India's long watch for an Agtech Unicorn

India is home to 100+ unicorns with a total combined valuation of $333+ Billion. Due to this, recently, India Inc has been tossing in joy and swelling in pride, and why shouldn’t it? After all, boasting of 100 unicorns is not a regular affair. India is only the third ecosystem in the world to do so after the US and China. Also, many of these existing unicorns like Oyo, Zomato, Dream 11, Ola, Razorpay, CRED, Pine Labs, etc., are expected to enter the Decacorn club (privately held startups with a US$10 billion valuation or above) – indeed another sign of ecosystem maturity.?

Image source - Inc42

On top of that, the sectoral split is highly diversified for the 100+ Indian unicorns emerging from e-commerce, financial technology (FinTech), education technology, food delivery, and mobility. Unconventional sectors and sub-sectors too marked an entry into the unicorn club, including NBFCs, Conversational Messaging, Cryptocurrency Exchanges, D2C, Cloud Kitchens, and many others. Surely an indicator of the startup ecosystem’s maturity.

But amongst this exuberance, one critical industry is missing from the unicorn carnival.

Hint – Think of the hinterlands; think of the most resilient sector during COVID-19 - the only industry to clock positive growth. This sector is the largest employer or probably a disguised employer for most of India. Well, put yourself on the back if you got it right; the industry is – Agriculture.

Let me build a case for you. Let’s consider different sectors and what has happened to them in recent years.

E-Commerce >> Market size - ~75 billion (FY22P) and estimated to grow US$ 200 billion by FY26 >> No of Unicorns – 23.

Fintech >> Market size - $31 Bn (FY21) and is estimated to be ~$ 150 Bn by 2025; No of Unicorns – 21.

Media and Entertainment >> Market size- 28 billion (FY21), expected to touch US$ 100 billion by FY3 >> No of Unicorns – 7.

Agritech >> Potential market Size - 24.1 billion (FY21) which grow to a $30 billion-$35 billion market by FY25 >> No of Unicorns - 0 (Tapped ag-tech market opportunity 204 million by FY20)

Notice the last piece; the sector is measured in “potential market size”.?

Image source - Market sizing, EY analysis

An industry that should have unlocked its true potential by now but hasn’t. Let’s understand what’s stopping Ag-tech from realizing its true potential and whether there is a way out in the future.

Okay, let’s try to double-click on certain aspects to understand it better. So we are going to –

1. To analyze the reasons (systemic and non-systemic) in ag-tech space, curbing the value unlocking.
2. To understand the roles of different players in the ecosystem – their abilities and willingness to support disruption.
3. In which direction Ag-tech in India is likely to go in this decade?
4. In the future, what role key stakeholders such as Founders, VCs, governments, and Institutions should ideally play?

Now that we have the context, let’s dive into the analysis, shall we? First, let’s start with understating the most significant enabler of a startup ecosystem: The risk capital/Venture capital.

Venture Capital’s comfort zone – If you look closely at the largest ag-tech funding rounds, it becomes pretty evident that VCs still haven’t built confidence in investing in ag-tech niches with the potential to solve the biggest pain points. E.g., low productivity, farm mechanization, and farmer income. You may ask why I made such a counterintuitive statement. After all, VC dollars are one of the most informed sets of investment, scouting opportunities with the most significant potential value unlock.

Well, Let’s test it out. To understand this better, I would ask you to look at the top-funded ag-tech ventures in India and identify their sub-segments. The top five of them are listed here -?

In a first-order analysis, it is evident that the top-funded startups, barring Absolute, are solving either the Supply chain or market linkage problem. Absolute is a stealth mode startup that has just entered the ag-tech biggies list with its recent $100mn fundraise from Sequoia, Alpha Wave, and Tiger Global. Interestingly according to its latest financials, Absolute’s claims of being R&D first company are also under skepticism as its research and development for FY21 were a minuscule 1.4% of its revenue. The majority of its line, just like its peers, is driven by farm commodity trading.

In a nutshell, until now, VCs have primarily put their biggest bets on supply chain tech and output market linkage.

A 2020 EY report analyzing startup funding patterns also highlights the same. The top-funded startups are solving either the Supply chain or market linkage problem. Refer to the below-attached infographics from the same report.

More than 500 agritech start-ups are operating in India, out of which 57 start-ups in the segments addressed have raised total funding of US$532 million, with the “Supply chain tech and output market linkage” segment emerging as the top-funded segment. Indian start-ups in this segment have raised over US$301 million across 33 deals till date. - EY India

The report also contrasts the same with the global funding pattern (infographics attached below).

Due to heavy investments in technology in agri-tech around the world, the “Precision agriculture and farm management” segment leads the charge in terms of funding as well as the number of start-ups as contrasted with India, where “Supply chain tech and output market linkage” is the leading segment. - EY India

This pattern tells a lot about the venture capital ecosystem. First, the VC ecosystem (barring a few funds) is full of folks with no first-hand relationship with the agriculture sector; hence, the ag-tech investment has been second fiddle to most funds. And let’s face it; it would always be easier for a VC associate to analyze the business model of a car-rental venture operating in tier-1/2 cities than a tractor/ thrasher rental startup working in villages of Madhya Pradesh or Bihar.?

The same comes to play when VCs invest in Ag-tech as well. VCs have perfected their investment thesis for sectors that compose the urban/semi-urban diaspora. Regarding ag-tech investment, the supply chain tech or market discovery set is closest to the urban diaspora/markets. Thought It’s positive from the supply chain and output market linkage segment’s standpoint. But, at best, this segment can add a few percent increments to a farmer’s income and defiantly can’t solve the core issues in agriculture like productivity, mechanizations, etc.?

Indian ag-tech instead needs investment in niches that can unlock maximum value for farmers. It would leave the core user–framers with greater liquidity to adopt the next disruption inducing a positive feedback loop. (80:20 rule at play). Global ag-tech funding patterns make it even more evident (infographics – 5). Most income and high productivity exosystems have seen maximum funding volume and round in precision agriculture and quality management.

Venture Capital Lifecycle – A typical VC fund cycles range between 3-6/7 years. It means the fund has to give promised returns (by winning some disproportionate bets) to its institutional backers as it matures. If not, it becomes challenging for the VC firm to raise the second/third fund.

It makes VCs pressure startups to provide decent exit opportunities in this period. To provide a decent exit to the investors in the given period, the startups need to raise every 18-20 months. A company needs to double its size and customer base every year to keep itself attractive enough for the next series of VC funding. The gestation period for research in agritech is very long because of the nascency of the research ecosystem, which leaves most startups starting from scratch. It requires a mature research ecosystem to churn successive incremental cutting-edge tech. And risk capital, by nature, is not the most suitable for building this ecosystem. Due to these reasons, the subsequent and frequent fundraisers become difficult for the early-stage startups, leaving the VC model unfit for the R&D bases startups.

R&D is a niche where governments and public institutions traditionally thrive the best. Israel is a prime example of venture capital funding successful ventures over the baseline innovation promoted by government and research institutions.?

Non-existent institutional agri-research and Industry linkage – India is a peculiar agrarian economy; there are around 118 Mn farmers in India operating 145M+ land holdings. Of these 145 Mn+ land holdings, more than 85% are marginal and small holdings (i.e., <2 ha size), and only 0.5% are large holdings (i.e.,>10 ha size).?

This small land holding leads to poor unit economics for farmers. Unaffordability and impracticality of large framing equipment lead to mechanization for small farmers. It impacts farm productivity.?

And we are pretty bad in terms of farm productivity, have a look at the table below from a report from the reserve bank of Australia. The paper is a bit older, but as per most recent reports/articles, productivity stats still depict similar trends.

Despite this, India maintains global competitiveness due to cheap labor input. Conceptualization of low-cost tech at agriculture research institutions for small land holdings should have occurred to increase framers’ income and their global competitiveness. Licensing and production of the farm equipment could have given an edge on mechanization and global competitiveness.

An excellent example of agricultural research and industry collaboration is the development of high-yielding crop varieties in Indian research institutions. The industry capitalized on these varieties and made them accessible to farmers across the nation, giving India an initial boost in crop productivity. If a similar model had been followed for developing cost-effective localized tech, the Indian farm mechanization rate would have been much higher.

Misaligned incentives for the talent – Every sector has growth phases, but to time it correctly, an ecosystem needs few rights. A large enough market/customer pool willing to pay for the product survives, risk capital to fuel the opportunities, and perhaps the most important is talent/skilled workforce to implement it on the ground. Indian IT boom is a good example.

Monetary incentives are the most significant driver for an ecosystem to retain talent, and the sector is notoriously known for rough working conditions and low pay-outs.?

For proxy, ask an IIM Ahemdabad’s PGP-FABM or IIM Lucknow PGP – ABM program (the best agri-business programs in the country) student about the general willingness of students to build their careers in Agri management. Also, try finding reasons for students’ reluctance. Honest answers would point out harsh working conditions and nonlucrative Pay-outs. A similar analysis of top agricultural university graduates will reveal the ecosystem’s high churn of Agri talent.

It is starting to change slowly. With an uptick in investment activity in the past few years, many bright individuals have left their high-paying jobs, hoping to build products for rural India and make money.

Way Forward –?

After a long wait, things finally have started to take a turn for ag-tech space. The agri-tech and agri-ecosystem sectors have seen significant interest from the investor community over the past few years. As per a Bain & Company report titled “Indian Agriculture: Ripe for Disruption,” India already has become the third-largest nation in terms of funding received and startups in the agri-tech space.

The report predicts that - ?“Technological changes, capabilities, and investment on the anvil will fundamentally change the productivity and landscape of Indian agriculture. In fact, our estimates indicate that approximately $30 billion to $35 billion of value pool will be created in agri-logistics, offtake, and agri-input delivery by 2025.” – Bain & Co. (emphesis added)

Recent $100mn fundraising of the (stealth mode) plant biotech venture Absolute from Sequoia, Alpha Wave, and Tiger Global (despite skepticism on the level of its R&D maturity) is a positive sign for the overall ecosystem. Only three companies—Ninjacart, WayCool, and DeHaat—have raised bigger rounds in the agritech before this. The indicator of VCs’ interest in putting risk capital in R&D-first agritech startups that can deliver the most significant disruption in the space.?

Suggestions for stakeholders –?

1. Government –?The government probably has the most significant role in the equation. As explained, the promotion of ag-tech R&D has been an area where governments and public institutions have been most influential in building the base. The government should focus on increasing PhDs in Agriculture universities and promoting them to pick up projects for solving deep-rooted problems in the space. Government can replicate the industry-market linkage models adopted for seed breeding and production for problems in farm machination, precision agriculture, and ag-tech R&D. Govt. should also incentive startup building deep tech solutions for farmers with regulatory relaxation, tax incentives, and monetary rewards. Further, the government should also focus on increasing farmers’ in-hand income by increasing productivity to induce liquidity in the system. The induce liquidity, by extension, would give ag-tech startups a healthy push due to a farmer’s increased ability to try ag-tech solutions.
2. Venture Capital firms –?Tech has been an enabler for many sectors’ most rapid value creations, and agriculture will be no different. The VCs should start taking more aggressive bets in niches having maximum potential for disrupting the space, e.g., precision agriculture, sensor fusion, machine vision, and artificial intelligence models, to name a few. The opportunity in Indian Ag-tech is large enough; hence VCs can take it as a land grab opportunity. The best way to do it is by enabling deep agricultural tech. VCs can scout talent/founders with first-hand interaction with the space via family background, educational pedigree, or professional experience.
3. Founders/Entrepreneurs –?Entrepreneurs are required to build a whole new set of solutions by leveraging tech and local languages such as - Hindi/Hinglish/Regional and with low-friction native UIs. There are possibilities to figure out new engagement and monetization models for a farm and farmer.???

Now answer to the big question, i.e., when would India see its first Ag-tech unicorn??

Looking at all the tailwind signals, the top 3 best-funded start-ups are just one/two fundraise away from touching the unicorn valuation. If India’s ag-tech space grows to $30 - $35 billion in value pool by 2025, it has to produce its first unicorn in the next 12-15 months. Ninjacart, WayCool, or DeHaat would be the most likely contenders for this, followed up by Arya.ag , absolute, and Agrostar.

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P. S - The text attempts to understand recent trends and may not be an all-encompassing analysis for the ag-tech ecosystem. Thoughts welcomed, cheers!