In my quest to find out why farming is such a tough business, a workshop for Food & Ag Entrepreneurs by a local Angel Investment Network caught my eye. It was a short, half-day workshop with potential investors that promised to explain the process of raising money for food businesses. Perfect! I signed up to be a fly-on-the-wall.
Post-workshop, I can safely say that I still don’t know how farmers can find investors. I doubt there were any farmers in the room, and not once was there any discussion of agriculture-specific (or even food-specific) issues. The content was purely investment focused: How to pitch investors, how to manage a fundraising campaign, how to structure the deal, etc.
The investors leading the workshop were professional investors. They thought in terms of the tech investment model, and wanted to invest in companies that behave like tech companies. Their mental model of a successful company was one that could invent something special, bring it to market, and profit by solving a problem that nobody else has solved.
I say tech, but really I’m talking about the predominant investment model for businesses in general. That model is the business model for how investors make their money, and it goes something like this: In order to make money as an investor, the businesses that succeed must subsidize the ones that fail. Since most businesses fail, the businesses that succeed must be wildly successful to make up for all the unsuccessful businesses.
In investor parlance, investors are searching for the billion-dollar unicorn that pays for all their unsuccessful investments. To do that, investors look for businesses with high growth potential. (You would think that farms would be the epitome of growth potential, but, alas, the growth they seek is financial not biological.) That means staking their hopes on innovation, a idea that is so fresh and new that it can revolutionize an industry. A business that merely has the potential to be profitable if it is well run doesn’t cut it.
Not a bad model, I suppose, but a world away from the businesses that farmers run. A successful farm doesn’t invent a new product. A successful farm sells its food for more that it costs to grow it. A farm business doesn’t need to revolutionize farming; success is in the execution, not the idea. And, while a well-run farm might be profitable, it is limited by its land base and its labour pool. Compared to an idea-driven tech company, it will never be a high-growth unicorn — it’s limited by the constraints of growing real food on real land.
Back to the investment workshop. The businesses in attendance were, by and large, tech companies masquerading as food companies under the buzzword “agribusiness”. Most were promising to revolutionize our food system: That high-growth carrot to lure the investors. Some of them actually may. None of them were farmers. I doubt the tech model of investment is coming to farming any time soon.
The lack of farmers in the room taught me something. The tech model of investing is being applied to all sorts of other businesses that farmers deal with on a day-to-day basis, but not the farms themselves. The problem is, that means these other businesses will all get much bigger than the farmers they do business with (or die trying). The investment model guarantees it.
The problem gets worse. Once a business has gotten big enough (a 10x return is the rule of thumb), the investor needs to cash out their investment. Until the sale is made, the investor hasn’t made a cent. The question is: Who buys large successful businesses? And that answer is: Other investors. These new investors also want to make a large profit, and the cycle repeats, sometimes several times. The result is a business that is constantly under pressure to become even bigger. The cycle ends when the business becomes so large that the buyer is either a giant corporation or a equally giant institutional investor.
This is how food giants like Bayer or Loblaws are made. They are a natural result of the investment model used to finance them. And, while that may not matter much in and of itself, it’s a problem for farmers, because that investment model doesn’t work for farmers. Farms — by their very nature — will always be a poor investment if the goal of investment is to find high-growth unicorns. And, without that investment, farms will always have a disadvantage in market power compared to the giant companies that they do business with.