How to Attract High-Quality Capital to Your AgTech Business
Written By: Robert Glanville, Member of Agritecture’s Advisory Board
While AgTech entrepreneurs are full of energy and enthusiasm, many struggle to attract meaningful capital to their companies. The struggle is often due to inexperience and a lack of understanding of how to present their business models to sophisticated, high-quality institutional capital. The term “high-quality capital” refers to investors with sufficient available capital to finance fledgling businesses or projects through self-sufficiency and beyond, and who can and will provide advice and support as the business or project grows.
The purpose of this post is to provide a road map—or a way of thinking—to guide those entrepreneurs in approaching institutional capital (or all capital, for that matter) and being successful in doing so. Following this road map will yield several secondary benefits for the entrepreneur, including increased preparedness to address the financial and operational challenges associated with the business or project, as well as a framework to contextualize feedback received from potential financial sponsors.
The core construct or road map is built around the following “4Ms”:
(1) Macro Environment: The entrepreneur must be able to articulate—using data—answers to the following questions about how their product or service fits into the larger macro environment:
What the key dynamics are for the fresh food/local urban agriculture market in your geography?
What are the general market dynamics for the problem that your product aims to solve (if a vendor to Controlled Environment Agriculture)?
What are some “existence proofs” (i.e. similar businesses or business models that are riding the same macro wave)?
Why do we expect significant demand for our product(s) relative to how the “problem” is being dealt with today?
(2) Micro (or Unit) Economics: The entrepreneur must be able to show what the unit economics are in the entrepreneur’s specific sub-markets for the key products to be grown on a per-weight basis.
Example: “If we grow X product, we expect Y revenue, and that translates to Z cash flows”
Or: “What is the net cash flow after all operating costs, relative to how much in capital expenditures and j-curve costs, creating an ROA (pre-tax) analysis?”
The assumptions should be based on real-world data (inputs and outputs), again as feasible based on existence proofs. The same thinking applies to AgTech vendors—how are we certain that the pricing structure and approach provided make sense versus the real-world solutions that businesses are using today?
(3) Management: The entrepreneur must consider and answer the following management-related questions:
Does the entrepreneur (and her team) have the requisite experience and firepower to execute? If not, where will the expertise and throughput come from, and how will it be recruited?
How does the management team need to evolve as the business grows? What skills are more important earlier or later in the growth process?
Has the entrepreneur (and team) experienced failure in the past, and if so, what was learned from those experiences?
How will management be incentivized to perform and manage the myriad significant challenges that face any fledgling entrepreneurial organization?
Is there a deep talent pool with the requisite skill sets available in the relevant geographies?
How will the inevitable challenges facing the business be addressed?
(4) Model: The entrepreneur must be able to show (usually in a combination of narrative and spreadsheet form):
How much capital is necessary to achieve break-even and to grow the business to size X (i.e. revenues and net cash flow), over what period of time?
The Model should also demonstrate the key inflection points for the business.
Example: “When are we going to know that the Micro (Unit) Economics we forecast are in the ballpark (or not), relative to how much capital we have put to work and at risk?”
There is a danger that “spreadsheet jockeying” (and over-engineering) can obscure the key facts that must be communicated in the Model component of the 4Ms—often, the entrepreneur will spend too much time (and model effort) around the financing assumptions (such as debt financing) rather than focusing on how the business will play out from a capital-requirements and operating-cash-flow point of view.
“Our core service is to provide clients with industry knowledge and data to prepare them to answer these questions as they seek high-quality capital,'' says Jeffrey Landau, Director of Business Development at Agritecture. “We fill in those gaps to better prepare our clients so they can articulate their vision with the proper industry context of lessons learned and best practices. The 4Ms is a framework we utilize with our clients from the concept development all the way through to the economic analysis.
One observation we’ve made at Agritecture is that entrepreneurs must be able to conceive of a new reality—a reality in which the businesses they are planning to build exist (whereas today they exist solely in their minds or in a business-plan form). One of our most important responsibilities is to ensure that an entrepreneur’s new reality is realistic and can come to fruition as self-sufficient, supportive of the capital that must be deployed to give that alternative reality a chance to succeed.
Entrepreneurs who are prepared to think this way will find the 4Ms construct crucial to approaching all forms of capital—“friend-and-family” capital, grant or seed capital, and high-quality institutional capital. We believe that entrepreneurs who are willing to test themselves with the 4Ms construct will be prepared to attract the necessary capital to bring their ideas from concept to execution, and ultimately, to franchise value and sustainability.