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Why leading VCs are rethinking their food investments

Funding for innovation in food and agriculture systems is due for a reality check after years of startup overvaluation.


Image via Shutterstock/Jantsarik

In his keynote presentation at VERGE 23, Shayle Kann, a partner at Energy Impact Partners, described climate tech investing as a wave: Either you are building a wave or you are riding one. Over the last five years, the secluded surf spot known only to agrifood specialist investors was overrun with generalist venture capitalists looking to catch the next big wave. 

But then the macroeconomic tides shifted — 85 food and beverage companies filed for bankruptcy in the U.S. in the first half of 2023 — and venture capitalists got spooked. 

Total investment in agrifood tech dropped by 44 percent from 2021 to 2022. Overall, funding for decarbonizing the food system remains embarrassingly low: Only 10 percent of venture capital in agrifood technology, around $2.3 billion, went toward climate solutions from 2019 to 2020.

Meanwhile, governments’ investments in agriculture and food continue to be misguided by antiquated policies born in the 20th century that don’t match the food system decarbonization challenge:

  • 90 percent of agricultural subsidies in the world harm the climate, nature and human health, according to the U.N. Food and Agriculture Organization. 
  • Only 5 percent of climate funding from the Inflation Reduction Act in the U.S. will go toward food and agriculture decarbonization. 
  • A mere 3 percent of government support for the agricultural sector in Organization for Economic Cooperation and Development countries goes toward innovation

Here is a rundown of the challenges in venture funding for food systems and the new strategies some companies are developing to better align funding structures with the realities of agrifood technology. 

The upside of tightening investment

Tighter venture funding is not great for entrepreneurs looking to raise money, but at a systems level it is not all bad news. Many fundraising rounds for agrifood startups were highly overvalued, which often led to nice headlines but not resilient business models. 

Startups and their investors are forced to have tough conversations, leading to lower, more realistic valuations based on the characteristics of the agrifood innovation ecosystem. Founding teams are being forced to focus on building strong fundamentals, understanding their solutions’ economics and setting a clear path to profitability instead of obsessing about the next round of venture funding. 

Rachel Konrad, chief brand officer at The Production Board, said at VERGE 23 that most agrifood technology companies are no longer venture-backable, and there will never be a return to the 2018-2021 boom. The short-term rush of money into agrifood tech we have just witnessed may lead to a long-term drought of capital when we can least afford it. 

Viewed in a positive light, though, this could be a "What doesn’t kill you makes you stronger" moment for private investment in decarbonizing food systems. It creates potential deals for corporate venture capital teams looking to advance their sustainability initiatives through strategic partnerships and acquisitions. 

Reality-based models 

So how are funders showing up differently to match this new market? 

As Connie Bowen, co-founder of Farmhand Ventures, put it: "Unicorn farms aren’t real, and money does not grow on trees." With venture capital investors experiencing a reality check over the last two years, some — such as Bowen — are looking beyond pure equity investments to more innovative structures that match the realities of building successful and resilient agrifood startups. 

At a VERGE 23 tutorial about agrifood innovation, Bowen and Indre Altman from S2G Ventures shared examples of how they are investing in alignment with food system realities instead of trying to copy the investment model built around technology and software-as-a-service models with minimal marginal costs. 

Here are four key realities they’re incorporating:

  • Agtech and food tech have longer maturation timelines. Farmers only have one harvest per field per year, so they hesitate to implement changes, given the potential risks. 
  • The development of impactful solutions is slow, given the time between testing an iteration and seeing the outcome. 
  • Agtech and food tech are frequently asset-heavy, so costs remain constant even at scale and involve significant upfront capital investments. 
  • "Farms are like snowflakes," as Bowen put it. Innovative solutions must be contextualized to specific crops, climates, soil types and market conditions. This means they will never experience viral growth through broad application. 

Bowen’s Farmhand Ventures uses redeemable equity to invest in agricultural technology. Redeemable equity, which starts out as a traditional equity investment but allows the business to buy back most of its equity stake with its revenue over time, is not a common investment structure in Silicon Valley, but it is well-suited for the food system. 

The structure allows startups to grow more slowly — aligned to the realities of agriculture. It also reduces the pressure for exiting via acquisitions by large corporations. When founders don’t have to focus on building a company to exit it, they can instead focus on building solutions that work well for their target customers.  

In short, Silicon Valley-style venture capital is not the right mechanism to unlock the levels of investment needed to decarbonize the food system. And while some private investors are starting to showcase new models, governments will certainly need to step up to lead the charge. With over $470 billion in climate-adverse agricultural subsidies worldwide, capital is certainly available to put toward these urgently needed solutions. 

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