The technology sector as a whole had a bruising year in 2022 as the market turbulence created by war in Ukraine, high energy prices, inflation and climbing interest rates all combined to knock confidence, rearrange investor priorities and force tech firms to find ways of getting back onto sure footing.
This manifested itself as 97,000 job cuts throughout the year in the US alone, which was the highest figure of any industry in the country and is up 649 percent from the 13,000 cuts that occurred in 2021.
On the trading floor, tech-heavy Nasdaq Composite posted a 33.1 percent loss for the year on December 30, while the S&P 500 finished the year with a loss of 19.4 percent. The figures on how much value tech stocks lost across the board vary, but a $4 trillion loss estimate stands at the more optimistic end of the spectrum, while some sources suggest the true figure could be closer to $8 trillion.
“That naturally flows down and the emphasis has moved from everything will be broken and rebuilt by tech with an endless amount of capital to, ‘What has got solid foundations in unit economics?’ That has flown immediately to food and agtech,” said Adam Anders, managing partner of Anterra Capital of Amsterdam.
So what segment of the emerging agtech space could be most negatively impacted by a bigger emphasis on good unit economics today, as opposed to the potential of creating it later?
Capital intensive areas such as indoor farming, 15-minute grocery delivery and aspects of alternative proteins are three market segments Anders suspects could be impacted by a retreat from investors.
“Maybe these things will bounce back and be super strong within two years, but it’s going to be a tough two years. And when they bounce back that’ll happen because there’s some good foundation businesses there. Capital intensive investment themes are sometimes better funded with a different category of capital with a lower return expectation and longer horizon, for example structured finance combined with project equity,” he added.
Timing the market
Anterra closed its second food and agriculture fund on $260 million in February 2022, after it eclipsed its original $230 million hard-cap. Having closed the fund 12 months ago, Anterra FA Ventures II is still only 30 percent deployed because Anterra felt things were “still too expensive” last year, while the uncertain nature of the market encouraged it to keep its powder dry.
Now that the market correction has occurred, the firm is ready to execute its strategy and intends to spend 2023 deploying Fund II, with plans for a follow-on vehicle unlikely to begin gathering steam until late 2024.
“I believe that B2B marketplaces with a connected software-as-a-service are going to take off in food and ag now,” said Anders, with regard to the areas where the firm is eyeing opportunities.
“Covid-related supply chain disruptions kicked off the digital transformation of how we get goods from the farm, to the port, to their final destination, with more transparency and pricing information as it flows through the value chain – I think that’s going to take off. These platforms also lend themselves to adding related financial products including loans, payment processing, insurance, price hedging and risk services. But so many have tried and failed that I’m almost nervous to say that,” said Anders.
Software tools, robotics and AI that helps to increase accuracy and efficiency in food processing are other areas of interest, while medicinal foods that come with “true IP” and tap into the food-as-health trend remain top of mind.
“We remain very bullish on animal health and the need for improvement on environmental impact there,” said Anders. “It’s a $2 trillion industry applying limited new technology and with a massive need for improvement. Not everyone’s going to move to a vegetable diet so let’s start making progress now on addressing animal related disease and improving the carbon footprint, environmental footprint and animal welfare performance of this sector.”
On a positive note for the firm’s existing investments, Anterra has a structure in place whereby LPs can invest directly into the firm’s portfolio companies, which they have done to the tune of more than $150 million since the close of Fund II last February, all of which is separate to the capital held by the vehicle.
“We structured it as a way to bring these guys into our network more and it shows the depth of capital that we can bring portfolio companies, which was the whole thesis,” explained Anders.
SaaS is a big tailwind
One of the biggest broader tailwinds supporting agtech right now, said Anders, is that tech adoption has largely maintained its momentum because the covid-19 pandemic forced companies to use more tech and fostered an openness to using biotechnology.
This momentum received an additional push from the Ukraine war, added Anders, due to the widespread impact on supply chains, constrained availability of key agricultural inputs such as fertilizer, as well as some of the food security measures that have been taken on a national level to protect domestic food supply.
“That disruption is terrible on so many levels for humanity but it is providing an unexpected tailwind where people are thinking, ‘Understanding my value chain better by using some digital solutions is a way through this volatility and madness.’
“If you’ve never used any tech and you operate at the middle of the food system with gross margins of circa 20-25 percent to get to a net of 2 or 3 percent, and you were trying to sell tech to those companies before covid, the business owners would just say, ‘No way, I don’t have any money to invest in tech.’ And now they realize, ‘I don’t need money. Software-as-a-service is a monthly variable cost and it makes me money.’ I think we’re just at the beginning of our sector understanding that.”
None of which is to say the outlook for the less capital-intensive segment of the agtech market in which Anterra plays is entirely safe from a slump of its own, added Anders. But he remains hopeful a major bust will be avoided.
“I don’t know exactly what the right case study is but I remember that clean tech completely collapsed and took another three years before you could even mention it. But then clean tech was largely capital intensive whereas with food and agtech, only about 20 percent of the key investment themes are capital intensive so I expect that we won’t go through the same bust,” he said.