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Venture capital firms looking closer at Midwest agriculture
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Venture capitalists and farmers share some common ground: tolerance for risk. With the wrong seeds and wrong conditions, investments can wither. With the right seeds and right conditions, profits can abound.
Now agriculture upstarts are pitching venture capitalists to plant their cash in technologies that could revolutionize how farmers produce, move and sell what feeds the world.
“We’re in a boom time for agriculture,” said Jason Henderson, vice president of the Omaha branch of the Federal Reserve Bank.
Analysts expect U.S. agricultural income to soar this year.
Last year the number of venture capital deals for companies involved in food and fuel production was less than 3 percent of the U.S. total, according to tracking by Dow Jones VentureSource. But that can mean there’s still plenty of opportunity.
“The best returns venture capital investors get are in areas where people aren’t looking,” said Jessica Canning, an analyst with Dow Jones VentureSource.
And Henderson said he had seen an uptick in interest.
The venture capital industry, like many others, rebounded in 2010. A part of that comeback was from investors making deals outside their traditional areas of information technology and health care. And as computerized equipment and GPS use become more common in agriculture, the lines between farming and high tech could soften further.
DuPont wants more
Grain prices twitched across a bank of monitors recently in Jason Tatge’s office at Farms Technology headquarters in Overland Park.
“Today we basically had … 5,912 different ticks,” or prices, on just one month’s futures contract for corn, Tatge said.
About a decade ago Tatge cooked up an online system, the Dynamic Pricing Platform, that lets growers set their own asking prices for grain and soybeans, sort of like Priceline.com. So a farmer can look at what the market’s doing, put in an offer to sell X number of bushels for, say, $5 each, and if a buyer such as the local ethanol plant is interested, it can take the farmer up on the bid.
In 2008 the venture capital wing of DuPont thought Tatge was onto something and bought a minority stake in Farms Technology. Then the chemical giant with agribusiness subsidiaries came back in late 2010 to cut a check for a majority share.
“We had built a product. We were out there marketing it,” said Tatge. “We were growing the business the old-fashioned way.
“And suddenly DuPont came along and said, ‘Look, we like what you’re doing, and here’s some capital, and let’s do it bigger and faster.’ ”
Since DuPont’s initial investment, Farms Technology has grown from 3,000 to 10,000 farmer accounts, such as the one held by Gary Briggs.
“I’ve used this for the last five years,” said Briggs, who farms corn just outside Kincaid in east-central Kansas. “Before that I would try to find buyers and market over the telephone. A lot of times you’d try to call … and they wouldn’t be available, or they wouldn’t call back for quite some time.”
Little by little over the last five years, Briggs began marketing more of his crop on Farms Technology’s Dynamic Pricing Platform. Today he sells almost all his corn that way, making it a welcome part of his operation.
Briggs does say there’s one drawback to having real-time market data and the ability to set prices any hour of the day — or night.
“It kind of gets in your blood,” Briggs said. “I’ll get up at 2 or 3 o’clock kind of curious what the nighttime trade’s doing. I’ve made sales doing that.
“My wife says I’m obsessed,” he said with a laugh.
Joking aside, Tatge thinks farmers’ growing desire to have instant information and access to markets will drive demand for his product and bring more venture capital to ag-focused startups such as his.
“Most of the new combines and the new tractors all have auto-steer, so when you’re planting you don’t have to steer anymore,” Tatge said. “If a farmer doesn’t really have to drive his tractor anymore, but he sits in there for eight hours a day, you know, what’s he going to do?”
Tatge laid out a scenario in which a farmer was riding in a tractor being steered by satellites through a cornfield. The yield estimate for his crop suddenly drops because of a weather prediction, or updated analysis of the crop so far or some other development, and that information pops up on the tractor’s digital dashboard.
“The odds are if they have lower-than-expected yields, then their neighbors probably do, and their neighbors’ neighbors probably do, so we’re probably going to have less supply than anticipated, which means they should all be raising their price,” Tatge said.
And with the Dynamic Pricing Platform, the farmer could do that immediately from the tractor.
“We want to give them tools to adjust the prices on what they’re expecting to get for their grain,” Tatge said.
‘A lot of opportunity’
California’s Silicon Valley was paved on top of agriculture.
In the early 1950s a little wheeling and dealing by Stanford University helped lease farmland to house a burgeoning tech industry. The area became the epicenter for the digital revolution — and for high-risk, high-reward venture capital investing.
Today the challenge facing ag entrepreneurs is getting big-money investors to dig under their traditional comfort zones in information technology, Web or biotech, and unearth opportunities in agriculture — much of it in the Midwest.
Because for all of the ability that the venture-nurtured Web gives people to connect anywhere with anyone, venture capitalists “prefer to invest within about three hours of their office,” said Canning, of Dow Jones VentureSource, which is based in San Francisco.
But she also said she had started to see investors stray from the coasts to make deals with ag companies in the Midwest.
“The fact that it’s such a significant market and there’s not as much movement right now leads one to believe that there’s a lot of opportunity in this area,” Canning said.
But getting into agriculture requires firsthand knowledge that many venture capitalists lack.
“There are two gaps,” said Jim Schultz, founder and managing partner of Open Prairie Ventures.
Schultz works a little like a Johnny Appleseed, spreading capital to grow Midwest ag companies from his firm’s headquarters in Effingham, Ill.
“One is trying to find managers who understand the space,” Schultz said.
The other, he said, is how a company eventually will be sold. It’s usually how venture capitalists make their money, and ag startups don’t have the same kind of established buyers as their counterparts in areas such as information technology.
In 2008 Open Prairie launched a $30 million fund that was split between agriculture and biotech. Schultz is looking to raise a new fund that deals solely with agriculture, and he’s been getting interest from investors as big as Goldman Sachs.
Although the new fund is still on the drawing board, Schultz keeps a big number in his mind’s eye.
“We’d like to think that it’s a nice nine-figure number, approaching $250 to $300 million,” Schultz said.
That may seem like pie in the sky, but companies such as Vestaron Corp. of Kalamazoo, Mich., have Schultz feeling optimistic. Vestaron makes a pesticide based on the venom of the Australian Blue Mountain Funnel-Web spider.
“The reality is that more firms will pick up the phone and talk to an agricultural company today than they would have back in 2005, 2006,” said John McIntyre, chief executive officer of Vestaron, which has raised more than $7 million from funding streams, including venture capital from Open Prairie.
But continued development takes more money, and persuading venture capitalists addled by the global recession to wade into largely uncharted waters takes some serious coaxing.
“There is still a discomfort as the discussions progress as to trying to get a grasp of and better understand what agriculture means,” McIntyre said.
That’s not a problem, though, at many Midwestern universities, which can serve as important conduits between ag-tech innovation and early-stage investment.
A quiet Midwest surge
After Purdue University senior Neil Mylet moved into his own apartment, he promptly hung white boards on all the walls.
An Indiana farm kid studying economics, Mylet needed loads of dry-erase space to endlessly mock up his big idea to make an iPhone app that controlled how grain was loaded into the back of a big rig.
“My last semester I was starting the process of getting patents and starting this company,” Mylet said. “I would miss a couple days of class a week to meet with my attorneys. I couldn’t tell my professors what I was doing. I think a lot of them maybe thought I was (just) skipping class.”
Mylet eventually launched LoadOut Technologies and sank his own money, earned from working on his family’s farm, into its development.
Today his company has a home in Purdue’s Research Park in West Lafayette, Ind., which Mylet said has been instrumental in LoadOut’s development.
Research centers at Midwestern universities, many encircled by farmland, are natural breeding grounds for ag-tech innovation. And this may ultimately be where venture capitalists unearth the next big idea.
“Five years ago we saw virtually no interest in the institution venture capital industry in ag technology, and that has shifted significantly,” said Steve Carter, director of Iowa State University’s Research Park in Ames.
Around 2005 there were two venture funds that had periodic contact with Carter. Today, he said, that number is 12 to 15.
“They’re looking for opportunities, and a couple of them have made investments” of $1 million or $2 million, Carter said.
That’s a nice sum of money, but putting together the infrastructure to demonstrate how ag-tech can be applied in a large-scale production is very expensive.
In that regard, incubators such as the one at Iowa State can serve as launching pads for ag entrepreneurs by helping offset some of the upfront investment costs.
The idea is that using public money this way will ultimately boost the economy.
Carter is especially excited by such things as new kinds of biofuels processes and products made from agricultural waste material, all of which need to be near Midwest farmland.
“Hauling massive amounts of feedstock long distances has a tremendous effect on the economy of these things,” Carter said. “As a person living in central Iowa, I’m very hopeful and very positive about the potential for these new industries in rural America.”
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