In 2021, Rocketship.vc, a Silicon Valley-based venture capital (VC) firm backed the Indian agritech startup Animall, a managed marketplace for cattle trading.
Madhu Shalini Iyer, a partner at the firm, said it was their first bet into the sector. The firm decided to invest in Animall after recognising its need and potential in an enormous agrarian market like India, she added.
However, over the last six to eight months, Iyer said the VC firm, which leverages data science and analytics to make investment decisions, has started to witness agritech pop up in their algorithms compelling the firm to look even closer into the sector.
“We are currently evaluating three to four agritech deals as we speak, that should tell you how much has changed for agritech,” Iyer told Moneycontrol in an interaction when she flew down to Mumbai recently.
Rocketship and Iyer’s bullishness towards agritech – a sector that was once left untouched by global investors, is echoed by many venture capitalists and industry experts who are intrigued by the sector’s growth over the last two years. Investors such as General Catalysts, Tiger Global, Sequoia Capital, and Alpha Wave Global, among others have taken cognisance of the sector.
Moneycontrol had earlier reported how investors' optimism in the nascent sector’s potential to grow on rising demand for quality food, supported by macro tailwinds like climate change and food security concerns triggered renewed interest in agritech in 2022.
This year, with private equity and venture capital investors shifting focus towards profitability, biggies in sectors like edtech, ecommerce and fintech – the poster boys of 2021’s startup bash, had to take a step back to re-evaluate their strategies and align themselves to the fundamentals.
Meanwhile, for the agritech ecosystem that witnessed valuations shooting up and continued funding with unwavering investor interest, there seems to be no end to the party.
As the year draws to a close, Moneycontrol took a look back at how the Indian agritech landscape entered a new chapter of growth in 2022 – a year that witnessed an overall lesser deployment of funds into startups even as many VC firms raised large India-focused funds amounting to over $7.8 billion in dry powder.
According to updated data by Venture intelligence, Agritech startups raised a total of $515 million in 49 deals in 2022, a spike of over three times from $161 million raised by agritech startups in 2020 showing how investments in the sector are above the pre-pandemic levels.
However, agritech was not completely unfazed by the perils of the funding winter that hit the ecosystem this year.
This year while the deal count was about 50 deals similar to last year's, the funding amount went down to $515 million from $859 million in 2021 depicting how there was a fall in large cheque sizes in 2022, according to data shared by venture intelligence.
Industry experts believe agritech founders who entered the market with last year’s mindset set themselves up for disappointment in an ecosystem that was witnessing an acute fall in late-stage deals and valuations going down.
“There are a couple of players that had to downsize either their round or the valuations on the tech side in agriculture,” said a source in the know, requesting anonymity.
Full-stack agritech startup DeHaat was expected to raise its latest funding round at a valuation of over $1 billion becoming India’s first agritech unicorn, sources have confirmed. However, the company ended up with a valuation of $695 million post its series E funding which was announced in its entirety at the beginning of December.
The source quoted above said that some agritech startups are witnessing speed bumps because the sector, which offers thin margins, is tough to navigate without capital efficiency and good unit economics.
“It's not like a consumer industry where we can actually spend some money to get the loyalty of the customers and establish a brand and get to profitability later,” they said.
The source added, “You may not be profitable at the EBITDA level, but at least your unit economies with respect to a per transaction on a variable cost basis are very important in agritech.” EBITDA stands for earnings before interest, tax, depreciation, and amortisation.
However, experts believe such instances to be just blips for the sector that otherwise poses a promising outlook for the coming years.
According to a recent report by investment banking firm Avendus Capital, the agritech sector is expected to create around eight to 10 unicorns in the next five years. As of date, the Indian agritech sector has not minted any unicorns. A unicorn is a startup valued at over $1 billion.
The report, which covered startups such as Absolute Foods, Arya.Ag, Dehaat, Farmart, and Bighaat, added that the initial public offering timelines for many agritech ventures are also three to five years away, which can be met with the precursor of active investments.
Pankaj Naik, executive director, and co-head of Digital and Technology Investment Banking at Avendus believes the sector has come off the curve as it has passed the early-stage phase, with product market fit and expectations on good unit economics established.
“Earlier, some of these new phase startups were very small with a GMV (gross market value) of about $50 million. Now, it's almost $180-200 million and they have pretty good gross margins of 10-15 percent,” Naik told Moneycontrol.
Even so, there are some home-grown venture capital firms which plan to steer clear of any agritech investments in the coming year.
Micro VCs, angel networks, and accelerators all want to get into the hottest startups as early as possible. However, Artha, founded by angel investor Anirudh Damani may stay away from agritech, a sector with many eyes on it. Damani said while there are several problems to solve in the sector, he is not big on agritech because it involves a high interface with the government.
“The government is the best lender and there is already a system there. Trying to replace it with a startup does not work unless you are inside the system from the very start. I see founders sitting in cities and trying to solve the problems of rural India and I don't think that city mentality will work there,” said Damani.
Earlier, the micro VC firm backed agritech startups like Farmerz FZ and SeeTree.
What's in store for 2023?
As things stand, Avendus’s Naik believes in 2023, startups in the “burn zone” unnecessarily would not receive much investment.
He said startups which built their businesses in a capital-efficient way with positive CM1 and CM2 (contribution margin one and two) are seeing a lot of interest that's coming their way. “This is where larger cheque sizes of $50-100 million with better valuations are possible,” he added. Contribution margins refer to revenue after deducting variable costs.
“We are seeing some momentum for such startups who will be reached out by the investors now and will take capital next year in February, March, or April based on our fillers, both on the investor side as well as on the company side,” said Naik.
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