Do we have enough agtech companies in Australia?’ The problem is we don’t have enough really successful agtech companies that have the capacity within their own product roadmaps and operational roadmaps to start building out the linkages," she said, with the caveat that this is by the current VC ecosystem's definitions of 'success'.

She also explained how Agri Digital went from making its name for conducting the world's first sale of grain on the blockchain to shifting its focus entirely.

"We didn’t think it was that momentous, and we were actually right. But everyone else thought it was momentous," she said.

"It propelled us as a company down a laneway that we were not prepared for – we were basically experimenting and thinking about the ways we could be streamlining the supply chain, and in particular payments and de-risking payments in the supply chain."

Over time however, amidst the height of the "mania" around blockchain, the Agri Digital founders realised that blockchain "was not going to be the way that these problems were going to be solved", at least not in the near term.

"We needed to stop doing what we were doing, and we needed to isolate it and put it into a different part of the business and eventually hive that off. 

"We did that, and that became a company called Geora which was recently bought by Agriprove."

From an early stage, Agri Digital has focused on enterprise customers, and is now focused on how to build more value for existing clientele. But another founder, John Fargher of Agriwebb, took this approach later in the piece.

"Our business model in Australia is very much direct to farm. Farmers try out our software, we bring our sales team in," said Fargher, whose company raised $11 million in May last year and is now used to manage a quarter of the country's livestock with 17,000 users across 28 markets worldwide.

"We have managed to scrap and kick and steal and punch our way through it here in Australia to get to where we are. This model’s pretty efficient, we bring on 60 or 70 new farmers a month, but that business model is not a globally scalable playbook.

"We've got experiences in multiple geographies trying this model and ultimately failing...now it's largely enterprise based, which is top-down value for everyone."

Like his fellow panelists, Fargher said venture capital as a funding instrument was "not aligned with timelines" or with how you can scale an agtech business. Whilst his company is technically backed by VCs, he clarified they were mostly 'family offices dressed up as VCs'.

"There are other instruments out there. And if you don't have to raise money, that's the best one," he said.

"In the early days when we started, there were a few tech companies that had gone out in this sector and hadn’t been successful because they were building tech in an ivory tower and saying ‘you should use this and it should be valuable to you’, and it just wasn’t.

"We very much took the product-market fit approach and got feedback on the ground. I would say that that's not a conversation that needs to be talked about - people have got it. If you haven’t got it, you should get it."

Despite the agtech sector's funding difficulties, green shoots are emerging. As noted by moderator Michael Macolino of Recode Ventures, new agtech-specific VCs have emerged in Australia such as Mandalay Ventures and Tenacious Ventures, while university research, accelerators and industry initiatives like the Hort Innovation-Artesian joint ventureare encouraging.

But the downside, he explained, was "a vast degree of dependency on government funding across the ecosystem".

"The challenge is the adoption of agritech has often been an incompatibility of business models between agritech and agriculture, with agritech companies often influenced by Silicon Valley startup strategies – it’s too often been 'technology push' rather than 'market pull'," Macolino said.

"Unicorns may continue to be elusive," he added, later extolling 'cockroaches', or scrappy businesses that survive no matter what. 

Yarger said agtech founders would have to "fight like hell" but it's worth the effort.

"Every single piece of agtech that's currently being innovated in Australia is contributing to accelerating and improving and innovating in our sector. Whatever you’re building is worthwhile, if only for the lessons learnt," she said.

"Just have the best time being part of literally what is going to be the coolest revolution in our food industry. This is a once-in-a-lifetime, once-in-a-generation thing that very few people would get to participate in."

"You may fail, that’s also OK. The IP that you create as an individual and the peers around you will go on to be your greatest asset," Fargher added.

"Legacy is a collective effort...it's not an individual thing. If we know that we're all in it together, people will be resilient," Weston concluded.