Impact investors call for more ‘creative capital’ for agricultural innovation
Agtech has a very important role to play in building a more efficient, equitable and sustainable global food system. From digital tools to organic tools, agtech entrepreneurs are working collectively to help farmers and food manufacturers create more efficient and healthier food products.
But it will take investors billions to turn that potential into scalable products and services that can help feed a growing population while simultaneously reducing environmental degradation.
“Creative capital” is one way to achieve this. This year’s panelists AgTech NEXT conference, from October 11 to 13 at Donald Danforth Plant Science Center in St. Louis, Missouri, will discuss exactly what this type of investment is (and isn’t) and how the agtech community can generate more of it.
Nancy PfundFounder and Managing Partner at DBL Partners, will kick off the discussion with a keynote address on the topic. It will be followed by a panel discussion featuring Adam BergmanManaging Director, Clean Energy Transition Group & Global Head of AgTech Investment at Town. Martha SchlicherPhD, entrepreneur in residence at BioGenerator and The Lightsmith Group co-founder and managing director Sanjay Wagle will also join the panel.
Definition of “creative capital”
Although it goes by many names (“impact capital”, “confluence capital”), creative capital generally refers to patient, long-term capital that does not require a quick return.
“The commonality of all these words is to have more impact on your investment rather than just a financial return,” she said. APN. “We are fundamentally focused on generating leading financial returns while driving environmental, social and economic progress in the sectors in which we invest.”
Bergman tells APN that creative capital includes “all other financing options besides equity that companies use, which is especially important today when it can be difficult to raise equity”.
Behind the push for more creative capital
Agriculture is responsible for almost a third (27%) of global greenhouse gas emissions, according to recent figures from McKinsey. To decarbonize the sector and create a more sustainable food system, farmers, producers, businesses and startups across the value chain must embrace new advances in agricultural innovation. This includes everything from implementation geospatial technology on the ground to shift to regenerative farming practices that sequester carbon and ultimately help other industries decarbonize.
But many of these technologies are much more difficult to finance than, for example, the applications and software services found at the consumer level. In the early stages, Bergman says, agtech companies are typically capital-intensive and take a long time to prove the technology and get to market. Equity fundraising isn’t always the answer here.
“The economics of raising equity to build facilities, to use for working capital or to pay for equipment isn’t really there. In terms of creative capital, I am referring to some of the less dilutive and non-dilutive sources which could include mezzanine debt, a government loan program or a partnership with a strategic company.
Pfund, whose firm has been making impact investments for more than two decades, firmly believes that investments don’t have to choose between financial returns and environmental benefits. “We generate best-in-class financial returns while driving environmental, social and economic progress in the sectors in which we invest,” she says of DBL Partners. “Since we’ve been doing this for so long, we have a lot of case studies and can show people that there’s no concessions and that the two goals are mutually reinforcing.”
It’s hard to have a discussion these days about investing without discussing the current economic climate.
Climate-focused technologies maybe better than other agribusiness sectors, but most companies in the space are still in the early stages of development and refinement of their technology. Few have material and business traction, says Bergman, and even fewer have positive EBITA.
“We’re talking about start-ups that are often capital-intensive, have a long road to commercialization, and often struggle to raise capital in today’s funding market,” he says.
“The fact that there hasn’t been an IPO since the first quarter [of 2022] and various private boosts are down, it harms the overall ecosystem,” adds Pfund. “You have companies that are reaching their size, and they need to get into the public markets to really grow and become dominant as you know, a Tesla or the solar companies did many years ago.”
On a more positive note, she says the current economic environment as well as current food security and environmental concerns are driving the kind of innovation that encourages longer-term capital.
“Any type of giant corporation born in the 20th century pretty much depends on carbon generation as part of its business model,” says Pfund. “We are currently seeing a shortage of innovative companies [in ag] and on the other hand, we see a lot of incumbent operators in the sector. It’s an incentive for us to jump in a big way and replace incumbents that are tied to a 20th century carbon model.
Bergman, meanwhile, says he’s “very bullish” on the agtech and foodtech sector and sees significant investment. Promising sectors include agricultural biotechnology, robotics and automation, precision agriculture and food waste reduction, to name a few.
A new era for impact investing
Part of this change is generational. Much research suggests younger generations as Millennials and Generation Z are “more active” when it comes to tackling climate change.
Bergman says he’s seen a new generation of investors enter the industry who are taking a longer-term horizon for their investments. “It’s everyone from family offices to corporate strategies and impact investors to sovereign wealth funds. We are also seeing a growing number of specialized investors in the agtech and foodtech sectors.
“[Impact investing] is truly a juggernaut that is here to stay because it is largely driven by the demands of young people who are unwilling to sacrifice their moral and social priorities for profit and gain,” says Pfund. Even with this slowdown, we are still making tremendous progress.