AgriTech Investing 101
Aditya Nataraja
Venture capital | Impact investment | Philanthropy | Incubation
I am often asked a question by many fellow investors and others about where to invest into AgriTech in India. These are investors who are investing across the spectrum (sector agnostic approach). The summary of their findings about the sector is as follows:
One of the approaches I use whenever I face a problem that seemingly has no easily visible solution, is to approach the entire situation from a first-principles approach. So, let's get going then...
What is Agritech?
The systematic use of technology to solve problems in agriculture sector.
Breaking this definition up to demystify the jargon: What are the problems that one can solve in the Indian Agri sector?
Problems are many. If you ask someone who has been in the sector for years, they will answer this question with "where do we begin?". This brings us to the classic market assessment conundrum of a village full of villagers with bare feet. Do you see them as a market for selling footwear? Or do you consider them as so used to being barefoot that they won't buy any footwear?
To understand the problems of the sector, we need to understand who are the people involved in the sector and what is the structure in which they are stacked up (value chains).
All of us know that the farmer is the one who carries out agriculture as an activity. Agriculture again is a superset of many activities like (brace yourself):
ground work, de-weeding, levelling, input purchase, irrigation/ land wetting, sowing, input deployment, constant monitoring, de-weeding, insecticide spraying, harvesting, post-harvest at farm processing (if any), bagging, weighing, hiring a vehicle, loading, finding the nearest market with the best pricing, going to the market, haggling with the traders there in an auction, spending a day or two at the market waiting for the best price, selling, realization of income (usually in cash).
In all of this there are two activities that the farmer is constantly at 24/7. Arranging funds and finding labour to work with.
Let's not forget the tending to livestock (sheep, goats, cows, buffaloes, hens, roosters, etc.) that usually tend to double up as insurance or provide funds for a function at home as you must have gathered that the so-called "agriculture" we defined above doesn't provide the household with a steady cash flow. I think I have made my point that Agriculture is a lot of work. A farmer is also being an entrepreneur while managing this entire process.
And that brings me to my first problem of the sector: The farmer is running a loss-making venture.
The income realized doesn't cover for the costs on a running basis.
A side-story here: Usually, there is the presence of a local informal credit provider who is standing at the doorstep when the farmer returns from the mandi post-selling the produce. The interest rates at which they would have borrowed are in the range of 24% or above. If you are in the field you will hear terms in local language which mean Rs. 2. Which means the farmer has to pay Rs. 2 per every Rs. 100 they borrow each month. By the end of one year, the amount repayable is Rs. 124. I am not even talking about the collateral that has been taken here.
Some numbers for the statisticians in you:
~80% of our farmers are small and marginal i.e. they cultivate on less than 5 acres of land. There are an overall 15 Cr to 17 Cr farmers in the country. On an average, you may assume roughly 9 Cr to 10 Cr farmers are active in any given season.
Around 12 Cr to 14 Cr are small and marginal farmers. Out of which active small and marginal farmers in any of the two major seasons would be around 7 Cr to 8 Cr farmers.
The connected problem to a financially unsustainable venture is that the next generation is not willing to continue farming.
That brings me to the second problem: dwindling number of farmers
New farmers are not entering agriculture at the same rate as which farmers are exiting farming.
The value chains are broken. The mandis, interface of the market to the farmer, are largely informal in operating style and the majority of the value there is taken away by the traders. The regulated (APMC) markets are in a dilapidated condition with poor infrastructure. Thus, the farmers go to the traders with cash-in-hand and who can purchase in bulk and pay instantly. APMC has failed the farmers.
Third problem: broken value chains.
Finally, the farmer needs access to formal credit. Farm loan waivers don't benefit the majority of the farmers. Like we have discussed 80% are small and marginal. They don't have the required collateral to take credit from the formal system in the first place. So, the farm loan waivers are either mainly helping the large farmers (who don't need it) or they are going into someone's pockets (you know who they are). We need a new system that will either include them in the existing credit system that we have or will build an alternative system that will provide the farmers with reasonable credit at non-shark rates.
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Fourth problem: Availability of credit with market terms that is recognized by the formal credit system
A basic problem we have noticed due to the lack of inter-generational handover of farming as an activity is the loss of traditional knowledge. Which crop to grow? What is the inter-cropping system? Which input to use? When to water the land? so on and so forth. Knowledge is getting lost.
Fifth problem: Knowledge of farming is gradually getting lost.
There are more problems that we can go on about. But these are the five key problems we have. Every other problem emerges from some part of these problems.
Summarizing what Agritech is: Systematic use of technology to solve the five key problems in the agricultural sector. The five key problems are:
Agritech Investing
So, what is Agritech investing? Investing into technology companies that are solving the problems in agriculture. We have just identified the key problems in agriculture. How do we evaluate the solutions that are being proposed for investment?
Again let's take a first-principles approach here as well. One of the things that should be considered is the following:
Is the company solving any aspect of the key problems of the sector?
If yes, look deeper. Evaluate this by carefully looking at the value proposition the company is proposing. For example, many companies are claiming to build full-stack solutions which include everything you can think of. Simplistically framing it, they will claim to provide help to the farmers in farming, farm monitoring, buying the output from the farm gate, selling to the buyer directly - thus providing farmers a better price and enabling the buyers get quality produce by monitoring the entire chain themselves.
Examine these claims closely. Some full-stack companies are taking over existing distributors/ retailers in villages, putting their brand boards on top of the shop's board and counting those numbers among their GMV numbers (inputs, etc.). They do this because their valuation is connected to GMV. It is, however, not adding any considerable change in the experience of the farmer. So, from an impact perspective and a value perspective zero is added.
The only way of figuring this out is by going to the field and checking how the operations flow. The knowledge in the conversations with the field personnel will most times end up convincing you of the experience. Independently interacting with the farmers in the local villages the company has operations in will help establish the genuity of the claims. Nothing in agritech can be concluded by sitting in airconditioned rooms and/or over zoom calls. I am tempted to extend this last piece to any sector actually. But that's just me.
How integrated is the farmer/ stakeholder into the technology being used?
The company has built a technology to solve a problem. Could be an app or a web application. Who is the primary stakeholder of this app? If we want to take the same example of full-stack solution here, then the buyers, the farmers, logistics service providers (if the company is providing itself or has a local tie-up), etc. should all be using the app. This rarely happens. However, you can observe that the company is closely orchestrating the entire transaction outside of technology. Probably, the transaction is entering the tech realm after a lag time. Again, that is fine because the sector is at a nascent phase. However, everyone is moving in this direction.
Just assume where we were in the early days of Flipkart and Amazon in India. Not many people could predict the change in the consumer behaviour. Today, even cars are being purchased online! Agriculture sector is on that spectrum somewhere. Covid-19 pandemic provided a massive push in that direction. However, we are still moving in that direction. So, to expect companies to have all transactions live on their tech platform/ app is slightly unrealistic. But they will be somewhere on the path in that direction.
Again, the way to verify this is to see how well are they (full stack companies are our example here, remember!) doing in their previous quarter and how much of that data on tech matches with the on-the-ground interviews you are having with the farmers and other stakeholders. Stay patient. The sector itself has to move on this. However, if you have found a company that has everything live on their platform, you are onto something!
But hey, many companies are doing this. Which one to invest into?
Agritech sector is nascent in its growth. Did I say this already? Well, because that's the truth. No single company has solved any single problem they have picked. If you study the companies that are of decent size today, you will notice that they started working on one problem, but then realized that the problem is connected with some other problem. So, they have ended up being full-stack companies by just following the track of problems to be solved.
The one method I use to evaluate tech companies in Agri space is to see how well is their technology providing them a moat against the other players. How difficult is it to replicate the technology they have built? What's the differentiation in the technology stack they have built? Understanding their technology at an architecture level becomes important than evaluating how efficient their code is. Is it modular? Is it ready for the next near-change that we expect the technology world to open up to? How keyed in are they into the tech world?
Who are the big customers they have been able to sell to? This is an important proxy indicator because this helps validate the value of their technology. Large enterprises typically have people who have seen and influenced the old economy style of operation. And have a healthy skepticism towards technology solutions. When we talk to the key people at the large enterprises, we begin to understand how well the company under consideration has been able to understand their needs and tailor the solution.
Even here, many companies have achieved this in parallel. My prediction for the Agritech sector is that over the next 3-4 years we will see intense M&A activity. Here the companies with value will be either acquired or will end up acquiring other companies. So, check carefully if there are any other big players in the same regions that your company is operating. I suspect companies will go for two things: mutually exclusive geographies covered and/or a differentiated scalable inbuilt layer of technology that they don't have.
Overall, I have tried to simplify Agritech investing. It might appear to be too simple for some. However, it helps those who are looking at this sector for investing.
Please let me know what you think in the comments below.
Thank you for reading!
Investment Director @ Caspian | Rural Management Expert
2 年Insightful, but I'm still confused. Where do I invest?
Delloite//Ex KPMG // Government Advisory// G&PS// Ex- AgriWatch
2 年Rajesh Patidar
Founder at agribond & Trycone | Identifying key market opportunities
2 年Very true
Founder & Director, InDhan Impact Financial Services Private Limited
2 年Nice thoughts. But, just a different perspective.? Some of the problems you highlighted indeed are great solutions. Mere ~16% GDP & over 45% workforce!! We need more produce per farm and not necessarily more farmers. Next gen into Ag means further fragmentation, making things even worse.? Broken value chains! Many tried bypassing traders. How many made difference to farmer? Pls don’t forget to add attendant costs in the exercise? Finally, many had to rely on the same traders. We should appreciate, there is something unique in their engagement fabric with farmer and the market. Expensive credit? Isn’t pricing linked to risks underlying? Embedded finance layered by input dealers/traders in the transaction is far more superior in terms of flexibility, convenience, and timely access than any formal financial institution can imagine. When tons of variables can potentially risk your principal, interest rate should be seen more contextual.? Traditional knowledge getting lost! That knowledge you meant is not existing anymore for it to get extinct. For decades there has been increased usage of synthetic chem & fertilizers, and this current generation only made it progressively worse. Instead, there is need to unlearn and relearn.
AgMart - Agri Market App
2 年Their is one more reason that make farming a loss making venture. i.e Time Value Depreciation(TVD). - Farm produce like fruits and vegetables being perishable, they keep loosing their value once they are harvested. When asset keeps loosing it's value, its natural that it deprive bargaining power of sellers & make markets unduly favorable to buyers. - In case of non-perishables too, asset value keeps depreciating but the slope of depreciation is less steepy. Hence most of the farmers prefer to grow non-perishables, which again leads to the problem of plenty & drives down prices. If we understand farming thoroughly, it's easy to understand how time plays important role in both sides of production & marketing. For farmers, TVD deprive their bargaining power & lesser sprice realisation. But from marketing point of view, this problem demands supply chain to be more faster & make our business operations race against time. Solution: For a problem which is due to Time, it's solution should also have to be Time. A practical & cheap digital solution that we are developing for this problem is 'Harvesting Calender' & 'Mandi arrival timetable', which will solve the problem for every stakeholder.