125. Winter is here!

“Software is Feeding the World” is a weekly newsletter for Food/AgTech leaders about technology trends.

Greetings from the San Francisco Bay Area. With the holiday season approaching in the US, Software is Feeding the World newsletter will take some breaks along the way. Here is the schedule for the next few weeks.

Sunday November 27th, 2022 No newsletter due to US Thanksgiving holiday

Sunday December 4th, 2022 Edition 126

Sunday December 11th, 2022 No newsletter due to travel

Sunday December 18th, 2022 Edition 127 (End of Year Review)

Sunday December 25th, 2022 No newsletter due to Christmas holidays

Sunday January 1st, 2022 No newsletter, New Years Day

Sunday January 8th, 2022 No newsletter due to travel

Sunday January 15th, 2022 Edition 128 (2023 Preview)

I want to wish everyone who celebrates a very happy, safe, and restful Thanksgiving.

Winter is here

One of my friends is approaching their 5 year anniversary at the AgTech arm of a large agriculture multinational. I joked with them that they were a loser in the tech world (5 years at the same tech company??) and a newbie in Ag. (Only 5 years???)

Even though it is a throwaway line of a joke, there is a kernel of truth in it.

Agriculture follows the pace of natural cycles, whereas tech on its own can follow a faster cycle of experimentation, and adoption. This fundamental difference in pace between tech and ag, is at the root of many problems faced by the AgTech (Agriculture + Technology) industry.

The mismatch in expectations in AgTech with the reality of natural cycles, has created a narrative (and rightly so) of AgTech not being able to deliver on its big promises. (See Shubhang Shankar’s, Syngenta Ventures essay from 2020)

The mismatch goes both ways. Tech has believed in the story of value creation in Ag at the same pace as other industries. Ag has set internal expectations that tech will deliver and unlock new value at a pace much faster than has been feasible, creating impatience on both sides.

This has been true whether the firms are venture backed or backed by large agriculture giants. Case in point is Climate Corporation is now much more firmly embedded inside Bayer, Granular is now there to support Corteva’s business in some shape or form, and very few pure-play tech companies have grown massive or have been successful.

AgTech companies or tech arms of agriculture companies have the expectation of a “J” curve in revenue growth along a very accelerated timeline. In most cases, every year the “J” curve just keeps getting pushed to the right.

In the current macro-economic environment of high interest rates, it is very much possible that the J-curves get pushed even more to the right. The current environment requires patient capital, and some rebalancing of focus to shorter term revenues to ride out the economic storm and survive to fight another day.

This means, most AgTech companies (or most companies irrespective of sector) need to focus more on the short term, and right size their investments on long term bets.

One can understand this mathematically by looking at the current interest rates, which are running in the 5% to 6% range in the US. Most tech companies need to achieve about 500 basis points above that minimum. They need to generate 11-12% returns (at least) on a risk adjusted basis better than a government bond in the US.

A simple chart can illustrate this point. Most companies will run a discounted cash flow analysis to estimate the money an investor would receive from their investment, adjusted for the time value of money. In a high interest rate environment, cash in future years is much lower adjusted to today vs. in a low interest rate environment.

Chart shows the present value of 10 units of cash flow in out-years adjusted to their current value based on cost of capital. As you can see, a change in cost of capital from 2% to 5% has a huge impact even 3-5 years out. Chart by Rhishi Pethe.

Michael Kempke was talking about grain merchandising on LinkedIn, but it applies to any investment right now.

Mike Solana of Pirate Wires made the same point in his post “Surviving and Thriving in Tech’s New Winter”

While tech’s new winter is no dot-com crash, the industry does appear to be entering an era of uncharacteristic austerity. Where teams aren’t already gutted, hiring is frozen, and budgets are slashed. Climbing interest rates have increased the cost of risk, which means 1) easy venture funding is no longer something any company, at any stage, can rely on, and 2) the future profits of high-growth tech companies are now discounted in a way most young professionals — who came of age after the 2008 housing crash — have never seen.

We have seen many tech companies go through restructuring of costs through layoffs and rebalancing their portfolios of short term vs. long term bets. This is especially true for tech startups, as they need to extend their runway and survive to fight another day.

If you listen to the insightful (but often obnoxious) All-In podcast with Jason Calacanis, Chamath Palihapitiya, David Sacks and David Friedburg (founder of The Climate Corp which was acquired by Monsanto for a $ 1B), they anticipate tough economic times for another two years (early 2025).

AgTech startups need to extend their runway based on their current funding and valuation, which requires managing your spend judiciously and rebalancing your focus on the short term vs. the long term.

One important difference between AgTech companies and non-AgTech Tech companies is that the extension of their runway is non-linear. What do I mean by that?

For example, suppose you are a tech startup helping small businesses manage invoices and billing. If you extend your runway from 18 months to 24 months, by managing your spend appropriately, you have just extended your runway by 33%. (Invoicing and billing for a small business is an year round activity depending on your business)

AgTech is a little different due to the natural cycle of agriculture. Certain tech products can be tried only once during a year. You have to wait for the next season to tweak the product and try it again with your customers.

If you can extend the runway from 18 months to 24 months, and if this includes an additional agriculture season, you have extended your runway by 50%. If that 6 month extension does not include an additional agriculture season, then you have not really extended your runway by much.

Recently, Shubhang Shankar, managing director of Syngenta Group Ventures, Ranveer Chandra, CTO of Agri-Food for Microsoft, and Covadonga Fernandez, corporate development at Kubota Corp talked about the challenging exit market for AgTech startups in the current macro-economic environment.

According to Shubhang Shankar, Ag innovation packaged into a physical product – chemicals, seeds, machines has the best opportunities to exit.

Kubota’s Fernandez said that tangible products are future key targets for acquisition with robotics and automation being the most likely next big deal.

Ranveer Chandra of Microsoft feels that the next space to see some exits will be in environmental, social, and governance reporting, particularly climate reporting such as carbon measurement and markets.

So what should AgTech startups do in this macro-economic environment?

Focus on solving immediate customer problems, which can bring in revenue in the short term.
Focus on managing their spend to y have a chance to survive and fight for another day.
Rebalance your portfolio of short term vs. long term bets.
Establish partnerships within the ecosystem to enable others to reduce costs or increase immediate revenue, to find distribution and access to customers.
Work to foster patience amongst your investors, and most importantly your employees.

It will be a tough few years for AgTech startups.

The silver lining is tough times bring additional focus on what’s essential and what’s not.

Hopefully, we will see some interesting and meaningful innovation come out on the other side of the current macroeconomic environment.

Technology Trends

Google’s Moonshot Lab Is Now in the Strawberry-Counting Business

Bloomberg Businessweek recently highlighted work by Mineral*, a project focused on sustainable agriculture at X, Alphabet’s moonshot factory. (*Full disclosure: I lead the product management and technology program management teams at Mineral).

The article talks about Mineral’s work in phenotyping strawberries at Driscoll’s.

Some key sections from the article,

Mineral is another way of saying Google. The closely guarded project grew out of an effort by the company’s famous innovation lab, X, to use cameras and machine learning to help farmers make better decisions. Working with Driscoll’s, Mineral created large unmanned rovers—the vehicles are a little bigger than a Smart car and are packed with sensors and cameras—that drive up and down crop rows collecting data that tell farmers which plants are thriving and which aren’t.

Besides at Driscoll’s, Google is testing versions of its agricultural technology with more than a dozen other companies including Syngenta, the Chinese state-owned agricultural giant that develops seeds, insecticides and herbicides for staples such as soybeans, corn and wheat. Syngenta has been using Mineral’s rovers to develop algorithms to identify palmer amaranth—a weed that can devastate entire farms if it takes hold. Eventually, this could allow Syngenta’s customers to do more targeted applications of herbicide instead of spraying entire fields.

X’s top executive, Astro Teller, says the idea for X has been to move beyond flashy innovations that don’t necessarily make good businesses to more meaningful endeavors that generate revenue and—in the long run—profit for parent company Alphabet Inc.

Can we trust agriculture to make itself sustainable?

Agriculture accounts for a fifth or a third of the total GHG emissions annually (depending on which report you believe). Agriculture and food systems also offer a portfolio of solutions to mitigate climate change problems.

Many food and agriculture industry players have made commitments to help reduce GHG emissions, help farmers and communities, while helping the industry produce high quality food (hopefully at relatively low prices for consumers).

Some food and agriculture industry players have also been accused of greenwashing. (“Greenwashing is when a company purports to be environmentally conscious for marketing purposes but actually isn’t making any notable sustainability efforts.”)

So how can we trust agriculture to make itself sustainable? The Breakthrough Institute offers a few hints.

And this should be the first rule of industry-led sustainability: If the goal is productivity growth, trust it.

The second rule follows: If big meat, dairy, or any other incumbent company labels anything that is not fundamentally about productivity growth as a sustainability effort, do not trust them.

The Breakthrough Institute couches this through the lens of productivity. Increasing productivity is sustainable all else being equal (a huge assumption). Getting more from the same amount of land is inherently sustainable, all else being equal.

I believe the focus of the industry will be on profitability not necessarily productivity. The Breakthrough Institute does call it out.

The food and agricultural industries cannot improve other sustainability measures—water conservation, manure-related pollution, and habitat protection—without losing money. Each and every one of these improvements cost money, and few, if any, provide a return on that initial investment.

There are certain negative externalities, where public institutions will play a role. Public incentive programs that pay farmers to reduce their nutrient run-off to protect nearby waterways, or stricter rules for producers, the government is a far more trustworthy driver of sustainability.

Technology (the main topic of this newsletter and blog) will also play a key role, as it will help the industry balance the equation along different vectors of sustainability like agronomic (yield), economic (profitability), environmental (ecosystem outcomes), and social/community issues.

In the News

AgTech and Agronomy

Researchers studying nitrogen for a better climate future (Oklahoma State)

Project aims to boost ag tech through improved field connectivity (University of Nebraska)

Three IP issues for AgTech startups

AGCO launches free operational planning tool in Western Europe

What investors should know about investing in food innovation and AgTech

Robotics and Automation

Give soybean plants a voice!

Ag equipment strategies get tricky in a post-pandemic world (from Oklahoma State)

Automated vs. autonomous and Elephants vs. spiders

Sustainability

Leaps by Bayer leads investment round in AgTech pioneer Nucicer to bring unique and cost effective plant protein ingredients to market

Tsunami of weed pressure

Ambrook has been producing some interesting analysis and research. “A Safety Net for Farmworkers During Climate Disasters”

Water is essence of carbon sequestration

Smallholder

Rice is the most prolific source of sustenance worldwide, accounting for approximately 21% of global per capita caloric intake, and 27% per capita caloric intake in developing countries. A staple for more than half of the world’s population, rice cultivation uses 30-40% of the world’s annual consumption of freshwater while contributing to over 10% of the world’s methane emissions. When compared to conventional rice paddy farming, Netafim’s drip irrigation technology out-produces paddy cultivation, using 70% less water, 30% less fertilizer, 36% less energy while reducing methane emissions to nearly zero and arsenic uptake by up to 90%.

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About me

My name is Rhishi Pethe. I lead the product management team at Project Mineral (focused on sustainable agriculture). The views expressed in this newsletter are my personal opinions.

Rhishi Pethe