FMS investing “Hot” in 2020
With Farm Management software, sensing, and IoT being the third most popular vertical of investor optimism for 2020, we want to share some of the insights we gained as an investor active in the Agtech industry. By the end of last year, Agfunder and Idea2Scale released the ‘Food & AgTech Investor Sentiment report’, revealing positive sentiment, largely concentrated upstream the “farm to fork” value chain. In this report 46% of investors included Farm Management software, sensing, and IoT in their top three as most excited about. When zooming in on the Farm Management software market, we tend to see a market that has been “on its way” for quite some time (some already started 10 years ago). While we have seen quite a large number of FMS ventures being acquired by the large Agri input companies, so far only a few have made it to an IPO.
“What keeps a FMS CEO awake at night? ”
We have talked to many great entrepreneurs that are revolutionizing farming today and tomorrow. These talks reveal some interesting perspectives on the developments in the FMS segment.
- Sales pitch – ‘ROI/per Acre’
The most advanced FMS solutions (currently in the market) tend to be focused on helping farmers improve yields and/or decrease costs. This value proposition is not unknown to farmers. On the contrary, farmers are targeted on a regular basis by all kinds of vendors selling ‘superior’ products like seeds, crop protection, nutrients, hardware etc. Trust is an important factor to understand what really works and what is just a sales pitch. Selling to farmers requires you to build trust and proof your solution is worth every dollar spent.
Another challenge for FMS companies is that they often deliver ‘observations’, but still require manual intervention to address the flagged issues. Think of satellites, drones & planes, weather stations and other sensors that are able to flag inconsistencies on the ground level. The question often arises if a good farmer or field worker would not have been able to make the same observation by just inspecting the land themselves. We have seen FMS ventures that have addressed this issue by integrating their solution with machinery (eg. integrating with irrigation machinery). What is still often missing is the entire financial overview of the farm as a business in order to track & monitor if an FMS is really improving the overall financial performance of a farm.
- Growth Strategies
FMS ventures with a solid value proposition tend to be able to grow revenue quite rapidly in the first one to two years. Primarily relying on an outbound strategy, where the team visits farmers directly and using their network to find other like-minded farmers. This strategy is of course very capital intensive (requires a large sales force) and with the promise of building a scalable SAAS business, companies often start (in parallel) building the inbound sales strategy. We find this in many blogposts, where ‘Use Cases’ and testimonials are presented. However in general this information provision does not lead to large amounts of inbound requests. One of the reasons founders often mention, is that the majority of their customer base is not very active online. Many later stage ventures often pursue the next real revenue growth phase: the “B2B2F” (Business to Business to Farmer) sales strategy, where a large corporate with a large pool of farmer clients pushes the FMS product to their customer base.
- Strategic direction
The entrepreneurs we have talked to tend to have a very clear vision for their company and have a clear path in mind how to get there. However as with many new businesses, pivoting in a business model/ product will likely occur. We tend to see three flavours:
- Agronomy solution: the venture deepens their solutions on the agronomy side – helping farmers get better insights and improve on getting more and higher quality produce, while effectively managing costs. For most ventures the next step logical step is to start integrating with hardware used on the farm like; tractors, harvesters or irrigation systems.
- Agronomy Platform: in essence most of these solution start of with the value proposition become the ‘business dashboard’ for a farmer. By generating an overview of the farmland, while offering features like; a task manager, machinery tracking, inventory management and next season crop planning. The next phase is focuses on becoming the “go to” platform with a broad offering of solution. In essence often becoming the aggregator of different third party services (eg. precision agriculture and predictive analytics) that they integrate into their solution.
- Financial management platform: the company tries to bridge the gap from the operational perspective to the bookkeeping/ERP side of the farm business. Trying to get the entire financial picture of the farm as a business, while also understanding how the farm is performing from an operational level. These kind of solutions would try to get insights in the overall financial performance of a farm.
Pieces of the Jigsaw 'credit model' puzzle
With Rabo Frontier Ventures we are on the lookout for interesting technology companies that are disrupting or will influence the current business of Rabobank. Our thesis is that with enormous amounts of new data being generated on the farm level (due to the rising use of agricultural machinery, robots and IoT devices like drones and sensor) and also the availability and ease of connecting to public and private data sources (like weather forecast, satellite imagery data and market prices) is creating more transparency throughout the Food & Agricultural supply chain. All these data points become pieces of a jigsaw puzzle that could lead to discovering new (loan) risk assessment models. These developments in combination with platforms that have digital engagement with potential end customers (farmers in this case) can become a new (digital) distribution channel for those currently being served with financial products, but also for the underserved (eg. small holder farmers).
With the expected next wave of capital being poured into the FMS segment (lets hope VC’s will keep there doors open!) we hope to see even more ventures appear in the landscape, but also to see current FMS players further improve their product. We think it is fair to say that the ventures operating in the FMS space face many challenges, but we will (and are) on the lookout for the ones that are really able to deliver on the value proposition that can be proven by high growth (sales) trajectories and positive retention metrics. Even in these challenging times our doors are open, feel free to reach out to Maurits.Lancee@rabobank.nl to get further acquainted.