Agtech investors face a capital drought and can’t take comfort from the experience of the biopharma sector, Sautrau told AgTechNavigator.
Back in 2011-12, the biopharma sector was similarly plagued with “clear delusion, negative perceptions versus digital tech on returns, a shrinking number of specialized funds and inaccessible IPO markets”.
Investors were challenging the relevance of the VC model to finance innovation in the ecosystem, much like in today’s agtech sector.
But biopharma VCs have since outperformed digital tech investors and experienced one of their best performing decades.
Isomorphic Labs, an AI-driven drug discovery company spun out of Alphabet, raised around $600 million in its first external funding round. Adheron Therapeutics was acquired by Roche for $580 million in 2015, when Naurex was also bought by Allergan for $560 million.
“This was accomplished with the traditional VC model,” said Sautrau. “Somehow, they managed to twist it to make it work.”
Agtech shares some similarities with biopharma, according to Sautrau. Both require a combination of multi-technology and sector-specific skills. They involve complex products and investors need a “strong stomach to withstand the ups and downs of the long journey towards a successful exit”.
Are we hunting swans or breeding horses?
But important differences exist too. Digital venturing is often described as the hunt for the ‘Black Swan’ or 10x returns. But agri-food tech investment should focus on breeding horses, not hunting for the unicorn, Sautrau said.
“Placing many small bets creates optionality and allows VCs to double-down when scalability and market traction are achieved. The loss rate tends to be quite high, 40% and above, and the fund performance mostly depends on one or two successful exits.”
Deeptech investing, like biopharma, has less “power-law skew”, where a small number of investments generate the vast majority of returns.
Deeptech’s “double-down-on-winners” ethos doesn’t work in agtech, he says, because agri-food tech companies go through multiple stages of risk: R&D, regulatory approval, industrialization and commercialization.
An ag biologicals start-up could get great field tests and quick regulatory clearance but then experience “significant delays on biomanufacturing that may bring the business to bankruptcy unless venture capitalists bail it out”.
Embrace cyclicality of ag with a broad brush
Embracing the cyclicality of the ag and food sectors is the way forward, Sautrau suggested. “Diversification is the golden rule.”
An investment strategy focusing on a single theme (like the alternative proteins bubble of 2022) may benefit from an “unrivalled expertise to pick up the next tech heroes in their field”, Sautrau pointed out. But the cyclical nature of agri-food, combined with the illiquid aspect of venture capital, make it “doomed” to face high risk.
Diversification could unlock exits too, he argued. “The crop protection market will probably never approach pharma in terms of M&A volumes. However, by investing in a portfolio that gets exposed to acquisitions from ag chemicals, animal health companies, ag equipment suppliers, ingredient specialists and/or food corporates, a broad and resilient M&A market can be synthetically replicated.”
A further step is to invest in “dual technologies”, or solutions that create value for industries beyond agri-food, broadening even more the pool of potential buyers.
“The constant cyclicality of investors sentiment and the fluctuating appetite of corporates for disruptive innovation constitute an undeniable reality that needs to be embraced,” noted Sautrau.
“Breakthrough technologies go through cycles that make them over-bought or over-sold… For venture capitalists this is a structural parameter. A portfolio that is well diversified in terms of investment themes and buyer groups, combined with high discipline to navigate through hypes, is the way to make agri-food tech venturing work.”
