Who is Going to Fund Your Agri Startup?

India is an agrarian economy with agriculture contributing 17.4 per cent to the national GVA (at current prices) and providing bread and butter to 57 per cent people.  It is one such domain that has always been a focus area for the government of India but remained on a low growth trajectory. The reasons may be frequent extreme weather events led by climate change, less adoption of modern agricultural technologies, lack of awareness amongst farmers for improved farming practices, absence of strong agricultural extension machinery and less number of entrepreneurial ventures and many more.

It is well established that technological progress is a key factor for agricultural growth as well as economic development (Barro and Sala-i-Martin, 1997). One way of achieving technological progress is by simply acquiring the technologies existing elsewhere in the world. Alternatively, nations can also attempt to enhance their own technological innovation capabilities (Shih and Chang, 2009). In case of embodied technologies, where the technology is embedded in a physical input, such as seed or machine or fertilizer, provision of safeguarding the technology through patenting is high. This also provides an opportunity for budding entrepreneurs to commercialize the ideas by marketing them.  

In agriculture, generally, whenever there is a talk about entrepreneurship, an image of a rural clad appears in our mind. Now the scenario is changing. The startups, that are coming in, belong to high tech era of agriculture i.e., applications of robotics in agriculture, wearable computing and augmented reality, precision farming etc. They are young, educated and experienced beings who don’t inherently belong to agriculture rather they are strong supporters of the convergence theory of different disciplines.  

Even though agriculture is a complex domain dependent upon various environmental and ecological parameters, there is money to be made. Also, Government’s interest in promoting the sector makes it a large pie of the cake for investors. Areas like irrigation, water, soil, warehousing and cold storages have also attracted public sector investments. Hence, Agriculture has become a mandatory topic of discussion in all startup events and investors’ meets. 

The focus areas in which the agricultural entrepreneurship is getting shape are Agri Inputs, Post-harvest and Food Processing, Farm Retailing, Natural Resource Management, Farm Mechanization, Precision Farming, Agri & Agri health services, ICT in Agriculture, Dairying, Biotechnology, Sustainable Agriculture, Agri Education, Supply Chain Management, Livestock and Fisheries etc.   

If we look at the grand pie of startups working in composite Indian startup ecosystem, we will find that 11 percent of them are agri-tech startups (Grand Thorton). In 2016, Fifty-three Indian Agritech startups raised 313 Million INR as private funding (Agfunder'sAgtech Report). According to the same report, India is one of the top six active destinations in the world for agritech startups. In 2017, Indian Agritech startups attracted $ 36 Mn into their kitty in which Pune based Agrostar and Noida based EM3 Agro services topped by raising a series B funding of $10 Million from Accel India and Global Innovation fund (GIF) led funds respectively. The Investors prefer different stages of the company for funding as there is no set rule for this. They have their own specializations regarding company’s growth cycle stage. These firms invest in majorly five stages depending upon their specialization i.e., Seed, Start-up, Early, Expansion and Mezzanine. Some other nomenclatures are also there in practice. However, they are a bit loosely defined. An analogy has been made to properly understand the same is given in Table. The expectations regarding manifold returns are generally higher if the investors invest in the initial stages of the company’s growth as compared to their later counterparts on the basis of their increased stay within the company.   

Table: Stages of funding for startups in India  

There are various funding agencies involved in this; Government, debt mechanism and private funding ventures. The details of these institutions are listed below: 

Government Grant-in-aid: Government supports agricultural startups with a variety of modes. One of them is the grant-in-aid support, which is being given to the startups based on their eligibility and selection. Technology Development Board’s grant, BIRAC’s BIG Grant, NIDHI-PRAYAS, MSME etcare few names in the list of funding agencies. The entrepreneurs either have to directly apply to these agencies or they have to apply through business incubators. The grant-in-aid is generally given for product and market development. But it is a tedious and cumbersome process that takes months to execute in many cases and the ticket size is also small.

Debt funding: Generally, it is thought that only banks provide debt funding, but,it is not true. Some government agencies and private investors are also providing debt assistance. Technology Development Board, InnovenCapital, Trifecta Capital etc are amongst the list of private and public-sector entities. The good news with debt capital is that the entrepreneur doesn’t lose any control over the firm for raising the finances, although, raising the debt capital is a tough task. 

Equity Funding: When someone establishes a company, s/he creates equity stakes (shares) adjacent to the money invested in the company. Here the startups are being provided with funds by charging them a percentage of their equity stakes (percentage of shares). This is how the investor becomes the shareholder of the company and is eligible to have board seat, voting rights and dividends. Although the one who invests in equity doesn’t have the ambition to stay with the firm for long. They invest in the company, stay there on the board for some time till when they get their desired RoIand then they move out of the company by selling the shares. The following entities fund the startups through this mode: 

Government: A 'fund of funds' of INR 10,000 crores has been established by GoI for supporting tech driven startups and agriculture is one focus area for this. The fund is being management by Small Industries Development Bank of India (SIDBI). SIDBI is investing this fund in SEBI registered Alternate Investment Funds (AIFs) and they have given 605.7 crores to 17 AIFs (Jan, 2018). Apart from this, Technology Development Board also provides equity capital to agricultural startups. 

Incubators: Business Incubators also provide funding to startups from their pool of funds and charge equity against it i.e., Villgro, CIIE Ahmedabad etc. 

Angel Investors: These are individual investors who have an urge to invest in startups with their surplus money. Now they are also associated with some consortium of angel investors and collectively select as well as invest in startups. As they enter at the seed stage of the company, they bear the highest risk after the founder and hence they charge handsome amount of equity from the founder upto 30 per cent. They also bring expert mentoring to the startup along with funds. 

Venture Capitalists (VC): Venture Capital funds are pool of funds collected from different entities and bodies i.e., PPF, Corporate Pension Funds, Insurance Companies, HNIs, Foundations, Fund of funds etc. These are being managed by General Partners. There are many VC firms who are providing funds in agriculture i.e., Omnivore, Aspada, Ankur Capital, Unitus Seed Fundsetc.  

Private Equity: Private Equity may be termed as a more mature investment where alike any other options given above, the investors invest in mature firms and buy major stakes and control of the company. They provide working capital for its diversification, expansion, new product development, new market development etc. India Value Fund is one such firm providing private equity in Agriculture.

Venture debt funding: It refers to debt funding being given to venture capital backed companies in their later stages of development. It is given to companies who have already captured a good market share, raised equity finance and are in expansion stage. Here, the companies have a decent repayment capacity and risk is also lower as compared to other stages. Many venture capital and private equity firms provide funding at this stage.

Agriculture has been a rewarding activity since ages and agribusiness is also following the same notion but it comes with its own set of challenges. Crop production and fortunes of farmer depends on weather gods to large extent. Besides this, the prototype development and validation of the offering also takes a hefty amount of time. The validation of the offering/product is necessary to comply with regulations. Unlike other areas i.e., IoT, FMCG, validation of products is on the basis of data collected from fields majorly. For this, trials need to be run on specific crops. It takes a lot of time and perseverance. Funding is a big challenge because of lack of collateral, unproven business idea and lower Return on Investment as compared to other tech sectors. Apart from this, the exit period for an investor is quite high as compared to other hot investment destinations.

Despite of all of these challenges, the investors are looking for disruptive technologies that blend traditional agricultural practices with smart solutions. They are interested in profitable ventures that witness convergence of disciplines i.e., Machine Learning (ML), Artificial Intelligence (AI), Internet-of-things (IoT) etc. They are keen on sectors that enable people to achieve highest efficiency. They believe that with better accessibility to technology, agriculture can be redefined in a better way which is being stared as the most problematic occupation signaling farmers’ suicides, inefficient practices, food wastages etc. It creates a hope of revisiting the wealthy tradition of converging entrepreneurship with agriculture in a prosperous way. 

Authors

Akriti Sharma, Scientist, ZTM & BPD Unit, ICAR-IARI 
Aditya K S, Scientist, Division of Agricultural Economics, ICAR-IARI 
Ankur Ojha, Assistant Professor, Department of FST, NIFTEM, Sonepat