This is the fifth in a series of interviews with deep tech investors, taking the temperature of their particular fields at the start of 2019, and reflecting on the year gone by. The first four installments dived into quantum computing, space, biotech and AI.
What does 2019 hold for the agtech sector? This was my question to Richard Smith, Managing Partner at Earth Capital UK, who looks at the fields of agriculture and energy through a sustainability lens. Richard is a mentor for the SME Leaders Programme at the Royal Academy of Engineering’s Enterprise Hub, is a Chartered Engineer, and has a background in industrial management, private equity transactions and financial advisory services.
Richard and I chat about the size of the opportunity in the agtech sector, how resource management goes much further than simply optimizing the farm, and dive into the companies and investment trends Richard is most closely keeping an eye on.
GM: So Richard, can you start by giving me a quick overview of Earth Capital Partners, and what you’re up to?
RS: I’m working in Earth Capital UK, focused on U.K. sustainability tech. And that’s covering a range of different themes in resource efficiency, pulling in water, agriculture, materials, and energy. And these are enabling technologies for large businesses. We’re looking to invest in young growth companies with a B2B-type product that will really have an impact somewhere in the industrial space. We’ve also got a team in Barcelona covering continental European technology, particularly in the Spanish and German areas, and we have businesses between Singapore and Nairobi. That’s a much larger actually – it has three funds running including clean power across Sub-Saharan Africa and South East Asia. They’re doing things like geothermal in Ethiopia, hydro in Uganda, biomass in Ghana, wind and landfill gas in the Philippines, and hydro and related things. And we offer some green power and baseload clean power in places where the grid is not strong today. We have a small team in Beijing, so a nascent operation there, who are quite focused on agriculture, so they’re working with a number of Chinese state authorities. China has a desperate need in terms of water and technology to improve their agriculture efficiency. We have small teams growing in Brazil, in Sao Paolo, and on the East Coast of the US. In terms of sustainability and impact investment, in addition to the normal financial reports, we report regularly to our investors using a proprietary tool called the Earth Dividend which assesses each company across 30 different tests on a wide range of ESG and sustainable development areas.
GM: Yeah, that is super broad, which is good because I feel in order to get the full picture with agtech, you need to understand various nuances across resources in general. So thinking about agtech, how would you divvy up the ecosystem into a map?
RS: It’s pretty broad. On one hand, you have the sensing and physical technology side – so stuff ‘on the ground’ on the farm. We see a lot of companies in data and precision agriculture in a whole range of different ways. Farm science is the other broad area which gets a fair amount of time, as that’s the one we tend to gravitate towards ourselves.
One other area I see a lot of activity is indoor farming. There’s a large number of U.S. and European companies really trying there. Overall, the money’s always in America. There’s a certain amount of money in Europe and good growth there, but overall, the U.S. is still 10 times the size of Europe, relatively speaking. So while Europe is growing strongly, it is being driven by the U.S. firms looking to support millennials and millennial food preferences. There’s a borderline between agtech and food tech, and people having more personal choice. One thing we all like to think about is actually not so much supporting that ‘California view of the world’, but what is happening in the larger volume end in Africa and Asia, and technologies more relevant for those markets. It aligns more with the ethos of the firm.
The other area we’ve been seeing a lot in lately is fintech for agtech. So you’ll see Blockchain and distributed ledger-type technologies that are specifically focused on those supply chains. We see large businesses looking at supply chain and DLT for both the developed and developing markets, but there are also some other people doing more of an intermediation play with the blockchain – there are interesting experiments going on with small communities in African countries, trying to enable them to sell their produce more directly, bypassing the power plays that happen around that. Ultimately the power of the supply chain exists very much closer to the rich consumers, and it dwindles as you get closer to some of the poorer growers. In the U.K., there’s a small team called AgriLedger that’s somewhat philanthropically funded right now. They are working on blockchain technology specifically to do that, and they’ve got trials running in some areas in Africa, just really to see how that can work in the practical sense.
Another area is in labor and automation. Some regions tend toward automation given high labor costs. This has included Europe historically and more recently also the U.S. Less so the priority in Africa, at least right now, where relatively-speaking other factors are more likely to be the constraints to growth, such as availability of capital for new tech at those local levels, which is needed not just for the tech itself but often those proof-of-concept deployments, as they can often be easier to achieve closer to developed markets. It’s why you’re seeing some enlightened family groups developing farms in Africa and Asia and deploying and testing as a deliberate policy.
Finally, soil is an interesting area. We’re all living on borrowed time with soils given long term depletion, erosion and climatic changes. Soil enrichment within the broader topic of biostimulants is a necessary area in addition to ‘more radical’ concepts such as vertical farming and hydroponics.
GM: So two things I want to dive in a little bit that you mentioned because I think this is a bigger conversation when it comes to agriculture and industry: this idea of undervalued innovation versus “what’s happening in Silicon Valley”. I think a lot of it depends on how you define the reason behind innovation. If it’s about satisfying consumer preferences in a first world market, then, of course, you can look at what Silicon Valley is doing, and it makes total sense. But if you’re looking at sustainability or feeding the world, then it doesn’t – at least not directly.
RS: Let’s look at volume in protein, for example, there are people experimenting all over the world with various forms of non-meat protein, or non-cattle protein, whether that’s fish-based or insect-based. This is really new, really different, and has the potential to make a difference. It may not be that it’s going to be the answer everywhere, but in certain parts of the world where there’s enough water, it could be very interesting. Water is always a key theme of all these things: you want more protein, you need water for more animals. That puts extra stress on the system. So something we’re seeing growing initially quickly in developed markets, but I think we’ll see more of it elsewhere, is that the indoor farming trend has received a lot of investment. You’ve got Infarm in Germany and likes of AeroFarms. The rationale for those, generally speaking, is around needing less water in terms of the full life cycle of the food. There’s a $40 million project happening in Dubai now for vertical farming, again it’s because of the water, but that’s really providing food not so much with and for the local community, but instead in partnership with airlines, to supply high-quality food for them. But starting projects of that scale in that part of the world means there will surely be more. I know our Chinese team is talking about a different range of greenhouse and water-saving technologies, and vertical farming technologies. One of our own companies is in water treatment – a Manchester-based spinout called Arvia. And in the context of agriculture, some of the U.K. water utilities are using it because of groundwater pollution. So you’ve got agriculture runoff, where metaldehyde and nasty things that get in the soil, which the water company now needs to get rid off before feeding into the global population. There’s a number of ways we’re investing in water, even into water toilets and so on, but that’s further away from agtech.
GM: In terms of 2019, what are you looking forward to, or keeping your eye on, which might be pivotal in terms of affecting this market?
RS: There’s not really any specific. Part of the reason for that is, as we think about the farm and crop-based kind of activities, part of the issue is that it’s a very long cycle. You’re not going to see results of anything for quite a long time. You could look at your data analytics, but you do come back to the fact that at some point someone has to actually go and test it in the field. It only rains once or twice a year what chance have you got? You might accelerate it in smart ways, but it is a sector that does require patient capital at those early stages. For other sectors, particularly consumer sectors, the feedback is a lot faster. There are just physical realities that will happen around agriculture that are different.
GM: What about things that were big maybe five to ten years ago that are now coming into fruition?
RS: The whole area of vertical farming, hydroponics and city-based farming is probably one that is front of mind. I think with indoor farming, we’ll continue to see more investment. But the other thing I expect to see more of is increasing proof of what’s happening in genetics, in a good way. There are various forms of genetics and analytics, which aren’t necessarily GMO, but they’re just ways of improving yield – selective breeding for example. And talking to universities in the U.K. in the past few months, there are a number of initiatives I expect to see come through in 2019. Seeing collaborations and spinouts from those who are starting to commercialize deeper their more biotech- and agtech-type technologies in a way that hasn’t really been seen before. The other topic that is coming more front in mind is the whole issue of food waste. And that expresses itself in developing economies. A lot of the food is still being grown in developing economies, and there’s a lot of plastic waste throughout the supply chain. We’re going to see more focus on that big issue. The public are becoming more aware of it, and they want to, and expect to, see action from the companies they buy from in the stores.
Thinking about 2019, and it’s not just about agtech here, but there is a bit of wall in the markets, and a lot of global liquidity issues, partly around U.K. and European politics. There’s just a race on the availability of cash. And for some of these young companies, in an industry which is highly seasonal in many parts of the value chain, what impact is that lack of cash going to have? There’s a risk in some of the sectors in agtech that are a bit more susceptible to some of the cash flow constraints, but that’s something I’m quite worried about. As a sector, it’s more immature than what you see in terms of consumer or energy sectors. There are only a few big deals, there’s less money-chasing overall in agtech. There’s a fair amount of consolidation in the agriculture sector overall, but it’s not like you register a company’s IPO every week. For people like me, part of the question is: if the sector is growing well, how do you sell, once you’re in? What is the exit story here, who’s actually going to buy this company? I think in this sector, it’s not that it can’t happen, but there needs to be careful thought – you might have to be creative in your thinking, looking at maybe people outside the agtech sector that might be interested, for example, in agricultural data.
GM: Thinking about startups in Europe, what are some of the companies out there you think are exciting in the agtech space?
RS: We’re a regulated entity, so naturally I’m not giving advice. Some young U.K. companies indicative of areas we’re looking at include Entocycle – they’re doing high-efficiency farming of insects for protein, targeted at using food waste to generate protein using very little water. There’s DryGro who are doing plant-based low-water protein source using Lemna (duckweed) and are running trials in Kenya. I mentioned AgriLedger – using distributed ledger technology to reorient agricultural supply chains, reduce waste and give small farmers in emerging economies a fairer deal. And there’s Roslin Technologies, an Edinburgh-based commercial arm of the famous Roslin Institute, developing a range of technologies including gene sequencing, biobanking, and bioinformatics.