A Unique Form of Funding Could Provide Relief For Indoor Vertical Farms
High Operating Costs and Shrinking VC Are Big Challenges
Indoor vertical farming has seen significant growth. In fact, the industry is expected to exceed $35.3 billion by 2032, up from $5.6 billion in 2022. It is also expected to achieve a compound annual growth rate of 20.8% by 2032, according to Market.us.
There’s a lot driving the trend. Supply chain issues have disrupted distribution for traditional farms. The climate crisis will continue to reduce crop yields. We’re seeing increasing demand for year-round access to fresh fruits and vegetables. And a growing population means we need more food for more people.
The world needs indoor and vertical gardening — and investors have taken notice. Last year, indoor vertical farming investments surpassed $2.4 billion.
Whether that type of investment continues is uncertain. According to PitchBook’s Q1 2023 AgTech Report, indoor farms raised $75.8 million globally across 14 deals in the first three months of 2023, down 70% in deal value from the previous quarter and 91% year-over-year. So far this year, there’s less VC funding available to fill indoor farmers’ coffers. It doesn’t mean the money’s not available; it just may be harder to obtain.
Current challenges eat away at capital
Indoor farmers are facing some headwinds right now. Generally speaking, indoor and vertical growing facilities come with hefty operating costs. These organizations need significant capital to build out facilities and buy equipment.
Additionally, these facilities require a great deal of energy to operate, and that is particularly challenging as we saw electricity prices rise 10.2 percent over the last year, according to the U.S. Bureau of Labor Statistics. Organizations in the industry need cash reserves to cover these high costs.
Indoor vertical gardening also requires highly skilled, qualified people to run the operations. Organizations are competing for workers with a unique skill set in a small talent pool. They need the money to both recruit them and pay them their value.
For many organizations, the cost of building and running their operations is bleeding the equity well dry. They simply don’t have the capital for activities that enable them to scale, like expanding their facilities, hiring the right people, and marketing their product.
Overcoming these challenges requires thinking outside of the box in terms of funding.
Extending the cash runway with equipment leasing
With the potential for less money coming in from outside sources—and both the cost of inflation and energy not going anywhere in the near term—indoor and vertical farming companies will need to figure out ways to stretch the money they do have.
One way to do that is through equipment leasing, which is a flexible low-cost way to finance the type of equipment needed to build and outfit an indoor growing facility. CSC Leasing, for example, offers a non-dilutive equipment lease line up to $20 million that doesn’t have warrants or require restrictive covenants.
Also, what many business owners don’t know is that they may be eligible for a sale leaseback, where an equipment financier purchases pre-owned equipment and places it under lease. For example, CSC offers up to 100% reimbursement, providing organizations with a much-needed influx of cash.
Equipment leasing can enable organizations to:
- Conserve equity capital and bank facilities for mission-critical growth and other key operating initiatives, rather than spending it on depreciating assets.
- Plan more effectively and establish a safety net with predictable payments spread out over several years.
- Hold on to equity in the business—if the lessor offers non-dilutive equipment financing options.
- Gain the liquidity to respond quickly to overcome challenges, act on opportunities and avoid risks.
- Stay on the cutting edge with new technology and avoid the burden of costly obsolescence and equipment disposal.
Ultimately, equipment leasing can provide indoor and vertical gardening organizations with the cash they need to continue to grow the business—even as challenges persist.
If you would like to learn more about CSC’s variety of solutions, contact Jess Hawthorne at jhawthorne@cscleasing.com or 804-239-7368.
The concept of Vertical Farming is not as contemporary as it might seem, with roots plunging deep into ancient history, as far back as the Hanging Gardens of Babylon in 605 BCE. However, it wasn’t until the 20th century that it truly began to blossom as a practical method of farming. The turning point was during WWII, when hydroponics—a subset of Vertical Farming—was employed on a large scale to feed the Allied Forces in the South Pacific, yielding over 8,000 tons of produce. The concept was refined further at Columbia University between 1991 and 1999, under the guidance of Professor Dr. Dickson Despommier. Now hailed as the father of modern Vertical Farming, Despommier and his students successfully devised a way to sustainably feed New York City’s populace via rooftop agriculture, birthing the contemporary approach to multi-story farming.
Hydrofarm Holdings Group, Inc.
One of Winter Farm’s goals is to help growers replace 10% of Canada’s strawberry imports. Can you speak to some of the environmental and economic benefits that could come from achieving this goal, and how Winter Farm is working to make it a reality?
What do you see as the biggest opportunities for the CEA industry as a whole in years to come, and how is Winter Farm working to seize them?
The most significant challenge we see is the need to reach profitability. We’ve all seen the recent headlines of farms shutting down, being delisted, or going through intensely difficult and desperate financial times. We’re starting to see that for many stakeholders, the hype is waning, the honeymoon is over, and investors want to see a return on their investment – or at least a very substantive and believable path to it. For CEA to truly become commercially viable and scalable, farmers need systems and support that help them produce a marketable product in a reasonable timeframe, and with enough margins to see a profit. As an industry, we need to focus more on celebrating the farms that reach profitability and less on how much money has been raised.
AI is evolving faster than any other technology we’ve ever seen. Generative AI like ChatGPT can produce an entire screenplay or write the code for a new app in a matter of minutes. However, the current version is already being replaced with an even more powerful version, GPT-4, which is said to be capable of creating full movies from simple text prompts. This massive jump in performance is due to a 10x increase in data parameters used for training. At AGEYE, we believe the future of indoor farming is data-driven, and our commitment to this goal drives everything we do. In 2019 we started training our vision models to detect crop stress. Fast forward to today, and we’ve expanded our AI platform to cover every aspect of an indoor farm. We’re collecting thousands of data points per plant, per cycle, that we aggerate with environment, energy, and labor data to produce powerful insights and unprecedented visibility across an entire operation. We’re empowering growers with the technology and tools they need to become efficient, sustainable, and, most importantly, profitable.
There are some very fundamental challenges that come with any installation, and while each installation is a bit different, many things we see are common. In the Nebraska installation, we will be retrofitting an existing building. This is quite common. One could argue that an optimal vertical farm would be created in a building specifically designed for vertical farming because everything from airflow to automation and intelligence would fit perfectly into a well-designed and very intentional space. This removes some of the challenges of altering what can sometimes seem like a square peg that needs to be implemented into a round hole. But, realistically speaking, there are real benefits to also retrofitting an existing building. We’re good enough at understanding what has to happen to know if it can successfully happen. A perfect building might be beyond the reach of many people who want to enter vertical indoor farming, while an existing space might mean that someone doesn’t need tens of millions of dollars to set up a successful indoor commercial farm. Repurposing buildings has an inherent appeal in that you are taking something that could be non-productive and turning it into something very productive at a cost point that makes sense for the owner and can create something beneficial in terms of actual production or job creation.
