VCs look to grow Ag 2.0

If you’re reading this over a meal, look down at the food on your plate. As a conscious consumer, it’s likely that some of your lunch would be considered sustainable. Maybe it’s that artisan cheese, the bread made with regionally sourced flour or the organic lettuce from a company with a national reach such as Earthbound Farms.

The variety of sources for those ingredients is an apt metaphor for the conversation currently taking place around investment in sustainable agriculture. Unlike green tech and energy, where bigger is almost always better, there is debate about where investment in the nation’s food system needs to go to make it more sustainable and environmentally beneficial.

On one side of the conversation are investment advisors such as Janine Yorio, managing director and founder of NewSeed Advisors, a firm focused on sustainable agriculture, natural foods and consumer goods based in New York City. Yorio is the organizer of a series of conferences called Agriculture 2.0 that explore the opportunities in the field of sustainable agriculture.

“The investment community looks at a lot of technologies to make agriculture more sustainable,” she says.

Some of the types of technologies Yorio finds attractive are natural pesticides; farming equipment that conserves fuel; water and fertilizer; and information technology that allows farmers to better measure the resources they use.

She also gravitates toward ideas aimed at closing the waste loop on farms, such as transforming crop and livestock waste into energy.

All of these ideas are attuned to making operations on large-scale farms more efficient. “I don’t see a lot of mainstream investment going to technology focused on small farms,” she says.

Those on the other side of the fence argue that small and regional agriculture concerns are the source for true change to the food landscape in the United States.

“The nature of venture capital investing is attuned to bubbles and quick returns,” says Scott Exo, executive director of Portland-based Food Alliance, a non-profit that’s developed an independently verified certification system for sustainable farms and food processors.

“The difficulty I have is that agriculture, by definition, is a long-term proposition that requires knowledge and investments that take a longer-term view,” he adds.

He points to organizations that also need financing, such as Holistic Management International, which helps ranchers take a longer-range view of ranchland management.

Making the land more productive by allowing natural grasses to return and re-seed themselves offers more opportunities for income thanks to demand for higher quality meat. Ranchers also potentially stand to benefit if they can sell credits for sequestering carbon by reducing crop and forage burning. But making changes like that can be costly and takes time, an equation that generally turns off institutional and venture capital investors, claims Exo.

Food companies that process crops and then sell their products on the wholesale and retail markets face similar dilemmas. After choosing to use sustainable ingredients, the biggest impact they can have is reducing greenhouse gas emissions from their supply chains.

Again, two approaches compete for investment dollars. Entrepreneurs can either reduce the miles their locally produced product travels to market or they can use new technology to change the costs and impacts associated with a national or international supply chain.

Globally Fresh Foods has pursued the latter. This California-based company says its food-packaging technology allows seafood to remain fresh for 30 days and gives it a shelf life up to two weeks so it can be shipped by sea instead of air.

That strategy appeals to Ag 2.0 investors like Paul Matteucci, a partner at US Venture Partners in Silicon Valley.

“Most of the opportunities I have seen that are trying to shrink the supply chain don’t seem to be very scalable to me,” he says. “They’re producing a premium product with a low shelf life that has to be sold fast to high-end buyers.”

“There are only so many consumers willing to buy a $4 head of lettuce,” he adds.

Matteucci says he’s currently interested in startups working on ideas related to supplying protein to large-scale aquaculture companies.

Locavore entrepreneurs are sometimes forced to finance their own startups, such as Josh Dorf, president of Stone-Buhr Flour Company.

In 2002, he acquired the Stone-Buhr brand with no outside investment. The Bay Area-based company works exclusively with family farmers on the West Coast who are certified by Food Alliance. It won’t ship its product further east than Utah and reports annual revenues of about $2 million, which Dorf says suits his plans well.

“The big concern is institutional investors looking for the classic metrics of VC in the dot-com era,”  he says.

That means that they want to invest in low-cost products that increase short-term crop yields, according to Dorf. Transforming a farm to an organic operation or otherwise changing agricultural operations so a finite allotment of soil is able to continue yielding crops requires longer-term investments than most venture capitalists are willing or able, to make, he claims.

There is no well-defined path to a sustainable food system in the United States, but even investments in locally focused companies on the West Coast should look attractive to investors, says Dorf.

“The fortunate thing in my mind is that the western U.S. is a huge market,” he says. 

In other words, the large population of people on the West Coast who care about the source of their food provides profitable opportunities for investors and entrepreneurs who are willing to play in the sustainable agriculture game over the long term.