At its most basic level, venture capital involves investing in companies that create value by solving problems. VC’s often search for companies addressing sectors of the economy that are full of problems — and therefore ripe for disruption. Solutions that effectively alleviate these problems have the potential to spread like wildfire and deliver the rapid, massive scale needed to generate venture-level returns.
From this perspective, Africa’s agriculture industry should be ripe for disruption — and therefore an attractive market for VC investment. Due to a host of problems, Sub-Saharan Africa’s agriculture industry is significantly less productive than the rest of the world.¹
Poor yields lead to significant problems with malnutrition¹:
Inefficiencies throughout the value chain result in agriculture workers creating very little value¹:
And because 56% of all African employees — or 364M people — work in agriculture, the industry’s problems are a significant contributor to poverty¹:
In addition to the industry’s general dysfunction, several other factors suggest Sub-Saharan African agribusinesses are poised for growth:
a) A young, rapidly growing population [median age of 19 years is the youngest region on earth; 2.5% population growth is the fastest¹]
b) Increased connectivity due to the proliferation of internet and cell coverage [72 cell phone subscriptions per 100 people in 2017 vs. 23 in 2007; 22% of the population using internet in 2017 vs. 3% in 2007¹]
c) The world’s growing need for calories and protein
d) Africa’s 60% share of the world’s remaining uncultivated, arable land²
Taken together, it’s not surprising that several emerging market VC’s have homed in on Africa’s agriculture industry. Indeed, private capital has flocked to the space recently³:
Despite the increased interest, there have been relatively few success stories for venture capital in the agriculture industry. Of course, this is partly explained by the challenges faced by all investors in Africa such as scarcity of talent, corruption, opaque and inconsistent property rights, and political instability. But even against this backdrop, investors have managed to find more success in other industries like fintech, energy, ICT, consumer goods, education, and healthcare⁴.
Of the 232 private investments in Sub-Saharan agribusinesses over the past two decades, only four have achieved an exit over $10M (although a few have shown some tangible progress and several others are too early to judge).
This paper explores why it’s been difficult to generate VC-level returns in agriculture and some solutions that show promise.
Problems
Some of the most pressing problems — and therefore some of the biggest opportunities for value-creating solutions — are as follows:
- Long growing seasons necessitate significant working capital and uneven cash flows — seeds and fertilizer need to be purchased before planting, labor and equipment is needed during harvest season, and revenue is generated for only a short window after the harvest. These are typically annual or bi-annual events that result in highly sporadic cash flows (although a few crops in a few climates can be harvested somewhat regularly year-round).
- Small farms are unable to realize economies of scale — most farms are a few acres or less and can’t justify investment in machinery, irrigation, or professional management. Inconsistent property rights, undocumented land ownership, and in some cases the cultural importance of land ownership prevents consolidation into larger farms.
- Rural, sparsely populated areas are difficult to serve — whether it’s selling seed and fertilizer, purchasing harvested produce, providing banking services, or conducting trainings, it takes a lot more time and money to travel between rural communities than it does to reach a similar amount of people in urban settings.
- Dependence on sporadic weather patterns — too much, too little, or poorly timed rains can devastate a crop cycle.
- Opaque prices — lack of knowledge of global, regional, and even local supply and demand lead to sporadic and unpredictable prices.
- Poor access to quality inputs — quality seeds, fertilizer, pesticide, animal feed, veterinary care, etc. are often unavailable or prohibitively expensive in rural areas.
- Poor access to finance — while this is generally true for much of Africa’s population, it is particularly difficult for farmers in rural communities to access credit or insurance products.
- Poor financial and technological literacy — again, this is an issue for a large portion of the African population, but it is more pronounced in rural areas.
If so many problems exist, then why haven’t more companies come along that solve one, create immense amounts of value, and spread across the continent?
We believe it’s because these problems are interrelated. Farmers’ cash flows are sporadic due to natural cyclicality and unpredictable weather. Because farmers’ cash flows are too sporadic, they are too risky for banks to lend to. Because farmers can’t get financing, most can’t afford quality inputs. Because farmers spend so little on inputs, it’s too expensive for input manufacturers to distribute to rural areas. Due to a lack of quality inputs, production is low…and so on and so forth.
If a company offers a solution to one problem, its customers still face all the others. One solution in the face of such a multitude of problems may not be enough to actually make a difference. A great example is solar-powered irrigation pumps, which can be manufactured for as little as $50 and are proven to increase yields up to 3x. This should be a great value proposition for farmers, but it’s not enough to invent and manufacture an affordable, effective solar irrigation pump. A company must also find a way to profitably distribute to rural customers, train them on proper use, facilitate access to credit or offer financing themselves, and then hope the season isn’t ruined by extreme weather, middlemen offering exploitative prices, or a glut in global commodity markets so the farmers can pay back what they owe. If any one of these things does not happen, then there will be no value creation, no sales, no scale, no profit, and no returns for venture investors.
Solutions
So what can a new venture do? In short — everything. Unlike in more developed markets where most new companies pick one thing and do it well, agribusinesses in Africa should try to address multiple problems. For example, if a company produces and sells day-old laying hens, it also needs to consider the challenges of distributing the chicks, ensuring customers have proper feed, and providing access to vaccinations and training. While this sounds — and is — difficult, there are examples of companies successfully solving multiple problems through a couple different strategies.
Vertical Integration
Companies that own multiple pieces of the supply chain are especially well-positioned to solve multiple problems. As in the example above, Ethiochicken does exactly that. Ethiochicken sells day-old laying and broiler chicks, feed, and vaccinations to “agents” it has trained. The agents then raise the chicks for about 45 days until they can survive with less care and sell them to chicken farmers, which are often small, family run operations in rural areas. Ethiochicken also helps source medication and machinery for the end customer chicken farmers. Importantly, it introduced a breed of chicken from France that is significantly more productive than Ethiopia’s native chickens. Ethiochicken’s core operation (hatching and selling chicks) very well may not have succeeded if it didn’t integrate upstream (by producing the feed and vaccinations) and downstream (training agents to raise the chicks and distribute them to final customers). By training the agents and providing proper feed and vaccinations, chick survival rate in the crucial first 45-days increased from 5% to 80%. Other examples of vertically integrated companies include:
- Chicoa Fish Farm — a Mozambique tilapia farm that produces its own feed, grows tilapia from fingerling to adult, and processes the fish in its own plant.
- Tomato Jos — a Nigerian tomato processor that also has a “nucleus farm” and out-grower scheme to supply tomatoes; it also provides training and inputs for its farmers.
- Agilis Partners — a Ugandan large-scale farm that grows, processes, stores, and sells several commodity crops; it also buys crops from third parties
- Aldeia Nova — an Angolan chicken hatchery that sells chicks and feed on credit, trains its customers, buys back eggs and adult chickens, processes meat, and finally sells the meat and eggs.
- The Perennial Food Group — an Ethiopian company that grows seedlings for fruit trees, sells the seedlings and seeds for other crops to smallholder farmers on credit, trains farmers, buys back the produce, processes and packages the produce in its cold-storage warehouse, and finally exports the packaged produce.
The obvious benefit to vertical integration is control of multiple pieces of the value chain. Logistics, working capital, and quality control are all handled internally; double marginalization is eliminated; and production and inventory decisions are much easier to coordinate. There’s no need to rely on possibly unreliable third parties.
The downside is that it can be very difficult to optimize capacity and utilization of different pieces of the value chain. For example, a plant that processes 4 tons of soybeans each month may only require four truckloads of deliveries. If the company were to vertically integrate by owning and operating the trucks, they would sit idle for 26 days each month or roughly 87% of the time. The natural seasonality of most agriculture processes exasperates this issue. Vertical integration is typically asset-heavy, and under-utilized assets make it difficult to achieve venture-level returns.
One of the most simple — and difficult — solutions is scale. Once an operation is big enough, it’s much easier to “right-size” assets for the optimal balance of capacity and utilization. We highlight some ways to achieve scale later on in the paper.
Platform and Partnership
Forging partnerships or building a platform that brings together products and services targeting multiple parts of the value chain is another way to create comprehensive solutions. This can mimic some of the advantages and scope of vertical integration.
One such partnership is the pairing of SunCulture, a company that provides solar-powered drip irrigation systems, and Twiga Foods, a company that matches farmers with offtakers and handles logistics. Samson Makau, a farmer for over 20 years in rural Kenya, explains how a referral from Twiga to SunCulture helped him: “Twiga has brought a new concept to us and we are happy. The partner [SunCulture] has taught us a new way of farming that we have not seen. They demonstrated how to use irrigation and now that I can get water on the whole farm, I will be able to grow more produce.”⁵
For Samson, this partnership creates higher yields and profit. For Twiga, Samson’s larger harvests result in a greater, more reliable source of supply. SunCulture gains a customer. Additionally, SunCulture sells its products on credit, and Sampson’s existing relationship with Twiga guarantees he has a reliable buyer and makes him more creditworthy.
Generally, partnerships like the one between Twiga and SunCulture can help ventures scale by de-risking their customer base (therefore decreasing churn rates and default rates), creating a referral network of additional potential customers (increasing growth and lowering customer acquisition costs), and allowing management to focus on their core operations.
A related business model that’s becoming popular is a more structured platform that brings together stakeholders from multiple parts of the value chain. One such example is DigiFarm, a platform launched by Safaricom. Digifarm is a one-stop shop solution that creates advisory content (through a partnership with Arifu), handles logistics (through a partnership with iProcure), creates mobile payment solutions (through Safaricom’s M-PESA), and has recently invested in its own warehouse depots to handle storage.
Tulaa, another Kenya-based platform, also covers the full value chain by extending financing for inputs, providing advice to farmers, and connecting farmers to buyers through sales agents and off-takers. Lastly, Agribuddy, (though not operating in Africa, it faces similar challenges in Cambodia) is a platform that connects financing, insurance, and market access solutions while providing last-mile distribution and advisory services itself.
What we’ve seen from platform companies is that it’s typically not enough to simply connect various stakeholders. Successful platforms also create some sort of value on their own. This stand-alone value can range from asset-light services like weather-based farming advice to more asset-heavy, high-touch services like last-mile delivery or cold-chain storage. Obviously, the more value the platform creates beyond connections, the easier it is to attract users in the first place and the “stickier” it becomes to its users.
Platforms must also balance the stakeholders in their network — a platform that matches farmers with off-takers can’t attract farmers if it doesn’t have any off-takers, and it can’t attract off-takers if it doesn’t have any farmers. To get around this catch-22, platforms can catalyze the adoption by certain stakeholders by (a) adding stand-alone value as discussed above or (b) subsidizing their use by letting them on the platform for free. For example, Apollo Agriculture connects farmers with input retailers, but it also provides financing and gives farmers free advice based on satellite images and machine learning.
For both partnerships and platforms, it’s incredibly important to ensure partners are reliable. Beyond competency and trustworthiness, partners must have (1) aligned incentives, (2) the resources to scale with all other players on the platform, and (3) a shared vision for the future of the partnership. Venture capitalists can add value by discovering, introducing, and vetting potential partners for their portfolio companies.
Beyond the startups we’ve already mentioned, we believe the companies listed below are well positioned to create value through partnerships — either through organic linkages in a subset of the value chain (e.g. Twiga- Sunculture), or by playing an integral role in a platform solution (e.g. DigiFarm).
- Agriwallet — a Kenya based digital financing company that connects farmers, buyers, and input suppliers. It currently partners with iProcure.
- Farmcrowdy — a Nigerian crowdfunding platform used to finance agriculture projects. Capital is used on inputs and sometimes to purchase land; the platform also facilitates crop insurance provided by a third party and connections to off-takers for the farmers’ produce. Farmcrowdy also provides training for the farmers.
- Apollo Agriculture — a Kenyan company that uses mobile technology, machine learning and remote sensing to provide customized packages of seed, fertilizer, advice, and insurance to smallholder farmers. Apollo partners with rural retailers for distribution — they tell the retailer what inputs the farmer needs, tell the farmers which retailer to go to pick up their package, and facilitate mobile payment through their app. Apollo provides financing, so farmers can purchase inputs on credit and also offers farming advice via recorded voice messages.
- iProcure — a Kenyan logistics company that owns and operates warehouses and last-mile distribution. It aggregates demand from smallholder farmers, analyzes supply and demand data, and shares information with input providers so they know when and where certain inputs need to be inventoried. It also uses its network to connect input suppliers with their end customers, so they can offer after-sale advice and support.
Tactics
Both vertical integration and platform/partnership strategies are difficult to execute. Vertical integration can stretch working capital, under-utilize expensive assets, and weakness in one part of the value chain can disrupt the entire operation. Platform strategies require relinquishing control of portions of the product or service offered to customers, and one unreliable partner can erode trust in the entire network and destroy value for all stakeholders. Both options require a lot of capital and a very broad vision — here we offer a few tactics that can help.
Homegrown model
Some investors — after identifying opportunities to create value in the market but finding no actionable investment options — choose to launch their own ventures. Investors provide the early-stage capital, recruit a management team (or assign some of their own employees to the new venture), and actively build the company. While investors certainly pick the wrong companies at times (hence the entire basis of this paper), some are in positions uniquely well-suited to developing comprehensive solutions. Having seen factors that contribute to the success and failure of ventures addressing individual pieces of the value chain — finance, processing, logistics, inputs, primary production, etc. — some investors can see how the puzzle pieces fit together and how tools applicable to one area can be tweaked to address others. Additionally, this model ensures early access to capital and management teams the investors inherently trust to deliver returns. Building a new venture obviously isn’t an option for most investors, but it is possible to co-invest or provide follow-on financing. Investors that have launched homegrown ventures include Vital Capital, Factor[e] Ventures, Goldtree, and Verdant Frontiers.
Take over existing assets
In many African countries, failed international development initiatives and/or communist state-owned enterprises have produced unused, inefficient, and undervalued assets. In the agribusiness space, these can range from coffee mills to meat processing plants to grain silos to commercial-scale farms. Acquiring these assets cheaply and breathing life into them with competent management and fresh capital can be a great way to quickly achieve the scale necessary for vertical integration or a comprehensive platform. Often, the assets were originally designed for vertical integration, so the value-add comes from improving efficiency rather than building from scratch (which usually requires significantly more capital). EthioChicken, Aldeia Nova, and Goldtree all bought or leased existing, large-scale assets.
De-risk with grants
Most activities in the agriculture value chain have inherent social impact — improving smallholder farmer livelihoods, increasing access to calories and protein, reducing food waste, and using environmental resources like land and water more efficiently fall under the purview of several philanthropies and international development institutions. Building comprehensive solutions — whether through vertical integration, platforms and partnerships, or any other model — typically takes significant amounts of time and money. This is especially true in developing and frontier markets where a lack of reliable information, corruption, scarcity of talent, and poor infrastructure are prevalent. If a VC invests before a venture is “investment ready”, the long, expensive path to scale can destroy investment returns even if the company is eventually successful.
As ventures search for product-market fit, build out their teams, iterate business models, and develop more solutions to more problems, grants can be a great source of capital to bridge the gap between when a company is launched and when it is ready for venture capital. As impact investing and venture philanthropy gain popularity, more options have emerged to bridge the gap — for instance loan guarantees or first-loss capital seeking concessionary returns. Philanthropies and impact investors can be great pipelines or even co-investors, and VC’s should cultivate these relationships. Discovering and helping portfolio companies apply for grants can be a significant way for investors to add value.
For instance, Twiga Foods was founded in 2013 and was awarded over $2M in grant funding before raising over $20M in venture capital in 2017 and 2019. Agriprotein Technologies was founded in 2008 and awarded $1.3M of grant funding and participated in two accelerators from 2012–2014 before it started raising venture capital in 2015. It most recently raised $106M in 2018.
Recommendations
With a huge addressable market, multitude of solvable problems, and potential to create large scale social impact, African agribusiness continues to draw significant interest from many types of investors. In this paper we’ve highlighted the immense challenges facing startups, but there is still reason for optimism for both operators and investors.
The key issue is understanding the intensely interconnected value chain. A venture that focuses on a single problem will likely find it difficult to create sustainable value. The question then becomes what other problems need to be solved, and what’s the best way to solve them? We believe the following tactics and strategies can help can help maximize the likelihood of success by offering comprehensive solutions.
- Acquire existing assets — this is especially helpful for vertically integrated operations that need scale to achieve efficient utilization and capacity.
- Platforms need to add value beyond connections — this helps make the network “sticky” and can catalyze growth in the user base essential to creating value through the network effect.
- Investors can launch their own ventures — with a broad vision and holistic approach, investors can design comprehensive solutions and ensure they have the early-stage capital and talent to execute.
- Team up with the right partners — the right partnership can increase both scope and scale, but partners must have aligned incentives, sufficient resources, and similar visions.
- Tap into grants and/or concessionary capital — use agriculture’s inherent social impact to access cheap capital while ventures build more solutions to more problems.
The pathway to acting on these strategies can vary greatly depending on a particular venture capitalist’s or startup’s goals and capabilities, but as long as the core problem of interdependence is in mind, there are ample ways to create value. As long as the full value chain is considered, there is huge potential to increase yields — for both farmer harvests and investor returns.
Sources:
World Bank Data
McKinsey Global Institute
Preqin Database: Funds raised with stated focus on Sub-Saharan Africa and Agriculture
Pitchbook
https://twiga.ke/2018/09/06/providing-farmers-with-access-to-markets/
