Access to sufficient appropriate capital remains one of the greatest keys to success for indoor agriculture entrepreneurs. In a survey conducted of indoor agriculture industry participants, Newbean Capital found that 53% of respondents stated their biggest business challenge was finding enough funding to operate or expand their farm. In addition, 74% of respondents were currently seeking external capital for their farm.
When discussing funding options for expansion, it is important to make the distinction between debt-based funding and equity-based funding. Debt-based funding is a loan. You either pay it back in installments, or when the loan comes due. Equity funding, on the other hand, is funding that gives investors shares in your company. Typically, with equity funding, an investor does not expect repayment until the business is sold or another investor buys their stake in the business.
A third type, which has been gaining a lot of attention recently, is non-dilutive funding, which doesn’t require a company to give up equity or take on debt. Although more common in the startup phase, non-dilutive funding could make sense for expanding an operation, for instance, if you are launching a new product, or moving into an area where local authorities seek to encourage job creation.
5 -Traditional Bank Loans
A popular form of financing and one that everyone will be familiar with is traditional bank loans. From our survey, 14% respondents took personal bank loans or home equity loans. From our discussions with indoor farmers, most loans to date have been secured against personal assets, rather than business assets. We have been told by farmers that some bankers have trouble comprehending their farming approach and that smaller, local banks have been more accommodating than larger ones at securing loans. This could be, in part, that they have a greater appreciation of the value that indoor farms bring to their communities.
4 – Private Equity and Strategic Investors
If you are looking to expand your operation, especially if you are looking to merge with or acquire another farm, private equity funds could be an option. These investors typically invest in the equity of mid-sized or larger companies and are often associated with mergers and acquisitions. Typically, they are looking to make investments of at least $10MM and often over $100MM. Oftentimes, they will look for a situation where they can acquire many businesses in the same industry and combine them (a rollup strategy).
In the legal cannabis industry, mergers and acquisitions have been commonplace for a while. In 2015, for example, there were at least 70MM in mergers and acquisitions alone . On the strategic investment side, for example, Scotts Miracle-Gro has made a series of hydroponic acquisitions, including General Hydroponics for near $130MM .
Because the industry is so young, the use of this funding source for indoor agriculture is rare but growing. Herb greenhouse grower, Shenandoah Growers, and plant factory major, Plenty Ag, have both secured private equity investors. As the industry starts to mature, and the size of each deal grows, we expect this type of funding to become an increasingly popular, mutually beneficial option to fund an expanding farm.
3 – Vendor Financing
An option that can be practical for many farmers looking to expand their operation is vendor financing and leasing. This allows farmers to dramatically reduce their fixed costs when launching an expansion. Some LED lighting vendors offer this service, and – shameless plug – our sibling company, Contain Inc, works with leading industry vendors and growers to aid them in securing lease financing for their farms.
2 – Venture Capital and Equity Crowdfunding
One of the best-known funding routes is through venture capital. Typically consisting of a group of two to five funds making a succession of equity investments, the venture capital model is best suited to tech focused, fast scaling businesses rather than standard single-site vertical farms. Venture capital companies are typically seeking companies that can deliver multiple years of triple-digit growth along with investment returns of at least 30% (IRR) over a three to four-year period.
While every venture capitalist is different, they typically look for the following qualities in a potential investment:
Team – This is a “make or break” factor in an investment decision. For instance, in a 2015 study, venture capital firm First Round found that younger founders outperformed older ones and most successful teams had at least one founder with an Ivy League, Stanford or MIT education. Prior experience in a tech firm also helped. A notable example, BrightFarms’ founder and CEO – Paul Lightfoot – previously founded Foodline, a venture-backed software company.
Technology – Venture capitalists are used to evaluating technologies as strong technology has historically outsized returns. This has led to the smartest indoor agriculture entrepreneurs to push their ability to develop and defend their proprietary technology as their pitch.
Traction – Most funders will expect to see that their startup’s technology has traction. They will expect to see a viable plan to scale the business. The farms that have been most successful in securing funding have planned multiple farms nationwide.
Timing – It’s much easier for venture capitalists to fund in an industry that is growing. Indoor agriculture is in prosperous times, but the challenge for investors is to understand if this translates into longer-term investments.
1 – Non-Dilutive Sources
While typically seen in a startup phase, there are a few practical ways to fund an expansion with non-dilutive funding. It all just depends on how you plan on expanding your farm.
For instance, government and private grants are an often-overlooked source of funding. Applying can be cumbersome, but the odds of winning a grant can be far higher than securing funding from a private investment. In addition, some may require a cost match, but there are many available for farms of all stages.
Want to know more?
Don’t miss the 6th Annual Indoor Ag Con on May 2-3 at the Las Vegas Convention Center. Make sure to catch the session “Should We Raise External Funds for our Indoor Farm?” with Jigar Shah, Co-Founder & President of Generate Capital. You can find the complete speaking agenda here. Want to attend? You can register here. Want to join our amazing variety of exhibitors? You can register to exhibit here.
Join Us at the 6th Annual Indoor Ag-Con on May 2-3, 2018
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