Agriculture startups failing to cultivate VC interest

Reuters/Rula Rouhana

• Regional agtech funding down by 26%
• Slow returns and risk deter investors
• Sector shows modest signs of recovery

Agriculture technology founders in the Gulf are having to resort to alternative sources of funding, as interest from venture capital entities dries up.

The region is following a global trend. Startups in so-called “agtech” cumulatively raised $1.2 billion across 161 deals in the first quarter of this year, down almost 26 percent and 20 percent respectively.

From 2019 to the year to date, roughly 45 percent of all investors participating in agriculture-focused funding rounds across the Middle East and North Africa were VC firms, followed by accelerator companies and investment companies, according to UAE-based venture data compiler Magnitt. 

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Founders are also turning to family offices, private equity investors, development banks and choosing to strike partnerships for funding.

“One approach is merging with another startup to boost revenue, reduce costs and extend their cash runway. Another viable strategy is seeking acquisition,” said Vijay Valecha, chief investment officer at Century Financial.

“Another viable strategy is seeking acquisition. Some founders, pressured by the tough VC environment, have resorted to executing deals in down rounds (when a private company offers additional shares for sale at a lower price than had been sold for in the previous financing round).”

The sector in the Middle East showed signs of recovery in the second quarter with a total investment value of $23 million last month.

This was shared among three startups, most notably a $16 million injection for Iyris (formerly Red Sea Farms) in its Series A round.

“On the one hand several startups have been able to raise funding,” said Alexander Kappes, CEO of Greener Crop Hydroponic Farm Management. “On the other hand, these investments often come from government/government-linked entities such as ADQ or Aramco, with VCs taking limited risk by participating.”

Resisting risks

Among the myriad "techs" VCs choose to invest in – financial, food, property, insurance – agtech falls down the list primarily because of the risks involved.

In May, property was the top-funded sector, raising $167 million over seven rounds. Financial was next, although it was considerably smaller at $32.7 million in investments across 12 startups, according to Wamda.

Dependence on weather and the slow-growing nature of crops requires patience in a world consumed by pressures for a return on investment.

“As Greener Crop, I gave up on fundraising after 1.5 years of conversations,” said Kappes. “We were shot down by all VCs due to a lack of interest and knowledge in agtech, as well as concerns about the market size and scalability.”

Instead, Kappes said the company “adjusted our model to be cashflow positive” through upfront payments and “had to accept a slower growth” in which they reinvested profits.

Arguably one of the biggest success stories of the agtech sector in the region has been Abu Dhabi-based Pure Harvest. It is certainly one of the best-funded startups, with more than $387 million raised to help fund its high-tech farming products.

But it appears almost to be the exception. Bronte Weir, co-founder and managing director of UAE-based Below Farm said the interest from VCs to invest just was not there.

“At the end of the day, you're growing food. You're not going to make a billion-dollar unicorn out of it,” she said.

“It's taken us a little while to learn that, a lot of knocking on the wrong doors, but now we've found a private equity investor that we are really looking forward to working with.”

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Founded in 2021, Below Farm grows six different types of mushrooms and produces two tonnes of mushrooms per month from its facility at Ajban Farms in Abu Dhabi.

The venture has so far been self-funded by Weir and her co-founders and supplies restaurants, retailers – Spinneys and Kibsons – and direct-to-customers in the UAE. 

Below Farm was involved in the Mohammed bin Rashid Innovation Fund and the World Economic Forum's Uplink accelerator for the circular economy. It is set for a move to a new facility near Kizad, where it will be able to grow “about 10 times the amount of mushrooms”.

“I think controlled environment agriculture has had a lot of focus in terms of VC in the last few years and I think a lot of them have been quite burnt, from Europe and North America,” said Weir.

Just 6 percent of investors made allocations in the agriculture sector in the Mena region over the last five years, according to a report from Clear World, which provides insight on Mena tech for policymakers, investors and founders, despite pressing concerns over climate change and food security.

Last year the UAE launched the National Food Security Strategy 2051, an ambitious vision to transform the country into a leader in the field of innovation-based food security.

“If the state (especially in the least developed countries) is genuinely interested and wants to help, even to the extent of co-financing, their appraisal metrics, as well as those of their development partners, if any, are incompatible and often incomprehensible to the purveyor of VC,” said Phil Riddell, water sector policy and sector financing specialist, Riddell Associates Ltd.