The good team at Agthentic have allowed us to repost the first half of their very interesting blog post here.
Agriculture is one of the most important and complex themes within climate tech. This post challenges the typical venture model, tells the agtech history and makes some bold suggestions of what we need to do from here.
Silicon Valley, where I (Sarah) grew up, and I (Matthew) lived and worked during the dot com era, is known as the birthplace of the modern tech industry, responsible for the reinforcing loop of entrepreneurs and venture capitalists, and the resulting disruptions to most major industries. But one industry where this hasn’t yet played out is agriculture- the incumbents today are largely the same firms that have dominated since the industrial and green revolutions enabled the shift to modern day farming practices.
But agriculture has not resisted digitization due to a lack of effort on the part of venture-backed startups or investors. In 2013 after Monsanto acquired the Climate Corporation for nearly $1B (one of the only exits of this size in the sector to date), venture capitalists (VCs) saw an opportunity. Pitch decks explaining how “ag is the least digitized industry”, and quantifying the potential ROI of “feeding the 10B mouths of tomorrow,” helped investors to increase agtech venture capital from $6.4B in 2014 to over $30B in 2020.
The silicon valley playbook expects unicorns, exits, and digital transformation of industries, yet to date in agtech, we are yet to see this happen at a mainstream level. Some claim that venture capital isn’t a fit for ag- that the timelines of complex natural systems, lack of underlying infrastructure (e.g., rural connectivity), and the relatively older user population make ag less susceptible to being eaten by software.
Our argument is slightly different. We believe that venture capital is a fit for agtech, but that the silicon valley ‘template’ of investing has set agtech back a decade, and that only by looking beyond the templated business models and tech stacks that work in the valley can we realize the returns and impact that will come from transitioning to a digitally native future for agriculture.
The silicon valley template
Venture capital is often about pattern matching. Two common patterns, or templates for business models, that exist in traditional tech venture capital are:
(1) User is the Customer- In this template, the customer is the direct beneficiary of using the product. Given the customer gets the value, they also pay for the product (through various models, such as SaaS and Freemium). The company can leverage network effects to grow their customer base, meanwhile making incremental product improvements. Examples here abound, such as Slack (freemium) and HubSpot (SaaS).
(2) User is the Product- In this template, the user gets value from the product but they are not the beneficiary, nor do they pay. Instead, the company monetizes the user, often through advertising. This template also has network effects, where as the product gains more users, it becomes more attractive to both other users and to the end customer. A classic example of this template is Facebook.
Both templates tend to rely on common attributes of software-enabled, low marginal cost business models. A constant stream of new features can enable rapid customer acquisition, and once the audience is large enough, it can be monetized via models like freemium subscriptions or selling targeted user data for advertising.
But it’s perhaps the propensity of VCs to apply these templates that has contributed to the misalignment in agtech investing thus far, as there are several reasons why they are not well suited to agriculture.
First, the number of possible users in agriculture just isn’t at population scale, so the deferred monetization strategy has no real payoff. Second, the ‘User is the Product’ template usually relies on a value exchange where the user gives away information about themselves and what they might want, and gets access to features in return. Farmers already face great uncertainty with weather, prices, and labor availability, so free or low cost incremental improvements are never going to balance out the possible consequences of giving away yet more control.
To read the rest, head over to Agthentic and post your comments and love there:
Key topics of the rest of the post:
- Agtech 1.0
- Agtech 2.0
- Moving beyond Silicon Valley templates and turning to the supply chain
The investing templates of silicon valley may have set agtech back, but as the agtech industry has evolved, it has created and attracted investors and entrepreneurs with experience not only in tech, but also in food and agriculture value chains, who are leading this new wave of agtech innovation. The question is whether this evolved approach to innovating and investing will realize the potential and deliver profitable, scalable business models that align better with agriculture.
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