Unitus Ventures is venture capital seeking seed stage investments into disruptive innovations that can scale to impact at least 100,000 families in 5 years. Unitus Ventures is convinced that a significant area of development – with the greatest opportunity to directly and indirectly transform the lives of the global poor — begins with agriculture in India.
This is the first of six part series on Agriculture in which we explore:
- Size Matters: Why Small Farms and Big Waste Are Creating Huge Opportunity in Indian Agriculture
- 50 Venture Backed Companies Transforming Ag
- Financial Services Improving BoP Ag
- Farm IT – Mobiles in the Mud
- Cloud Brings Rain to Indian Ag: Startups Bringing Supply Chain Management to the Ag Supply Chain
- 5 Companies We Like – Indian Ag
This first article provides the big picture of challenges and opportunities. Our look at 50 venture companies identifies a number of trends and hot areas for innovation. The final three articles look at the areas we found to be most interesting in the near term: financial services, farm IT, and cloud-based supply chain management.
Why Small Farms and Big Waste Equals Huge Opportunity in Indian Agriculture
There is a significant paradox between India as a burgeoning superpower with an abundance of natural resources and second largest population in the world, and yet there is an inability to adequately feed and nourish their citizens.
What’s Right about Investing in Improving Agriculture in India?
India has unique agriculture opportunities due the scale and scope of its resources and population. Agriculture is the largest employment sector in the world, supporting two billion people on 550 million farms globally. In India, 115 million farms support 600 million people and agribusiness represents 60-70% of those employed. India also has 180 million hectares of arable land (second only to the United States and larger than the European Union’s 140M hectares) and is the world’s 10th largest economy. While there are vast resources and potential, India’s agricultural sector only accounts for 2% of global trade while 230 million of its citizens—including 50% of children under the age of five—are malnourished.
Agricultural and Food Value Chain and Opportunities for VC Funded Companies
Before diving into investment opportunities, let’s take a quick look at how KPMG has defined the value chain and where there are opportunities for VC funded companies. Within the illustration, input companies are providing physical inputs (seeds, fertilizer and food ingredients) and service inputs (crop protection and crop insurance) to farmers. These activities are characterized as the pre-harvest phase, while the post-harvest phase starts with the transfer crops, meat, dairy from the farm, and ends when the product reaches a final form.
Categories 1-6 represent possible areas for start-ups, while the following evaluations give a relative high, medium or low as to their level of attractiveness for VC funding:
- There is a high level of VC interest within Inputs, especially within the development of new types of seeds and the provision of services such as crop insurance or animal health & nutrition. For example: Richcore, Barrix Agro Sciences, Khedut Agro Engineering, MITRA, and Sai Sudhir.
- There is a high level of VC interest within farming and its subcategories of: planting, selling and growing. For example: Skymet, Uniphore, Eurvaka Tech, and Artoo.
- There is a medium level of VC interest within trading/processing, with some interest into the development of new processing techniques, and the majority of investment going towards the acquisition of processing companies/technologies for vertical integration of the supply-chain. For example: I-WAC, Promethean Power, and Microspin Machine Works.
- There is a low level of VC interest into acquiring most food companies due to their size, however, there is a high level of interest within food companies and coop’s seeking to acquire companies for vertical integration. For example: Zameen, Sresta, Arohan Foods and Milk Mantra.
- There is a low level of VC interest into retail due to the capital requirements associated with large-scale distribution. There are however opportunities for businesses utilizing their E2E capabilities to enable more regional and locally focused sales. For example Knids Green KPGL and, Aroghyam.
- The highest level of VC interest is found within the ‘value chain’ segment, where IT and cloud based services are being developed to support and integrate the supply chain. For example: Frontal Rain, Stellapps Tech, Thinklink, Sohan Lal Commodity and LEAF.
With the taxonomy of agribusiness understood, it time to focus on the some of the unique opportunities, challenges and trends present in India. (See 50 Venture Backed Companies Transforming Ag for deeper look at the market and specific insights into seed stage venture capital opportunities)
What’s Challenging about Investing to Improve Agriculture in India?
The primary challenges (from a venture investor’s perspective) in agricultural improvements are in dealing with the huge number of small and inefficient farms, and in overcoming obstacles caused by an ineffective infrastructure.
Farms are too small to be productive
Average farm size and poor infrastructure are leading contributors to depressingly-low farm yields and deplorable amounts of food waste. Indian farms are small; 70% are less than 1 hectare, while the national average is less than 2 hectares. Oxfam’s information breaks down farm size by region,with and shows farms in Europe and the Unites States are 30X and 150X the size of those in India. This is significant because a number of empirical studies have shown there is an inverse relationship between farm size and productivity, along with a number of the other challenges illustrated in this great article on Fun Facts About Farm Size. Short-term, yield directly impacts cash-flow and the ability to respond to fluctuations in the market. Long-term, yield limits a farmer’s ability to:
- Invest into their farm’s future to increase productivity and decrease risks associated with their crops (via inputs such as seeds, fertilizer, crop insurance, market/weather info, livestock health support, etc.)
- Invest into their families in areas such as education, healthcare, training, etc.
One-third of Indian agriculture spoils, rots or is wasted before reaching consumers due to limited infrastructure and supply chain integration. While significant investment was made during the Green Revolution, lack of maintenance, upkeep and additional development has lead to serious deficits in core areas of water management, storage and transportation. Today, irrigation only reaches 40% of India’s arable land (while a third of the water is lost en route), leaving 70% of India’s farmland dependent on monsoons.
Politics make investing challenging
Since the Green Revolution, inconsistent government policies and intervention has created a challenging environment for domestic and international investors. Domestic subsidies and investments are used in politics as campaign tools. As a result a near continuous contradiction is created since short-term reforms and changes based on election cycles are seldom complimentary and often contrary to the investments directly preceding them. This trend continues at the international level, leading commentary towards India’s agriculture policies to often describe it as “allergic to consistency.” This ‘allergy’, coupled with inconsistent laws and regulations across states, makes doing business difficult and dissuades the deployment of much needed FMI.
Investment is needed throughout the value chain
Indian farmers are not able realize the potential their land is capable of producing in large part due to a number of challenges stemming from land size. Once food is produced, lack of infrastructure and inefficiencies within the supply chain cause the loss of over a third of food produced. It’s these challenges, as daunting as they may seem, that create an opportunity—many would say an imperative—for increased investment into innovative solutions to increase farmer productivity and income.
Global Trends on the Horizon
By 2050 the world will need to create 70% more food—than today—to feed a global population of 9.2 billion people. Climate change is making weather increasingly volatile and severe. The food value chain requires new levels of transparency to accommodate new societal values around foods production, and the realities around food security.
The Challenge of more complexity, volatility and scrutiny
Global agriculture will become more complex, volatile and scrutinized during the coming decades. Demand for food will increase due to population growth—especially within Africa & BRIC nations—while the increasing scarcity of resources and global shifts towards areas such as biofuel will contribute to more complexity.
In addition to these variables, weather volatility from climate change and the increasingly interconnected agricultural markets from globalization will lead to more volatility. Furthermore, global food safety & food security, coupled with increased social awareness towards areas like fair trade, sustainability and organic production, will require new levels of certification and scrutiny into end-to-end production.
The Opportunity for more control, flexibility and transparency
Increased complexity, volatility and scrutiny creates opportunities for those able to bring more control, flexibility and transparency into and throughout the value chain.Healthcare
To accommodate these changes, businesses within agriculture will require a new level of control throughout the supply chain to satisfy additional demand and quality requirements, better IT and data utilization to enable planning and flexibility around weather and market volatility, and, integration throughout the supply chain to create transparency and visibility within the value chain from farm to fork.
No shortage of companies looking to solve the big problems
While there is incredible opportunity for agribusiness in India, there are significant and robust challenges starting at the farm and seen throughout the value chain.
The good news is that for every challenge there are an equal number of opportunities for solutions, positive disruption, innovation, increased efficiency, and wise investment. In our next update, we’ll share the results of research into over 50 companies that are going after these opportunities to improve agricultural outcomes in India, with a particular focus on opportunities within agritech such as disruptive solutions delivered by mobile phones and cloud-based supply-chain management.