Sprouting Reads #5: Agritech Venture Capital Dilemma -Rhishi Pethe's Interview with Sarah Mock
Shall we critically examine the function of Venture Capital in agriculture?
Wishing you all a Good Friday!
Welcome to the fifth edition of Sprouting Reads.
You can check out the previous editions here.
Sprouting Reads #1: Amitabh Kant's Agritech Oped, Jain Irrigation's Recast Plan & India's Edible Oil Problem.
About Sprouting Reads
If you've ever grown food in your kitchen garden like me, sooner than later, you would realize the importance of letting seeds germinate. As much as I would like to include sprouting as an essential process for the raw foods that my body loves to experiment with, I am keen to see how this mindful practice could be adapted for the food that my mind consumes.
You see, comprehension is as much biological as digestion is.
And so, once in a while, I want to look at one or two articles closely and chew over them. I may or may not have a long-form narrative take on it, but I want to meditate slowly on them so that those among you who are deeply thinking about agriculture could ruminate on them as slowly as wise cows do. Who knows? Perhaps, you may end up seeing them differently.
I discovered the works of Sarah Mock with her provocative article, 80 million reasons to not pay for regenerative agriculture. As a fellow storyteller, many of her words sounded music to my ears - the mental models I have “hired” to make sense of the role of technology and capital in agriculture.
If you’ve been a regular reader in these spaces, and if you’ve taken the time to read between the lines, you would notice that this blog newsletter, Agribusiness Matters, for most parts, has been running on a predictable narrative.
Act 0: I try my darnedest to deflate the inflated expectations that is floating in the air about technology transforming agriculture for the benefit of farmers.(Shall we simply say that the jury is not out yet?)
Act 1: I try my best to unpack the complexity of the domain and show the real wicked challenges involved in designing 21st century systems for the world's oldest industry:Food and agriculture
Act 2: I implore agritech entrepreneurs to do more ground research, get their hands dirty, immerse deeper in farmers' livelihood contexts before they set out to build their groundbreaking marketplace/app/platform.
More recently, when I was chatting in that latest time-waste social media phenomenon called Clubhouse with Mark Kahn (Omnivore Ventures), Sarah Nolet (Tenacious Ventures), and Michael Dean (AgFunder), I reflected on my propensity to do technology bashing in my newsletters while being, ahem, well, an independent agtech consultant.
In doing what I am doing, what am I really doing?
I have been testing a strange hypothesis. You are forewarned. It is going to sound provocative, at best, and lynch-worthy, at worst.
Nature doesn’t have any real connection with money. At the end of the day, it’s a fantasy in our minds. There is no reason to believe that nature respects money.
In a domain like agriculture with massive fat tail risks of nature, this hypothesis has massive implications for
a) Farmers, who have been dreaming to make as much money as consumers who consume the food they grow.
b) Entrepreneurs, who have been building technological systems to help farmers make money while making more money in return, commensurate with the risks involved in building such systems.
c) Venture Capitalists, who have been betting on the agritech experiments entrepreneurs have been doing while making more money in return, commensurate with the risks involved in betting on entrepreneurs.
In that Clubhouse room packed with many VCs, I set my pet cat out among the pigeons with a provocative thesis underpinning my hypothesis:
Save a few parts, Agritech isn’t amenable to venture capital.
Before you come to lynch me, let me start off with a simple question.
If you are given an option to invest in a) Farm b) Factory, what would you choose?
If you are smart, it’s obvious that you will invest money into a factory as the returns are far more certain than if you invest money into a farm. In a factory, the infrastructure is created to respect money. On a farm, Nature doesn’t care about your money and the infrastructure you painstakingly built.
On the farm, you could build a wall that would retain the soil from running out in the rains. One big flood comes and within 15 minutes, your money goes down the drain.
Let’s now approach this thorny question in orthogonal ways.
In a domain in which,
1) The average farm institution (be it FPO or a Cooperative) takes 15-20 years to build and mature.
2) Newer innovations like Vertical Farming are quickly being singled out by VCs themselves as incompatible with Venture Capital (Check out my conversation with Shubhang Shankar for a deep dive on this ).
3) Large vertically integrated agritech firms, which are capable of giving the much desired “exit” options to startups, are busy consolidating
4) The ground rules are far more attuned to the economics of variety than the economics of scale.
It doesn’t seem unreasonable to state this thesis. Doesn’t it?
Few moons ago, Avishek Gupta made an orthogonal, albeit more straightforward argument in his article, “World Domination" of the Agri Supply Chain”
What worries me is that some [his emphasis, not mine] of these companies (startups) and their VC investors are looking at the agri supply chain "domination" game with a similar approach like the Uber/Ola/Flipkart/Amazon model of "world domination" by burning huge volume of money to deliver market distorting "subsidies" to capture market share with the hope that the last startup standing will win it all.
How does one make sense of the role of venture capital, and thus technology in agriculture?
I began to think deeper about it, spurred by this excellent conversation between Rhishi and Sarah.
This conversation had all the necessary ingredients for legendary screenwriter Aaron Sorkin to write a fascinating script on the central conflict between technology and agriculture, as we go ahead with our collective aspiration of feeding a warming planet of 10 billion without really messing up our habitat irrevocably.
Sarah sets the conversation’s opening zinger with her assessment that startups that chase profit, can only come up with ways that create more money, not necessarily feed all people without harming the planet.
“There are a lot of solutions that make a lot of money. But they are not the best solutions to feed people, or to farm in ways that doesn’t threaten the long term viability of human life.”- Sarah
Rhishi returns the opening shot with another important point: “Time Horizon Issue”. In other words, wouldn’t we optimize this problem over time, with enough computational power?
It reminded me of Futurist Amara’s quote: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
Few moons ago, when I spelt out my understanding of Farmer’s Agri-Input Hierarchy of Needs in my subscriber-only article, Plantix and the Two Roads to Digital Agriculture, I drew a beta version of this Maslowesque pyramid.
The problem is this: Farmers are looking at what is important bottom-up, while entrepreneurs are looking at it, top—down.
Sarah responds to this “Time Horizon Issue” this way.
“I would believe that there is a time horizon problem with some of these technologies and that we're going to get there-- but how do you monetize that conversation?
The people who have money in ag are the input companies and they are not interested in investing in getting farmers to pay less for inputs. It's a bad outcome for us, ecologically, as a nation, and in a lot of ways, for farmers themselves. -Sarah
She also spells out the implications for Carbon Markets in stark terms
“If you can become the NASDAQ or the New York stock exchange of carbon trading in agriculture, there is an infinite amount of money to be made. So, of course they're all rushing to do it. They're all trying to be the first.” - Sarah
She further goes on to talk about co-ops, comparing buy-side FBN with sell-side Amul. It is here where she made an interesting point about zero-sum games.
“There's a hundred thousand commercial grain producers in the United States. The problem with ag and co-ops, especially local co-ops is that there is a zero sum game in agriculture and it's land. I want more land. And I can't have it, unless someone else does poorly and wants to give it up so that I can have it. And that kind of zero sum relationship, eventually causes some real problems, and I think inevitably erodes the coop model for commodity grain growers in the US. But elsewhere, I do believe in the model.” -Sarah.
This is a fascinating conversation, and I must thank Rhishi for doing this!
Do check out the complete conversation. It’s worth it.