Valor's Take on AgTech and our Recent Investment in Agrolend

Valor is going into its fourth investment in the agriculture space, an industry that we started to invest in 2020. As per the following rationale, suffice to say that our level of excitement with the space is huge. So far, it has translated into three investments in Brazil (Gaivota, Agrolend and *undisclosed*), and one in the U.S (PatternAg). We look forward to continuing to meet the trailblazers of agriculture!???

Brazil provides a fertile ground for innovation in ag?

The imminence of finding new ways to produce and distribute food is propelling a lot of innovation in the agricultural value chain. A good part of that innovation comes out of Brazil. This is quite natural, because Brazil, with its 5+ million farms, is considered to be the farm of the world. The country is the world’s leading producer of coffee, sugarcane, orange, and soybeans, the second largest beef producer, and third and fourth largest in corn and cotton. According to FAO (Food and Agriculture Organization), Brazil alone is expected to contribute 40% of future additional food demand on the planet.

Local Producers rank extremely high globally in terms of digital adoption and are among the most modern globally, with highly mechanized systems in place. According to a study conducted by McKinsey in 2021, the penetration of digital mediums in Brazilian farms before the onset of the pandemic was 36%, and is now currently sitting at 46% (vs. the U.S, which went from 24% to 31%).

As we go through another round of generational shift in the management behind these farms, we expect this innovative mindset only to accelerate. A byproduct of the sheer size of the market, and farmer's openness to innovation, Brazil is now host to a vibrant AgTech ecosystem that boasts over 1,500 ag and food technology startups. We foresee massive value being created for the next decade and beyond.

Valor's Focus areas

In agro the spectrum of innovation can be quite broad. At Valor, we see things that are highly specialized, like biological solutions with radical new methods that maximize yield and increase the resilience of plants to diseases and pests. We see cutting edge innovations in life sciences such as lab-grown meat. We see projects using robotics, such as drone surveillance and vertical farming.?

As a generalist fund, we want to target companies with innovative business models that focus on bringing further efficiency in the farm to table value chain. With the applications of big data, the internet of things and artificial intelligence this can come in many forms. On the digital front, we are excited about solutions focused on providing efficiency tools for farms and enterprise incumbents. We are also interested in companies facilitating trade, such as grain, hardware and commodity marketplaces. These companies are increasing transparency on the transactional front and reducing prices for the end buyer. Another area we are very keen on - as per the below rationale - is financialization and credit, a key lubricant of the agribusiness value chain.

Valor's investment in Agrolend

Agriculture is an industry that is highly dependent on debt, as farmers have a long cash cycle and need credit for virtually all of their input and machinery purchases (90% of their working capital are debt based). But although large farmers have access to good credit (big banks, subsidies, industries, etc.), small and medium ones are deeply underserved, or unserved altogether. Banks have ignored this segment because (1) Reaching the geographically dispersed small and medium farmers directly to offer credit or to sell products is hard, and (2) the government subsidy has existed for decades. Retailers and suppliers, on the other hand, carry a lot of the burden of the scarcity of funding in the industry.

As a result, the agricultural credit market in Brazil is still in its infancy, and when compared to the U.S, it is still very much underpenetrated. Despite the agribusiness market size in Brazil being ~20% larger than the U.S ($212B vs. $175B), the agro debt market in the U.S is 2.5x the size of Brazil's ($15B vs. $6B).

Reminiscent of Brazil's personal banking oligopolized structure, agro credit concessions are still very much concentrated in three banking institutions, which concentrate about 70% of the total credit pipeline. These institutions are not only unable to serve the entirety of the market, but they also operate with a bureaucracy filled credit approval process and less than appealing interest rates, leaving out a large number of cash strapped farmers, especially those who are located in remote regions and have less access to capital to maintain (and expand) their production.

This is where Agrolend comes in, targeting the ~700,000 small and medium-sized farmers with annual revenues between R$500K and R$5M. The company extends these farmers a complementary working capital credit line powered by a user-friendly app and web version, and a powerful credit engine running on the back end; producers get a credit line within 48 hours, avoiding multiple visits to physical branches and filling a ton of paperwork.?

Agrolend employs a savvy go-to-market strategy, partnering with ag Input distributors and manufacturers to reach the thousands of farmers who hold some sort of commercial partnership with these players. Through this approach, Agrolend is able to meaningfully decrease its customer acquisition cost and at the same time grow its origination capability in a much faster manner, quickly reaching different regions and crop types in Brazil. But even more importantly, Agrolend becomes the interfacing agent with the farmer himself, opening up a plethora of product expansion opportunities, including insurance, credit cards and digital accounts.?

When we were first pitched by the Glezer brothers, André and Alan, and Valeria Bonadio, we were completely enamored with their vision of building Latam's first digital bank for the agro. We quickly found that this team was highly complementary, with a perfect combination of skill sets and expertise in financial markets, legal, regulatory, technology and agriculture to make this dream a reality.?

We are proud to partner with the Agrolend team on this Series A financing, and look forward to empowering the company to democratize agricultural credit and narrow the funding gap of the sector across Brazil and beyond!