Venture Capital Flowing to Canadian AgTech

Technology and innovation are transforming one of Canada’s most traditional industries, and venture capitalists cannot get enough of it.

While the venture capital (VC) market as a whole finds itself in the middle of a correction that reflects ongoing stock market volatility and global economic uncertainty, the Agriculture Technology (agtech) sector may have bucked the trend. According to PitchBook, Canadian deal volume in this space tripled between 2020 and 2021, and early indications for 2022 suggest we are on track to double the 2021 figure again by the end of the year. It is possible, however, that the market slowdown has yet to bear out in the data, but either way, agtech is, and will continue to be, an important focus for the VC industry. Below we set outsome of the reasons why, and what it means for investors.

AGTECH GOES MAINSTREAM

In the last couple of years, plant-based alternative protein companies such as Impossible Foods and Beyond Meat – both VC backed – have become household names, accelerating the rise of the entire FoodTech industry, including the agtech sector within it.  

New technologies are inherently risky prospects, and VCs know that they will strikeout with the vast majority of their investments. The whole space operates on the basis that success is possible as long as you hit a few homeruns – those portfolio companies that provide investors with a 10 times (or higher) return on their investment.

However, those kinds of returns are only possible for companies with a large market size. And while agtech encompasses much more than alternative proteins, the consumer embrace and proven success of these start-ups has been a boon to the wider sector by signalling the broader market-size and adoption potential.

In our experience, businesses in related fields – including precision farming and seed technology – now have an easier time catching the eye of traditional VC funds and corporate strategic investors hoping to cement their place in the agricultural sector of the future.

Still, challenges remain converting interest into actual investment, thanks to industry-wide caution around company valuations and enhanced scrutiny of results.

CANADIAN SOIL PROVIDES FERTILE GROUND FOR AGTECH START-UPS 

Agriculture has been a mainstay of the Canadian economy for centuries, and it is well-placed to remain long into the future, thanks to a thriving VC ecosystem that is helping the next generation of agricultural entrepreneurs flourish, wherever they are in the country. A continuing challenge that the sector is increasingly addressing is to ensure that this ecosystem continues to become more interconnected across the country.

The sector has also helped Canada tap the potential outside its three most populous provinces, thanks to the developing VC infrastructure emerging in the western regions where the bulk of crops are grown.

For example, a proliferation of accelerators and incubators like Startup Edmonton and Platform Calgary have helped make Alberta a magnet for agtech talent, offering founders and their fledgling businesses the support networks they need in their early stages of development. And when the federal government unveiled its Silicon Valley-inspired Innovation Supercluster Initiative in 2018, it earmarked more than C$170-million in federal funds for Saskatchewan-based Protein Industries Canada to match private sector investments.

The supercluster provides a focal point for academic institutions, non-profits and companies of all sizes involved in plant protein research, while a number of the provincial government’s incentive programs cater to businesses in the agtech field.

OLD PROBLEMS, NEW OPPORTUNITIES

While climate change and supply chain disruption – exacerbated by the Covid pandemic and Russia’s war in Ukraine – have provided the agricultural sector with some of its biggest problems in recent years, agtech developers are attracting investment by pitching themselves as the solutions.

The agricultural sector has frequently found itself in the crosshairs of climate activists as the world has become more focused on environmental issues. Indeed, the government of Canada estimates that as much as 10% of the country’s total greenhouse gas emissions can be traced back to crop and livestock production.

However, agtech companies exploiting developments in alternative proteins, regenerative agriculture and carbon capture look poised to play a major role in reducing the industry’s carbon footprint and combatting climate change more broadly.

Meanwhile, smart farming methods powered by artificial intelligence and big-data analytics promise to tackle local shortages and drive food exports by boosting efficiency and improving crop yields.

PICKING WINNERS

None of the heat in the agtech market makes it any easier for the VC funds and corporate strategics to find the value they are seeking for their investments. So, how should they protect themselves in their search for early-stage partners? Here are our top three tips:

• Look at the leadership: Founders will need to demonstrate not only that they have the expertise and educational background necessary to deliver growth, but also the determination and personality to withstand the exhausting ups and downs of start-up life.

• Obtain sector-specific expertise: Compared with other start-up spaces, agtech relies heavily on a strong command of the sciences, including life-sciences. Companies tend to be faced with hard technical questions that can only be answered with the help of intensive scientific research. As a result, investors will need to go with more than their gut, giving themselves access to a deep well of specialist knowledge about the target’s area of business.   

• Seek legal advice: Ideally,  you should seek legal advice from a full-service law firm that can provide end-to-end coverage of the food and agribusiness sector, as well as extensive VC financing experience.

For more information, please contact:

Marko Trivun                   +1-416-863-3185
Milomir Strbac                +1-416-863-3158

or any other member of our Emerging Companies & Venture Capital or Food, Beverage & Agribusiness groups.