When I started writing this newsletter in 2020, if you had asked me what I’d be doing in 2023, I would have told you I’d likely be raising a venture fund solely to invest in animal agtech and meat tech. My thesis was this:
- Animal agtech lags behind the crop side of agtech in maturity, in # of deals, in size of deals, in adoption, in all of it.
- Animal agriculture is roughly equal in market value to row crops and therefore an equally large opportunity from a startup/venture perspective.
- Animal ag faces unique challenges & opportunities from growing consumer demand and increasing consumer expectations.
- Animal ag / meat / dairy is a category overlooked by most VC’s and so there’s huge opportunity in going all in on this space.
Spoiler alert: I’m not raising a fund to invest in an animal ag thesis, and have no plans to do so. And in a 180* turn, I actually believe raising a venture fund solely to focus on animal ag would be a mistake.
Not only that, a nagging question has been in the back of my mind recently:
Is animal agtech even venture viable?
If we’re going to have this conversation, two quick ground rules:
- Read all the way to the end because this is a nuanced discussion, and know that I know I’m only scratching the surface here.
- Remember that this newsletter is about learning out loud, which includes asking uncomfortable questions.
Let’s jump in.
What’s generally true of a venture-backable business?
- It has the potential to return the investor’s entire fund upon exit. This means things like having a large TAM (total addressable market), including line of sight to large adjacent markets.
- It has a lever(s) that allows them to scale in an exponential’ish way. Think of cloud-based software where the marginal cost to add one more user is nominal, or online banks that can scale product delivery and customer experience through tech rather than more humans, or a business with network effects that can lower customer acquisition costs.
Are those things true in animal ag? It depends.
It depends on the individual segment of livestock, meat, and dairy that you’re talking about…and the geography.
For example, selling a SaaS product to poultry integrators in the US is very much an enterprise sales process, whereas selling to individual poultry farmers in Thailand might be much more of an SMB process. Or selling into 10k+ dairies in the US versus selling to the typical dairy producer in India who has 2 animals. I’ve been thinking recently about the tradeoffs between market size (bigger is better!) and concentration among customers (sometimes bigger is better, sometimes bigger is just costlier to sell & serve and creates risk from a lack of customer diversification). More on that another day.
It depends on what problem the startup is trying to solve, and more importantly on the startup’s solution.
A solution that looks and feels more like a consulting business is not a good candidate for venture capital but a business that looks and feels more like a pure SaaS play could be.
It depends on how many adjacent markets a startup can reasonably expect to move into.
Well, reasonably isn’t a good word here…replace reasonably with aggressively optimistically. Rightfully so, founders and VC’s have to suspend disbelief long enough to consider the best case scenario if everything goes right (before preparing for the inverse).
The challenge here is that founders love to think that once they prove out their solution in their home country then global domination is within reach, but given the diversity of production systems and industry structures around the world, it’s rarely true that startups can scale their solution globally within their species of focus. It’s all the more rare that a solution in livestock can move from one species to another – the home run solution in dairy is unlikely to be fit for purpose in poultry, for example.
And to that point, it also depends on how easy or hard it is to scale the startup’s solution.
Let’s play devil’s advocate though, and lay out both the bull and the bear case for venture capital in animal agtech.
The bull case centers around macro dynamics like growing demand for animal protein, increasing emphasis on sustainability, bifurcation of consumer preferences, etc.
An industry in growth mode attracts innovation and investment, full stop.
The bear case that animal agtech is NOT venture backable?
(1) No billion dollar exits. Animal ag has not seen its equivalent of a Climate Corp (billion dollar acquisition), or FBN or Indigo who are likely to IPO.
The easy rebuttal to #1 is that just because it hasn’t happened, doesn’t mean it won’t happen. The 2nd easiest rebuttal is there aren’t that many more big wins in crop tech than livestock so it’s not like livestock is super far behind.
(2) No dedicated funds. Sometimes its difficult to tell if something doesn’t exist because the right person hasn’t made it happen yet, or if something doesn’t exist because others have considered it and decided it’s not a good investment. The notion of an animal agtech fund feels like more of the latter. If it were going to happen, it feels like the time would have been in the cheap capital frenzy of the last few years.
So let’s just say animal agtech is not a good fit for venture capital in the long run; then what?
How does new innovation get funding in the absence of venture capital?
(1) More customer-backed companies. Except this often means companies need a short time from inception to value businesses (rather than multi-year development before commercialization), which either means lighter touch R&D plays (and more software than hardware or deep tech, or at least more engineer-founded companies) or more startups that find interim revenue that may not be scalable (e.g. consulting revenue) to fund the development of their larger vision.
(2) Strategic investors.
(3) Family offices, particularly family offices who's capital was/is primarily generated through livestock, meat & dairy.
I like family offices because they can often move quickly to make investment decisions and where there’s an industry link, they can quickly get high conviction about a startup’s problem & solution.
The challenge for family offices is the time required to drive deal flow and manage investments for what is likely a fraction of the portfolio. I suppose you could make a case then for pooling funds amongst multiple family offices and hiring a general partner to manage the investment pipeline and portfolio. I suppose you would then have to call it a fund, and if they are investing in venture then you’d call it a venture fund. <face palm>
(4) Rely on independently wealthy entrepreneurs to enter the space. Yuck, yuck, yuck. This would mean that a lot of great would-be companies would never see the light of day.
maybe being a non-venture viable category just means that tech comes to livestock later in the lifecycle of any specific tech, once cost of goods have dropped and (effective) off the shelf technology is available that reduces the time from inception to a viable product.
I recently read that the number of venture funds fell by roughly half from ~2008 to ~2010 as the financial crisis drove a lot of new venture funds out. The economic chaos of COVID, inflation, and a new high interest rate environment are very different from the financial crisis and yet macro economic factors have a huge impact on venture capital. If LP’s can get higher return with lower risk elsewhere as they can today, they are likely to commit less to the next venture fund than they might have committed to the last venture fund.
We’re seeing now how interest rate environment plays a big role in venture capital markets: in how much capital is available, in fund size, in how risk tolerant GP’s are, in valuations, etc etc etc.
All that to say, if ever there were going to be a venture fund focused solely on animal agtech, the time to raise that fund was probably between 2019 and 2022.
But even if an entire fund centered on animal agtech doesn't make sense, there will continue to be some businesses within livestock/meat/dairy that are a fit for venture capital and will make sense as investments in a broader agtech portfolio, or SaaS portfolio, or deep tech portfolio, or climate portfolio.
This highlights the distinction between a specific category as the foundation of the fund’s thesis (e.g. animal agtech) versus as part of a broader portfolio, like 30% animal agtech investments as part of a broader agtech portfolio.
Success in venture funds is all about portfolio construction – the venture model accounts for the fact that most companies will not return any capital and the meaningful returns come from the very small percentage of companies with successful exits.
Individual fund returns are generally not publicly available but industry-wide, the vast majority of venture returns accrue to a tiny number of venture firms & funds, just like the vast majority of returns to funds are accrued by a tiny number of companies.
A few years ago I was convinced that animal agtech startups represented <20% of most agtech funds’ investments because there was
less venture capital available.
Now I’m convinced there are fewer venture backed animal agtech companies, and less venture capital invested in the category, because there are fewer venture backable animal agtech startups.
Chicken or the egg? Maybe it doesn’t matter which came first, as long as there are paths forward for innovation in both.
(Btw I 100% assume since I’ve lent public voice to my 180* turn, that someday soon someone will launch a livestock-focused fund, and over the next decade, they will crush it.)