Venture capitalism can sometimes seem like a bunch of 20-somethings with fashionable facial hair, T-shirts, jeans and hot iPhone apps that hold the promise of a big payout.
Farmland, livestock and food crops, however, might be the last thing the investment sector makes you think of.
But Arama Kukutai, a New Zealand farmer’s son and a managing director of Finistere Ventures, a life science venture capital firm, will tell you that agriculture is one of the investing world’s best-kept secrets.
“Agriculture has become a hot area for investors interested in both a hedge against inflation in stagnant bond markets and a sector with fundamental attractiveness given the global, long-term demand for increases in food, energy and industrial outputs,” he says.
San Diego-based Finistere Ventures is raising a $150 million fund to invest in agricultural technology within the food, energy and sustainability sectors.
Much of the investment revolves around one simple fact: The world’s population is growing fast and agriculture is struggling to find ways to keep up with the rising demand for food.
“Our piece of the puzzle is figuring out what technologies are going to come along next that are going to add to agricultural productivity and what the world is going to need to feed itself,” says Kukutai.
Venture capital and agriculture have not been linked together in the past because few firms understood the sector well enough to recognize promising agriculture tech companies, he says.
But Finistere sees this rapidly changing. Both traditional corporate players such as Pioneer, Bayer and Monsanto and a new wave of start-ups are making significant efforts to develop new technologies. Venture-funded companies, meanwhile, are emerging as disruptive competition for old-guard corporate players. These businesses can also become attractive acquisition targets for large companies that need new products for their pipeline, helping early investors reap rewards on their investments.
“Exciting technology companies are cropping up in response to fundamental demands for [food],” says Kukutai.
These companies, for example, are developing biological solutions for pest and weed controls that replace toxic chemicals; new approaches to plant nutrition, animal health and welfare; and information technology for managing traceability, eliminating waste or managing data more effectively. Just as technology has transformed other industries, from hotel reservations to finance to medical record management, the technology developed at these firms is transforming agriculture.
“There are huge opportunities to be realized in this space,” says Kukutai. Finistere looks for early-stage investment opportunities that grow out of large-scale, governmental agricultural research. The U.S. alone spends close to $4.5 billion a year on agricultural research, funding land grant universities through the USDA, DOE and other agencies concerned with energy and food security, says Kukutai.
Finistere does not invest in companies that are doing new science; instead, it looks for those that have used public money to discover the science and are now figuring out ways to turn new technology into products. “We deliberately don’t take science risk,” says Kukutai.
The firm works domestically with researchers and research programs at places such as Texas A&M and Mississippi State. “Land grant universities have phenomenal track records in R&D, but have pretty poor track records at commercialization,” says Kukutai. “We put private money to work building companies and products, not doing science and discovery. That’s a big difference between us and, say, Cleantech, or us and pharmaceuticals. The money we put into a company in total to get a return is a fraction of what investors are putting into those companies.”
Besides offering capital, Finistere also helps start-ups find people to implement their strategic plans, says Kukutai. “We’re figuring out with the entrepreneurs how to craft the markets, technology, people and products together in a way that makes money for those companies and makes them attractive, whether for an IPO or an acquisition.”
The challenges and opportunities in agriculture are huge, according to Kukutai.
By 2050, it is estimated that 9 billion people will inhabit the Earth, requiring production of 80% more calories than are produced today. “This is an order of orders of magnitude challenge,” says Kukutai. “We’ll get there, but it’s not a layup.”
Experts estimate that food prices will continue to rise, with demand swelling because of increasing wealth in the emerging economies of nations such as China and India. The burgeoning middle class in emerging markets is also eating more protein as it develops a taste for Western-style diets rich in poultry and meat. This, in turn, will increase demand for cereals and grains as well as water and fertilizers to feed livestock, which is more expensive to bring to market, per calorie, than fruits and vegetables.
Much technology is focused on making agriculture more efficient to counter one of the biggest problems facing the world today—that at best, there is a month’s worth of fresh food at any given time, he says. “We’ve done a good job of industrializing food production, we’re able to store food, but we still need fresh food,” he says.
Increasing wealth will also mean a large increase in demand for energy—a big driver for affordable biofuels, green chemistry and biomaterials, all produced in a sustainable way that doesn’t prevent future generations from meeting their needs.
Devoting more land to agriculture isn’t the answer because most of the world’s farmland is already used up. “There’s not another Brazil waiting to be put into production,” he says.
Land will have to become more productive, and therein lies the opportunity. Kukutai notes that agricultural productivity generally improves at only about 2% a year, but the world is hitting a threshold where it needs to improve by more than that just to keep pace with the rising calorie demands. A technology that can boost productivity in corn or soybeans by, say, 5% is hugely valuable.
New technologies that make plants more drought resistant or new crops that can utilize low-quality farmland are all helping unlock more value. Take water management. Agriculture uses about 40% of the world’s water supply at any point in time, says Kukutai. Finistere looks for technologies that make plants more water efficient or ones that deploy antibiotics to increase drought and heat tolerance, taking dry, desert-like land and putting it into use by changing the types of plants that can grow there.
Experienced farm and agricultural operators know that the greatest opportunity to add both value and sustainability to their land comes when they change its use, Kukutai says. One example is the development of tropical soybeans, which originated in the temperate zone, for planting in Brazil. On his family’s large dairy farm, Kukutai was able to figure out how to intersperse low-level, low-intensity crops to feed cattle with oilseed trees that produced oil reserves for biofuels and increased the value of the land.
SGB, a California company in which Finistere has an investment, grows a plant called Jatropha on land that is too dry for food crops. The plant’s seeds are inedible but are used to produce a high-quality biodiesel fuel. Moreover, the fuel-extraction process creates a residual cake that can be used as biomass feedstock to power electricity plants or as biogas or high-quality organic fertilizer. “It’s a way of turning dry, low-quality land into oil production fields. This is making land more valuable and making valuable things on it,” he says.
A New Silicon Valley?
Kukutai believes agricultural technology is building up into something that will garner the attention of investors worldwide over the next couple of years.
“There’s a Silicon Valley moment that’s going to happen here,” says Kukutai. “When investors say they don’t understand agriculture, I say, you understand the fiscal cliff. Well, this is the calorie cliff. This one’s real—we didn’t make this one up.”
Investment managers are catching on as well, says Kukutai. The majority of investors in Finistere’s new fund are family offices, which he says view the sector as both a moneymaking proposition and an opportunity to do good—so-called impact investing.
“In most long-term or legacy wealth holders’ equation, owning real estate has always been part of the portfolio mix, and this is another form of real estate,” he says. “It’s not only to hedge against inflation. When you understand what’s going on with food production and demand, there’s also the recognition that this is inherently an area where if you invest, it’s for the good of the planet.”
Finistere welcomes strategic corporate investors into its new fund, says Kukutai, because they can help figure out how to accelerate a new company’s technology progress. They bring their immense technical capabilities to bear, which would be far too expensive for a start-up to replicate. In return, they get a strategic benefit from getting a first look at new technologies.
Finistere’s investments range from seed capital of $1 million to help develop early-stage concepts to as much as $10 million. It may invest alongside a strategic corporate investor or another venture group. Family offices invest both in the fund and sometimes directly in a company, says Kukutai.
Agricultural technology is a different way to think about investing in one of the more fundamental industries in the world, says Kukutai, adding, half jokingly, “Agriculture is becoming the breakout sector—5,000 years in the making.”