VC working group - reactions in the Agrifood sector to Covid-19

The points noted here are taken from a group discussion set up with firm Principals/Partner level members from the firms displayed above (“the Contributors”), and comments are not attributed to any individual. 

The information is not confidential and may be disclosed to third parties at the discretion of the Contributors, except that, except that no information contained herein may be disclosed, quoted, referred to, published or delivered, in whole or in part with the Media.

The comments are grouped into key headings, as follows.

A.  Macro trends:

·   Pandemic recessions have historically been “V” shaped recoveries, but noting that the world is very different in terms of globalization than in prior examples.

·   No clear consensus yet emerging on the duration of a Covid-19 lockdown, or timeline for return to ‘normal’ but managers are looking to a slow recovery in the funding environment. Pandemic recessions may be V shaped historically but companies need to plan for cyclical closing and re-openings of the economy, plus disease incidence in the wider workforce and community. The impact of delays in Agriculture can mean missing seasons of work, which could compound capital runway issues.

·   Government lobby efforts could be very important to helping improve the ecosystem for startup/innovation led companies. Beyond PPP, there is a need to look at targeted efforts to support them. Examples could include a greater effort on Rural Broadband to enable greater connectivity. 

 ·   M&A activity is also expected to be a ‘mixed bag’ but major companies noting they are still looking opportunistically in this environment, especially in distressed situations.

·   Companies with high burn and expecting to turn to IPO markets will face meaningful headwinds continuing their funding track and may have to make difficult choices. High capex model companies will struggle to raise new funding, and depending on shape of a recovery could be at more significant risk of cash out.

B.  Financing trends:

·   Investors are all looking at their existing portfolios, with common guidance that companies may find it hard to raise new capital much before H2 2021; for companies that haven’t raised but need to, we are seeing a rapid swing toward Bridge rounds or internal rounds that help get drywell/runway through end 2021.   

·   Many managers will be in "wait and see" mode on new deals for next 60-90 days; some deals that were already well advanced are still progressing, but investors are also reconsidering terms such as valuation, tranches, use of funds… on more favorable basis to investors.

·   Adverse selection to raising capital now from outside investors i.e. is something wrong with the company if they have to raise fresh money at the worst possible time?

·   Investors noted in looking at both current and new deals, assessing syndicate ‘health’ is becoming a critical factor in determining investment especially in existing portfolio companies raising from new sources.

·   Smart CEOs/founders tending to value speed to closing over valuation or deal ‘optimization’.

C.  Agritech specific trends:

·   Crop inputs – this segment has attracted a lot of capital over the last 3 years, with extensive field trialing and customer pilots being important to showing value to adopt. With Covid-19 impacting operating bandwidth at farms, there will be a high bar to changing how farmers operate especially with labor constraints. Likely to impact adoption timelines.

·   Precision Ag, Smart Farm Equipment, Imagery, Sensors, Software analytics – we are seeing more “steady as she goes” with portfolio companies reporting that they are still making sales and proceeding with roll-out in the 2020 season. That said, with pressure on budgets, any such applications must have a critical value proposition and clear value in the season to warrant attention. Also given f2f nature of sales, many farmers are not adding new relationships/products.

·   R&D/Life Science focused companies – these are different to companies with commercial (revenue) milestones and face less supply chain disruptions, though field trialing is likely to be impacted; we are seeing financing rounds continued with science-driven milestones. The value inflections in these types of companies are perceived differently versus commercial customers e.g. revenue and supply chain disruptions.  However, contributors still expect increased runway needs due to milestone impacts/delays. We are seeing companies with lab facilities running multiple shifts with social distancing to keep up progress but at ~ 50% of progress vs plan.

·   High value produce: growers are experiencing major hits to revenue with perishable products caught out by shutdown of the restaurant/food service sector; putting an even sharper focus on automation/robotics in field, but investors remain mixed over whether the economics will pencil for investment by venture. Likely to help greenhouse and vertical/CEA farming momentum.

D.  Foodtech specific trends:

·   Companies in many of the DTC food production, e-commerce retail and distribution are experiencing major upticks in revenue due to the crisis; “Grocery delivery is here to stay”.

·   The crisis is highlighting the need for labor solutions in production and distribution; companies are attracting capital in warehouse automation for example; there will be a reaction to strikes and disease impacts on labor availability.

·   Channel digitization is being accelerated: a generation is being trained on shopping for their food in this way. As this channel becomes more familiar, it will increase need for differentiation especially in Grocery and Meal Kits.

·   Food service and restaurant tech companies are being particularly hard hit. Many restaurants will close through or as a result of the crisis. Cloud Kitchens are likely beneficiaries of a change in consumer demand and business model reaction to the impact on real estate models.

E.  General comments:

·   Venture timelines for making investment decisions tend to be longer, so the crisis may end up being less impactful for the firms who continue their remote Diligence and prepare companies to be investable when activity picks up

·   For many younger entrepreneurs who have not experienced a recession (as many of the investors in this group noted) the new environment on funding appetite, timelines and likely valuation impacts may take some getting used to; very different to the last 5 years of “up and to the right”.

·   Funds with recent closings and liquidity expect to see a lot of opportunities in this new normal, but are also expressing the need for strong discipline in deal fundamentals

·   Rural America will likely be a major focus for the Government in terms of economic stimulus which should generally be a tailwind for startups and funds focused in the geographies “between the Coasts”.

ENDS.

This summary is being provided by the Contributors for informational purposes only and does not constitute investment or financial advice. The Contributors assume no liability related to the accuracy or completeness of the information contained in this summary, and shall under no circumstances be or become liable to any recipient for errors, inaccuracies or omissions in the information presented herein, or for any consequences that may be suffered by any recipient as a result of the receipt of, or reliance upon, such information.