How farmers can invest in ag tech

Despite market volatility and a slowdown in venture capital activity in 2022, the ag tech space remains a hotbed for investment, innovation, and opportunity. With the support of investment firms such as Fulcrum Global Capital, it's also an area more producers are entering.

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"Not only does an investment give us the chance to make money, but we also get a sneak peek into innovative companies, technologies, and thought processes for production agriculture," says Scott Foote, who operates Foote Cattle Co. with brothers Brad and Greg and has been investing with Fulcrum Global Capital since 2019.

Focused on global food initiatives, Fulcrum Global Capital is always on the lookout for technologies that maintain or increase yield with a more biological (and less chemical or antibiotic) solution, reduce food waste, and improve food safety.

In addition, the innovations must have a sufficient and obvious return on investment (ROI) for the producer. The time frame of that ROI often gets missed, says Kevin Lockett, a partner and chief financial officer at Fulcrum Global Capital.

"When we talk about agriculture, many times the ROI is the actual growing season, because each growing season is different," Lockett says. "Farmers are looking for a very short period where they will at least break even by trying a technology. If it is truly value added, then over time there will be an increase in benefit and, hopefully, in margin."

Located in Kansas, the firm also includes Duane Cantrell, managing partner and chief executive officer, and John Peryam, a partner and general counsel. The trio has more than 100 years of experience building, growing, and investing in industry-leading companies.

2023 Outlook for Ag Tech Investment

Roger Royse says venture investing was down in 2022 across all sectors. "But it is less down in ag tech as institutional investors wait for valuations to drop," says Royse, a partner at Haynes and Boone, LLP. He practices in the areas of corporate and securities law, mergers and acquisitions, and fund formation. "I expect 2023 to see the bottom in valuations and venture and angel investing to pick up again since investment funds have a lot of undeployed funds they have to start spending during their fund term." As ag tech matures as an industry, his firm is also seeing private equity get into investing. "That will only increase, further driving up demand for precision farming solutions," Royse says.

Engaging Farmers and Ranchers

Many of Fulcrum's investors, who represent 13 states across the Midwest, are row crop and livestock producers. "We want people who sign the front of the check, not just the back of the check — people who have to make these innovations work and can potentially help prove their effectiveness," Lockett says.

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To be successful long term, Foote says their operation must take a proactive approach to improve every aspect of how he and his brothers do business. Owned by their father, Bob Foote, since 1985, Foote Cattle Co. has grown through the years to include five feed yards, five ranches, and a bank, among other investments. Today, the sons are continuing their father's legacy of raising quality beef.

Carrying on that tradition means being innovative, so they don't get stuck in a rut. "Cattle feeding is tough. It's important to keep thinking about ways to be better cattle feeders, so we can become more sustainable in our processes and cattle feeding business. Fulcrum gives us the ability to see new products and ideas that may help us achieve that," Foote says. "Some of the innovative companies and technologies it has come across have been interesting to learn about."

For example, Foote says they were included in a call with an entrepreneur who was trying to develop a product to lower methane emissions in livestock. While Fulcrum didn't end up investing in the company, it gave the Footes an advanced look into an innovation that was relevant to their business.

It's common for the Fulcrum team to organize a panel of six to eight farmers so a company can pitch its idea. "As an investor, it makes me feel like I'm really a part of the process," Foote says.

The brothers are currently evaluating TeleSense, a recent exit from Fulcrum's portfolio. Launched in 2014, the company's cable-free technology monitors grain temperature and moisture in the Footes' grain bins as well as in their grain piles. Data is accessed through the TeleSense app.

"We're listening to the air as it moves through the grain because it carries information," says Naeem Zafar, the founder of TeleSense. "The air not only knows the temperature and moisture, but also the CO2 level, which is a leading indicator of an infestation. Knowing when levels are in the danger zone allows you to act before it's too late."

What areas grab investors’ interest?

Farm management is hot right now, says Roger Royse, a partner at Haynes and Boone, LLP, who specializes in corporate and securities law, mergers and acquisitions, and fund formation. "Vertical farming is getting a lot of attention due to its impact on lowering transportation and freight costs. However, it is hard to make a profitable business out of controlled-environment ag," he says. Given the emphasis on clean farming solutions, as well as products that improve a farmer's profit by providing tools that can assess a soil issue before it affects yield, Royse adds that soil health is also an area seeing growth. "Autonomous and electric tractors are also getting a lot of buzz," he says.

Deliberate Investments

Fulcrum looks at hundreds of startups each year and typically invests in only two or three. Because it enters at the Series A round, which is beyond proof of concept, its goal is to exit within three to five years. When an exit occurs, investors receive their pro rata share. To date, the firm has invested in 14 companies, with two exits.

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"They seem to have a very deliberate process and do their due diligence before they spend any dollars on an investment, which helps us be more comfortable," Foote says. "In fact, the three partners all must vote yes before they make an investment."

Indiana producer Bob Fanning, who began investing with Fulcrum in 2017, says, "Some people think a venture capitalist is a swashbuckler who has a knack for picking investments. I don't agree. It really takes disciplined work, and sometimes that's more important than a past record because an investor may have just gotten lucky on a company."

Cantrell admits it's hard not to get incredibly excited and want to move very quickly on a lot of the opportunities that come across their desk. Both Lockett and Cantrell say start-ups that have gone far in their process possess certain qualities. First, the problem being solved must matter. There also must be a solid team behind the idea.

"There is still much work to be done to commercialize successfully, and there is never going to be a straight path from investment to liquidity that's easy," Lockett says. "At this stage, we're investing in the people as well. Those individuals must have the ability to pivot, understand what the market is looking for, and provide a solution to a very big problem in an economical way that makes sense for the end user."

Sabanto, which has developed an aftermarket autonomous farming system, is one of 14 companies in Fulcrum Global Capital's investment portfolio.

Before he made a commitment to invest, Fanning says a lot of thought went into his decision. Investing in a new venture involves a high level of uncertainty, and it can be difficult to tell at the outset whether an investment will pay off.

"We wanted to diversify the farm. As an investor, I also wanted to stay with what I knew: agriculture," he says. "Why not get in early and learn about some of the new trends?"

Because Fulcrum ticked all his boxes, Fanning has invested $250,000 in Fund 1 and $750,000 in Fund 2.

"The long-term record on venture capital investments in the last 15 years has been about a 14% return, but you need to know what you're doing. We have a definite plan and think we can average between 10% to 15% over a period," says Fanning, who started buying land in 1975 and gradually built Pretty Prairie Farms. Today, he raises corn and soybeans and manages timber on about 6,000 acres. "Over the next five to 10 years, we would like to build our farm's portfolio to $5 to $8 million."

Foote says he looks at ROI in two ways. "First, what is the financial return? Second, what is the educational return? In other words, what did we learn through the process that helped us to get better?"

While investing can offer a great opportunity to producers, Fanning says it's important to do your homework. "Be confident before you invest and don't get caught up in a sales pitch," he says.