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Betting on the Farm

When Ron Meeusen and Andy Ziolkowski decided to launch a Midwestern venture fund focused on the agriculture industry, they knew it would be a lonely path.

The two had been working on a study for the state of Indiana, looking at opportunities in the food and agriculture space, when they noticed one area in which the region fell short.

“We literally stumbled over the fact that there were no venture capital funds dedicated to that sector,” says Meeusen, who has a Ph.D. in plant biology and is a former biotech research executive.

Meeusen paired up with Ziolkowski, a banker and life science investor, in 2008 to launch MidPoint Food & Ag Fund (now called Cultivian Ventures) a Carmel, Ind.-based firm that seeks out deals in such areas as animal health, food safety, pest control and biomass-based fuel.

Limited partners weren’t exactly lining up with cash. The fund closed in December 2008, one of the most difficult venture fundraising years on record, with a modest $28 million in capital commitments.

The two partners proceeded to make about a half dozen investments and got their first hit earlier this year when Divergence, a developer of genomic methods for controlling crop-attacking parasitic nematodes, sold to Monsanto.

While that deal produced what Ziolkowski calls a “venture scale” rate of return, it was hardly the start of the next big trend. Cultivian remains, to its partners’ knowledge, the only active VC fund specifically dedicated to the agriculture space.

And although, much like the biomedical and tech sectors, “big ag” has its share of multi-billion-dollar industry giants active in technology scouting, product licensing and acquisitions, much of the action remains far removed from VC strongholds in Silicon Valley and the Northeast.

However, investment momentum appears to be growing.

Divergence was one of a handful of profitable exits recently in the agriculture space. Others include Athenix, a supplier of seeds and transgenic organisms for the chemical and feed industries, which sold to Bayer CropScience for $400 million, and Gevo, a developer of facilities to convert agricultural waste into fuel, which raised $96 million in a February initial public offering.

Another VC-backed fuel developer—algae-based biofuel producer Solazyme—is in registration for a proposed $100 million IPO.

More venture capital firms are also beefing up their expertise in the ag-tech space, observes David Cope, CEO of Purfresh, a provider of food purification technology that has raised multiple oversubscribed rounds over the past few years. That could signal more VCs are poised to shift from talking about opportunities in agriculture to actually investing in them.

“A couple of years ago, [ag-tech] was really hot because the category was an obvious great idea. But like a lot of new categories there was a lot of debate about having the skills to assess investments,” Cope says. “Now we see a resurgence in interest. And we’re seeing many of these venture firms staffing up with investors who understand these more life-science-like investments.”

Those staffing up include established firms based in Silicon Valley and the East Coast, such as Kleiner Perkins Caufield & Byers and Atlas Venture.

Kleiner Perkins added Amol Deshpande, a former agribusiness entrepreneur and investor at Cargill Ventures, to its partnership roster in 2008. Atlas and Monsanto this spring announced a partnership to jointly scout and co-invest in promising bio startups with agricultural applications.

Corporate investors are also eyeing the venture landscape. Seed and insecticide producer Syngenta recently launched Syngenta Ventures, a venture division to invest in startups with models aligned to the company’s strategic interests. On the financial side, New York-based, NewSeed Advisors offers investment banking services for sustainable agriculture entrepreneurs and investors, as well as organizing conferences and doing seed deals in the sector.

Hedge funds, too, are eyeing deals, including Passport Capital, a San Francisco-based firm with an active agriculture investment practice that makes mostly public investments but also looks at startups.

Malthus Revisited

Certainly, the demographics are on the side of investors. The latest population growth projections from the United Nations forecast that there will be between 8.1 and 10.6 billion people on Earth to feed by 2050, up from just under 7 billion today. Agriculture investors cite a number of concurrent trends—such as increased meat consumption in emerging economies, broader biofuel usage, fishery depletion and commodity price inflation—that are adding to demand for innovation in food production, processing and transport.

“The economics have become better and better over the last decade for agriculture,” Ejnar Knudsen, portfolio manager at Passport Capital, told an audience at the Ag 2.0 investment conference in San Francisco in April.

A couple of years ago, [ag-tech] was really hot because the category was an obvious great idea. Now we see a resurgence in interest. And we’re seeing many of these venture firms staffing up with investors.”

David CopeCEOPurfresh

Knudsen noted that at current birth rates, the world’s population is increasing every five years by 300 million, roughly the size of the U.S. population. That kind of growth rate strains food producers and puts pressure on prices.

Food supply concerns are prompting calls for action from politicians in emerging and developed economies alike. In May, Secretary of State Hillary Clinton warned attendees at a U.N. Food and Agriculture Organization meeting that global shortages of food and spiraling prices threaten widespread destabilization and urged immediate steps to hold down costs and boost agricultural production. The organization’s food-price index, which tracks a basket of commodities, was up 36% in April compared to year-ago levels.

Investors point to numerous studies concluding that global agricultural production will need to approximately double over the next couple of decades to keep up with global population growth and dietary changes. Meeting that goal will require significant innovation to find ways to improve yields and to cut waste on the route from farm to table.

In Purfresh’s case, solutions revolve largely round the notion of finding ways to reduce spoilage of perishables in transit. Though the Fremont, Calif.-based company got its start marketing a technology using ozone to disinfect and store food, it has branched out to other areas of the supply chain. Currently, the company is generating much of its business from a sensor-based system used in container shipments that tracks the condition of food in transit and releases ozone to reduce decay.

Purfresh’s system, Cope claims, can reduce the amount of food lost to spoilage or over-ripening by as much as 90 percent.

Venture investors seem confident the solution can work. Purfresh has raised $51 million since 2004, according to Thomson Reuters (publisher of VCJ), from such backers as Foundation Capital, JAFCO Ventures, Chrysalix Energy and Chilton Investments. Its revenues, according to Cope, are in the “double-digit millions” and have doubled year-over-year.

Sector Cross-Pollination

Purfresh is one of several ag-tech players that have recently raised sizeable venture rounds.

Kaiima, an Israeli developer of products to increase yields of energy crops using genome multiplication technology, raised nearly $20 million in March from Draper Fisher Jurvetson, Kleiner Perkins and Tamir Fishman Ventures.

Davis, Calif.-based AgraQuest, a developer of biopesticides for sustainable agriculture, raised $17.7 million in a March round led by Generation Investment Management.

A compilation of agriculture-focused deals showed companies with a focus in the sector raising more than $200 million since last year. Calculating a comprehensive number for dollars invested is complicated, however, as companies in areas such as water purification technologies, supply chain software, or sensor networking, may have applications in agriculture but do not count it as their primary source of revenue. Agriculture deals often also cross-classify as cleantech, particularly in areas such as environmentally safe ways to deal with pests and increase crop yields

“One of the things we’re interested in is an ecologically and environmentally friendly solution to a problem,” says Ilya Nykin of Prolog Ventures, which has several natural foods plays in its portfolio and also provided the first venture money in Divergence.

The St. Louis-based firm invested in Divergence, Nykin says, because partners saw potential in the company’s genetics-based approach to controlling agricultural parasites. Because “parasites are fairly close to us on the evolutionary tree,” he says, many pesticides used to kill them are also harmful to humans. Divergence’ approach is to focus on aspects of the genome that are not shared with humans, and then to develop formulations that were effective on parasites but not damaging to other species.

Environmental concerns are also the key driver in what remains the most high-profile and largest agriculture sector for venture capital: biofuels. Concerns over peak oil and pollution, combined with worries about the impact of crop-based biofuels on the food supply, have augmented investor interest in other technologies that use plant waste, algae and other sources to make fuel.

And despite setbacks with some early venture bets in the ethanol space, VCs continue to back large rounds for these capital-intensive plays.

Cobalt Technologies, which produces biobutanol used in fuel and product materials from biomass, raised $22 million in a May round backed by VantagePoint Capital Partners, Pinnacle Ventures, Life Sciences Partners, Harris & Harris Group and Burrill & Co. The Mountain View, Calif.-based company has raised $38 million to date.

Coskata, a Warrenville, Ill.-based developer of technologies for processing biorefuse into ethanol, raised $29 million in a later stage round last year backed by Advanced Technology Ventures, General Motors, The Blackstone Group, Globespan Capital Partners, GreatPoint Ventures and Khosla Ventures. The company has raised $101 million in the past five years from venture investors, and in January cinched $250 million for a planned cellulosic ethanol facility in Alabama, the largest biofuels plant loan guarantee ever.

There are also plenty of areas in which ag investors are looking for deals. One that Ziolkowski cites is the natural ingredients space, such as lower-calorie substitutes for fats and sugars, foods with antioxidant properties, and new flavorings. Food safety is another popular area, in particular, systems that track produce and other items across the supply chain.

Yet another, non-obvious area is robotics, which Zolkowski says could gain traction in U.S. and European agriculture due to shortages of farmworkers. Cultivian funded one such company last year, Billerica, Mass.-based Harvest Automation, which develops robots that work with humans in manual labor projects in agriculture and other industries.

From Pharma to Farm

There aren’t many venture capitalists and never have been who are that interested in agriculture, so if you want to start an ag-based company, it’s tough.”

David McGee Executive Director UC Davis Innovation Access

Many of the applications of most interest to “Big Ag” also come out of companies in the pharmaceutical and life science space, a convergence of interest that’s of increasing relevance to VCs in those sectors.

Among the most directed efforts on this front is a partnership announced in April between Atlas and Monsanto, which is also a limited partner in its latest fund. The partners say they will work jointly to identify investment opportunities of mutual interest in such fields as genomics, informatics and biology.

The focus, says Atlas Partner Jean-Francois Formela, will be on companies that have not raised a venture round, with typical investment size ranging from a few hundred thousand dollars to $1 million. The partnership will include two dedicated staffers – one from Monsanto and one based in Cambridge, Mass., where Atlas is located.

Though Monsanto’s focus will be largely on its core industry, Formela says that Atlas will look broadly at applications beyond agriculture. The idea, he says, is that almost any life science tool that is effective in molecular detection can have relevance in the ag-bio sector. But since agriculture industry acquirers account for only a tiny portion of life sciences M&A, it makes sense to focus on multiple end-markets.

For Atlas to invest in most cases, he says: “The business model would have to be that those companies could be successful independent companies with markets that could include ag-bio but also others and would serve the life sciences market at large.”

As examples of such an approach, he points to Helicos Biosciences, an Atlas-backed gene sequencing company that went public four years ago and currently sells its technology primarily for use in human health research. The company also markets to agriculture industry customers. Others that could fit into this category include genomic analysis toolmaker Affymetrix and laboratory supplier Calipher Life Sciences, neither of which would ever be called an agriculture company, but which develops applications of relevance to the industry.

Another investor active in this arena, historically, is life sciences investor Burrill & Co., which raised two dedicated agbio funds 1998 and 2001. The firm has not raised a follow-on dedicated fund since, although it has continued to make investments in the sector.

There are also pure-play agriculture companies putting advances in genomics are other areas of bioscience to work.

In addition to Divergence, venture-backed Arcadia Biosciences is employing genetics research to develop hardier plants. The Davis, Calif.-based company licensed technology from the University of California at Davis that identified a gene for drought tolerance that could be introduced into plants. Nearby AgraQuest is also a heavy investor in research and development around applying advances in biological science for applications around plant health and yield stimulation, soil fumigation for control of pathogens, and fungal control.

Where Are the Exits?

What’s unclear is the extent to which venture investments in these and other agriculture-focused areas can deliver exits for venture firms.

Companies that have the revenue and traction to consider an IPO can take more than decade to reach that point. AgraQuest, for instance, had its first capital-raising event in 1996 and its most recent this year, raising a $112 million over 12 total rounds, according to Thomson Reuters. The company was rumored to be on the verge of filing to go public several months ago, but has yet to do so.

Long-time horizons for bringing a product to market are one reason venture capitalists have traditionally invested only meagerly in the agriculture sector, says David McGee, executive director of UC Davis InnovationAccess, the university’s tech transfer division.

In the case of genetically engineered plants, for instance, it takes five to seven growing seasons even after a crop is developed to determine if the desired trait is inherited. Another turn-off for venture investors is that commodity pricing for agricultural products does not provide the large profit margins VCs expect.

“There aren’t many venture capitalists and never have been who are that interested in agriculture, so if you want to start an ag-based company, it’s tough,” McGee says.

That said, if one can come up with crops that gain broad acceptance, as Monsanto has done, then it can be a very successful venture because of the sheer size of the market. Additionally, McGee says he sees greater interest from VCs in some areas with broad application in agriculture, such as technologies that can reduce water consumption.

Funding companies to the point of exit is also challenging, says Prolog’s Nykin, as agriculture-focused startups tend to be capital intensive. Given a short list of later stage investors with specialization in agriculture, he says, early stage backers such as Prolog may face challenges finding co-investors for subsequent rounds. The pool of most likely acquirers for agbio companies, though well-capitalized, is also brief: Monasanto, Syngenta, Bayer CropScience, ConAgra and ADM, as well as chemical makers BASF, DuPont and Dow Chemical.

When taking into account all startups tied to the agriculture industry, the field of potential acquirers gets substantially larger. It includes leading packaged foods purveyors such as Kraft, Nestle and Unliver, distributors, and even makers of farm machinery, such as Deere & Co. Investors and entrepreneurs aren’t writing off IPOs either. Though to date, biofuels companies have been the main IPO candidates in the agriculture space, Novazyme’s Cope says he believes there’s some pent-up investor demand for strong offerings in other sub-sectors as well, such as food safety.

As they await agriculture’s blockbuster IPO moment, however, Meeusen and Ziolkowski say they’re still seeing a shortage of capital directed to the industry, particularly for companies in regions with few active venture firms. That’s why agriculture is one of the rare areas where active venture capitalists might actually welcome more competition, Meeusen says.

“We estimate the North American market could accommodate four or five funds like ours before we start stepping on each others’ toes,” he says.