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15 Sep, 2021

Investing in Agtech with Arama Kukutai

David Leydon, Head of Food & AgriBusiness at ifac spoke to global leader in the Agtech space, Arama Kukutai, a former New Zealand dairy farmer, now living in San Francisco. Arama has been at the forefront of investing in agtech globally since he co-founded Finistere Ventures in 2006.

Investment in agtech globally has grown dramatically in the past 15 years. There is an expanding agtech ecosystem in Ireland with agtech top of mind for many existing agribusinesses, farmers, politicians and state agencies.

Arama is well known in the agtech and investing community in Ireland and around the globe. As co-founder of Finistere Ventures, which has investment from the Irish Strategic Investment Fund (ISIF) and has invested in businesses like ApisProtect, he has experience in the Irish agtech sector.

Arama has a global perspective and coming from an operations background he has focused on “using technology as a critical lever to improve the profitability and sustainability of farming”.

We started our conversation looking at the major trends in agtech investment followed by a deeper dive into advice for agtech entrepreneurs in Ireland as well as what agribusinesses need to be aware of and how Ireland can be an agtech European hub.

Growth of Venture Capital into Agriculture

“When we started Finistere back in 2006, there really wasn’t an agri-food venture marketplace. There were tiny amounts of capital being deployed but it wasn’t the sort of space venture investors could drive venture returns. When we fast forward 15 years the landscape is now unrecognisable. Agtech is now a legitimate venture asset class.”

“In 2020, $22 billion was invested representing 50% annual compounded growth over the 2010 to 2020 decade. It’s remarkable growth which has accelerated over the last five years. We’re very bullish about the very long-term future” and in terms of venture investing in agriculture, “we’ve arrived at square one.”

While capital is being invested across the entire chain of food and agriculture, a number of areas get significant investment, including indoor farming, crop protection, inputs management and alternative proteins. Additionally, “there are pockets of new growth in areas like supply chain management, supply chain resilience, as well as continued investment into digital from compliance type technologies to automated recommendations for spraying or for fertiliser based on satellite data”.

Impact on Irish AgriBusiness

How this avalanche of capital and potential disruption into the sector will impact on existing Irish agribusinesses is still to be worked out. It is Arama’s view that “awareness is so critical for legacy agriculture businesses. The scale and speed of investment coming into the agri sector means having that awareness is tougher than it sounds. Last year there were 8,500 distinct investors in a particular study that we looked at.”

For Irish agribusinesses, having awareness of what is happening in their sector is important. Following on from this, one way to maintain relevance and grow their existing business is to acquire talent, technology or brands. There are many lessons for Irish agribusinesses as Arama explains. “When you think about the integration model, it often comes down to people dynamics. I’ve seen more bad jobs done with integration of start ups than good ones, including the classic one - Gosh, California’s a really expensive place to do business. Why don’t we just move everybody to the Midwest? It won’t happen.”

“The integration strategy comes back ultimately to the people. And how do you incentivise, attract and continue to keep the flywheel of creative talent turning? Because often as a large company, that’s what you’re buying. You’re buying talent and capability that doesn’t exist in your own company and looking to infuse it. And it’s very hard.”

“I actually think our chances are better in the food space. For example, a site integrating an alternative protein business into a traditional dairy one, there’s a lot of manufacturing, logistics and other capabilities that once you’ve actually proved the product concept, a large business can do those things much better than small companies.”

We can learn a lot from the Pharmaceuticals sector. Biotech has really replaced the innovation engine of a lot of large pharma companies. Biotech has benefitted from pharma’s experience in taking products to clinical studies, taking them through regulatory, getting them into manufacturing, getting products distributed and dealing with government affairs compliance. And it’s proved a huge win for both sides. Agri and food companies have had much less exposure than pharmaceuticals so there’s a learning curve.

Ireland as an AgTech Leader

Arama is positive about Ireland as an agtech hub. There already exists a vibrant startup ecosystem, an English-speaking talent pool, lots of high-quality corporate players and an ideal gateway to the wider EU.

He noted that Ireland has got both a domestic as well as an international opportunity. “One of our portfolio companies in robotics recently re-domiciled as an Irish company for exactly that reason and for access to the IT talent that exists in Ireland.”

However, his main observation on what Ireland can do better centred on the need for greater engagement between the investment private sector and the science industry. He noted that there is a lot of intellectual property and technology locked up at university and research institutions.

“There’s a marked difference from what I’ve observed personally in Ireland versus, say, Israel, where frankly, good ideas have really made it out of the lab quickly. I think that Ireland needs to do a better job of unlocking access to technology and aligning incentives”.

He continued, “you’ve got a pretty enviable brand and track record, you don’t have to persuade people outside of Ireland that Ireland’s great at agriculture. Everyone kind of knows that globally already. But I think you really need to speed up the cycle time of getting science and technology out of institutions to startups.”

“It’s an area where I’m convinced there’s a lot of value that can be built at very early stages through leveraging scientific endeavours that will have had, in some cases, years of work put into them before they’re ready for commercialisation. That’s an area where I think you can do a lot to build value in an early- stage business. And this is where government can play a role, too, as there needs to be clear incentives. That’s something that New Zealand has really woken up to and the Israelis already knew how to do it for twenty-five years. I think AgTech Ireland could be the logical place to provide feedback to Government from industry and help in the creation of the ecosystem”.

The growth of venture capital in agtech will bring significant and long term changes to the sector. Arama has made a few key points for the Irish agribusiness sector. Firstly, Irish agribusiness will need to stay alert to understand both the threats but also the opportunities that their current resources and expertise offer them. Secondly, speed to commercialisation from institutions is critical. We need to take the best of the Israeli and New Zealand model and bring it back to Ireland. Finally, Ireland has great opportunity to be a key EU agtech hub. Ensuring all players in the sector are aligned will help us make the most of this opportunity.

Scaling your Agtech Business

Building a successful agtech business is challenging so having a very good team is vital. Indeed, “great technology could get ruined by a bad team”. Arama’s view is that it’s not just about the management team but about “the syndicate of support around the company. We definitely subscribe to the view that there are disproportionate contributions from the founders and leadership, but equally also from the ecosystem around them. Who are the other investors, corporate partners, sponsors, people in their ecosystem to help build that company?”

Having a number of interested investors is great but due diligence is daunting. The basics are still critical whether it is a venture investor or a bank. “Not to sound too boring about it, but do the team really understand their product market fit? How penetrating are their questions or insights about the business model they’re promoting?”

Commenting on red flags in a due diligence process, Arama notes that “a pretty big turnoff from the first round of due diligence is a bunch of misassumptions or misstatements that subsequently change. It shows a lack of understanding”.

Every business has weaknesses and challenges. Arama advises agtech companies to be “candid about where the gaps are, where you need help. You know, some people interpret that as weakness or undermining your negotiating position. It’s the exact opposite. It shows that you understand where the issues are and where you need the help”.

Arama is clear that while his firm is very orientated around venture; “there are many ways you can build a successful business and not all of them necessarily suit a venture capital model for funding. For example, I see companies that want to grow organically and don’t want to carve out any significant control of their business. They are quite happy building a business over a 20-year timeframe.”

Venture has a different profile. “Finistere or any VC is looking for companies that can really drive very rapid growth in their business. Over a five-year period, is there potential to double or triple revenue every year?”

So, to make sense in a venture world Irish agtech entrepreneurs need to ask whether they have a disruptive concept or technology with potential in a very large market which truly solves a big problem?

“VC dollars are very sought after. It’s not just the money, there’s all the capability networks that come with it. There is an enhanced expectation and a level of accountability. This is not suitable if you just want autonomy. We’re looking for founders who are open to being coached, who are like, hey, I don’t have all the answers. I’m going to need some help to grow this business.”

“The majority of our companies will be acquired through Merger and Acquisition (M&A), but we’ve seen in the last three years a wave of companies going for Initial Public Offerings (IPO) and in the last 18 months, the boom of SPAC (Special Purpose Acquisition Company) activity has impacted. Venture investors are looking for a medium three to five times return on invested capital in a five-to-seven year period. So, 20% plus Internal Rate of Return (IRR) number”.

Download the Irish Food & AgriBusiness Report 2021

From Brexit to Covid, trade deals and changing consumer behaviour, Irish food and agribusiness owners have had an extraordinary 12 months