Big Data, robotics and synth bio: Driving “The New Agriculture”

The MLS Capital II fund closed its capital raise around a year ago, and The Digest stopped by the Limited Partners meeting last week to check on the latest in the BioGreenTech space from what is shaping up as the most interesting and dynamic investment portfolio we have seen in quite a long time. The fund is managed by Spruce Capital Partners and Xeraya Capital.

If you haven’t been to an LP meeting before, they are generally intimate gatherings of venture capitalists, their underlying investors (the Limited Partners), portfolio company CEOs, and some thought leaders invited to share their perspective on sector opportunities and challenges.

The transformation at hand

BioGreenTech? Consider it a spectrum including plant and animal agriculture; food, feed, and nutrition; bio-renewable chemicals and materials — and the “big data” analytics, robotics, production, harvesting and use of natural resources, and synthetic biology that provides the transformational science disrupting traditional markets in ag, food and materials.

“It’s a unique time,” said Fund co-chair Roger Wyse, “with multiple technologies disrupting the ag-food value chain, and with multinationals migrating to transnationals. Consolidation amongst companies like Monsanto and Bayer, Syngenta and ChemChina and DowDuPont means more emphasis on open innovation. Like pharma, the players will be bigger and likely less innovative.”

The 5 market drivers

The drivers are as new as the technologies to solve them — many of them were front and center at the Paris Climate Change talks, and discussions at FAO and the World Economic Forum — and just about everywhere else.

1. Climate change and a heightened interest in sustainability and natural resource management including water and land.

2. A shift from carbohydrate to protein-based diets in the developing world.

3. A global population expected to reach 9 billion by 2050.

4. Regulatory uncertainty that impacts gene modification and markets for renewables.

5. A consumer demand for transparency from ingredients to carbon footprints.

The 5 technology drivers

1. Plant improvement, from genotype enhancement to phenotype selection and deployment.

2. Automation, from self-driving tractors to unmanned aerial robots that replace scarce labor and bring new complex real-time data.

3. Transformed pest management, moving from traditional chemicals and biologicals, to more integrated pest management, including microbials as well as new chemicals and breeding — and opportunities in the plant’s micro-biome.

4. Data science — big data management allowing for faster, better cheaper decision-support tools.

5. PrecisionAg — more targeted delivery of water, crop protection, and seeds to optimize yield and minimize inputs.

“Which ones will add value, and which ones can we capture to realize value, that’s our challenge over this period,” said Wyse.

At the same time, Wyse listed some of the factors that are driving new thinking. In crops, we are beginning to see a plateau in yield improvement — a slow-down in the rate of productivity increase, despite rising investment in R&D. With climate change, we are seeing also more variability in yields, he said.

To meet these challenges, he noted a slew of new technologies coming into existence, from improving breeding and gene editing all the way to integration of technologies based not only on plants but the root system and the soil.

It’s the seed

“The seed will a significant carrier of new technology through seed coatings as well as the technology and genetics in the seed,” Wyse said. “And, with all the consolidation, corn and soy germ-plasm is likely to be controlled by 3 (or 4) large companies. There will be a smaller number of exit and partnering opportunities. Yet, you can expect as these 3 large companies begin to look much like each other, that how they are integrating technology into their value proposition will be critical to their differentiation.”

Sector early-stage investment soaring

Investment in ag food and bio was up 95% in 2014, Wyse noted, with $4.6B invested across 526 deals and 672 unique investors. $1.6B for agriculture and plants. $2.08B for food with a strong emphasis on the Blue Apron type of convenient food plays. “Uber Eats” as Wyse described them. Also $495M for industrials and the remainder scattered in smaller investment sectors such as animal.

“VCs have stepped into agriculture and food in a big way, in part because of the rise of the importance of protein but also because of the convergence of data technologies which have brought synergies with traditional high tech investment in digital technology — it can make for strong syndicates through partnering,” Wyse added.

“In places like Emeryville it feels like half the buildings are filled with incubators and accelerators. Corporate venture capital has increased, and crowd funding is playing a role. Plus, angel investors, incubators and the very hot area of accelerators around the country, with firms like Yield Labs and IndieBio being the two of the most important.”

Dronetech getting crowded

“We like to call it informed ag, as opposed to vs PrecisionAg, which is a misnomer,” Wyse said, “but under any name we’ve seen $661M invested in that space alone and 80% has gone to drones and imaging. That’s made it pretty hard to find new transformative opportunities in data collection. But we see opportunities in data analytics and decision support. It’s not only about remote low-cost sensing but about analysis and visualization. Smart machines need to provide actionable information. Who is going to integrate all this info? That’s why we are looking at companies like AgerPoint and Aerial Intelligence.”

Where’s the value proposition, and who deploys the technology?

It’s not just about how much data you capture, and at what cost. Two questions facing many of these young companies are “who’s the customer?” and “how is this data or intelligence going to be sold to multiple partners?” So far, the companies are far too early-stage to focus on anything except building out technology and addressing technology risk — but deployment risk is going to be an issue.

3 Choke Points and a cautionary note

For all that is changing, here are three things that. more or less, are not.

1. Brain capacity.

2. Retail shelf-space.

3. Time in the day.

Growers and food retailers are out of brain space and shelf-space, and although the internet offers an unlimited shelf, ask yourself how much interest you personally have shown in scrolling through the millions of books, consumer electronics, devices, toys, games and so on available on the internet? Although the digital shelf is infinite, the time to sort through and compare options and consider new solutions is not. So, brand, reputation, placement, and high-profile channels to market will be more and more important.

We see very limited grasp of marketing amongst the companies in this space — an almost laughable naïvete on how to build brands, enter markets and crash through barriers that incumbents raise. It’s a faith in the power of technology alone, and a curious attachment to “success stories” in new foods and materials that have generated sub-5% market shares. It was the hallmark of Apple between 1985 and 1997 — technological prowess, a cluttered product set and low-wattage design and marketing, and the same hubris that condemned ethanol to its present fuel ghetto. But, it’s early days — we’ll mark that as a point of future concern.

The Market is huge

No doubt about it, if incumbents have much to protect it is because the markets are large. $60B for crop protection, and crop nutrition is $300B, says Wyse. And he foresees that investment in non-chemical alternatives can be “truly disruptive if they can bring their costs down” — noting $168M in early-stage investments and 35 deals involving 44 unique investors.

For example, think of a coating that can be sprayed on a seed to prevent boring insects. Not to mention the opportunities brought by gene editing technologies such as CRISPR/Cas9 — where companies like Caribou Biosystems are active. “DNA synthesis went from $1 to cents per base, ” Wyse notes. “But also, when DuPont Pioneer came out with new waxing corn, the [regulatory] application was [only] 6 pages and they got an OK in 4 months. That’s transformative.”

Industrials: slow going

“There’s no demand drop-in replacements for commodity chemicals at these oil prices,” said Wyse. “So, it’s been slow-going in renewable chemicals. There’s no green premium, value is performance based, regulatory uncertainty continues, and the scaling of engineered organisms is very expensive. There are powerful technologies, but they are still in process in getting commercialization.”

Food innovation is rocking

Wyse noted the number of companies that started out in fuels and industrials that have switched over to food innovation. Food innovation has attracted $1.64B in deal flow, and 137 investments in all.

“Foods were ready for something big. For years, thad seen almost the lowest level of innovation of all,“ Wyse said. “There had been some new snacks, but mostly line extensions and process improvement. But now we have the whole “Uber Eats” sector and companies targeting population growth, emerging economies, rising middle classes and increased urbanization.”

For sure, one driver is simply a demand for more food; not just different alternatives. The prediction is that global demand for protein will grow from 87-100 pounds per capita. Plus, there are going to be strong opportunities in meat substitutes, and egg whites. Companies like Impossible Foods, Kite Hill, Clara Foods, Ripple Foods, Modern Meadow, Beyond Meat and the Amazing Protein Company have come along.

But the challenge will be the same as for ag tech. It’s getting on the shelf and staying there. We’ll see more and more consumers reading labels — looking for non-GMO, clean, simple, fresh, local and organic foods — even as the technology available to grow foods becomes less local, less organic, less simple and less non-GMO.

Wyse doesn’t see it as one or the other. Rather, we’ll see markets for each, he said. “Products will address millennials, who are replacing the Baby Boomers, and offer them choice. And we’ll see Flexitarians, trending towards vegetarian.”

Consolidation? It’s back. The red light, yellow-light, green light scenario.

“Back in the 90s, as biotech was coming in,” Wyse recalled, ”it seemed as if everyone wanted to be in life sciences and there was a tremendous amount of activity. It lasted about 18 months and it all blew apart, because the market could not understand the companies and the companies couldn’t understand the opportunities. So it came back to pure ag plays, and we had 10-12 years of stability with the Big Six. Now, we have a new round of consolidation — Monsanto/Bayer being the latest.” But there’s been Dow/DuPont, and Syngenta/ChemChina.

What will happen?

Long term, it’s a green light. The new companies will seek to differentiate themselves through astute technology acquisitions and tech deployment.

Mid-term, it’s a yellow light, though, as there will be fewer companies to partner with and be invested in by as the technologies develop. But it’s not all bad in the mid-term —  companies will be likely to outsource more.

Short-term it’s a red light, we could expect from the past to see sharply reduced investment and long-term development from the consolidating companies while they go through rounds of cost-cutting and re-organization.

The Bottom Line: Happy Days Are Almost Here Again

“It’s an extraordinary time in the ag value chain,” says Wyse, “with multiple waves of technology, with climate change, consumer shifts, population growth and greater emphasis on sustainability. Offsetting that, consolidation and regulatory uncertainty with a number of sectors from GMO to industrials. But we’re looking to invest in 3 companies in next 6 weeks, and we see the potential for great margins from the companies coming along in this new technology wave.”