Finistere Ventures’ Kukutai makes case: Agtech is underinvested: corrected

A good case can be made that agtech is underinvested.

The dynamics of a big end market and relatively little capital invested create an attractive landscape for investors, such as Arama Kukutai, co-founder and partner at Finistere Ventures. Kukutai serves on the boards of such companies as Taranis, a precision agriculture intelligence platform, and Crop Pro Insurance, which provides insurance risk management services to farmers.

“Agriculture is less proven than other sectors, but it is an enormous part of the global economy,” Kukutai said.

Still, valuations have been climbing, particularly in later rounds, and check sizes are heading north. To Kukutai, this suggests market opportunities with disruptive companies will require significant capital.

VCJ recently spoke with Kukutai about agtech investing. An edited transcript follows.

Q: How do you view today’s capital flows into agtech?

A: When we think about the capital that [went] to fintech last year, roughly $16 billion, and the venture capital in agtech, [about] $1.5 billion, the sector is underinvested.

Q: You’re investing out of a $150 million second fund. How far into the fund are you?

A: We are probably, from a reserve and investment standpoint, about halfway through our fund. We’ve got nine portfolio investments and we have a number of those now going through Series B and later growth rounds.

We’ve got four or five new deals we are working on this year. By the end of this year we’ll be well positioned with the current fund and thinking about what comes next.

Q: So you are already thinking about raising a third fund?

A: Yes. We plan to go into market and raise in the first quarter of next year. We haven’t formally started raising yet. But we’ve had a lot of inbound interest in what is obviously a sector that is on the upswing.

[While agtech] is a niche part of the venture capital asset class, it is a growing part. It has got a lot of demand from among capital providers. That is partly due to the quality of companies that are out there to invest in and the continuing macroeconomic tailwinds.

Q: Will the new fund be similar in size to your present fund?

A: It probably will be slightly bigger, more likely in the $200 million range.  That is something that is being debated internally and we’ll take some soundings from the market.

A couple factors are behind going larger. One is that there is a maturing group of somewhere between 750 and 800 Series A companies funded over the last five years in the segment. Many are now raising their Series B and sometimes Series C rounds. In some cases we’re seeing a few later than that. So rounds are getting larger and later. And there is a strong cohort of investable next-round companies that we would like to participate in.

We obviously have done a lot of homework to figure out who we think some of the best companies are. That just takes a bit more capital to play your position. That said, there still remains a very strong pipeline of earlier-stage companies and our strategy has been to lead or co-lead in the A round.

Q: Last year’s investment numbers were strong. What do you expect to see in 2018?

A: I would say a similar order of magnitude of total dollars, but possibly a different distribution of dollars. Over the last five years, the segments money has gone to have moved to into indoor farming, supply chain, and then biological, non-chemical forms of crop protection, with companies like Indigo, Ginkgo and others.

We’re going to see more follow-on financings this year. So indoor farming is continuing to attract pretty sizeable checks because it is a somewhat capital-intensive business model. We’re also seeing larger rounds in the digital space as the category leaders start to emerge. I think we’re also going to see more capital go into the fintech area in agriculture.

Q: Round sizes have climbed, particularly later rounds. Are valuations ahead of themselves or justified?

A: It’s not a secret to anyone in venture, or private equity for that matter, that valuations have been on the climb. Look at the National Venture Capital Association data that PitchBook generates.

I believe the Series A pre-money is in the range of $25 million, across all venture. In ag, it is closer to $15 million. Ag has not been as exuberant from a valuation standpoint. Of course there are always outliers.

Q: With nine out of 10 exits in agtech coming from M&A and the agriculture and food industries consolidating, how do you see mergers affecting exits?

A: There is a short-term con, in one sense, in that companies going through the consolidation process are often distracted. Understandably, people are worried about whether they have a job, where that job might be, etc. Till that shakes out, that can slow down the process.

On the flip side, for those that have gone through the process and consolidated, we’re seeing a number of them come out very aggressively in the market looking for innovation because, having gone through the consolidation process and often having bought out one or the other, or taken on new debt, they can’t wait to drive new growth.

It can’t just be all about cost reduction. Technology is the only reliable way to drive growth.

Q: Do you think IPOs will see an impact?

A: We think the shakeup means companies that have got truly the ability to build a substantial company are going to look for the IPO path. We have a number of companies in our portfolio, and that’s their plan.

Correction: Article corrected to state fintech investing, not food tech investing, came to about $16 billion last year.