• Culterra

Investing along the curve: Revealing the best opportunities across the food supply chain

-DOWNLOAD FOOD SUPPLY CHAIN TECH ADOPTION CURVE-

MAY 2021


Ag / Food Tech are undoubtedly having a moment in the sun with $30.5 Billion of fresh capital in 2020, according to AgFunder, representing a 35% increase over 2019. Yet the bulk of value creation and investment to-date have been consolidated at the end-points of Food and Ag - either within Supply (farm / ag), or further downstream within Demand (consumer / retail / restaurants).


Now, with the perfect storm of COVID-related disruptions, intensifying food safety regulations and a proliferation of new business models, like D2C, we are reaching a unique inflection point to create new tech-driven market value within the food supply chain.


MARKET WINDS FAVOR THE BOLD (AND COMMITTED)


As discussed in Culterra Capital’s 2021 Food Supply Chain Predictions, the recent supply chain dislocations have spurred an unprecedented urgency to update a sector that hasn't been significantly modernized since the last century, yet represents ~15% of the global GDP.


With our aging food supply chain infrastructure, data record keeping and reporting, and historical tech investment of less than 1.5% of revenue (LocalGlobe), we are seeing that woeful underinvestment is amplifying risk and disruptions.


It’s clear stakeholders can no longer put off investment into the supply chain tech. But where do they start?


Whether for internal digital transformation projects, or external private capital investors, it is challenging to find alignment between timing of investment and technology / platform maturity. It is often a choice between tech that is market-proven and/or at commercial scale, versus tech which is long-on-promise but still short-on-results.


In sharing our perspectives on The Food Supply Chain Tech Adoption Curve (shown below), we hope to spark additional conversation and strategic interest in scaling tech companies that are solving real challenges from the farmgate to retail / food service provider.


CULTERRA CAPITAL’S FOOD SUPPLY CHAIN TECH ADOPTION CURVE


For the past decade we’ve tracked tech across the food system with our Ag, Food, and most recently, Supply Chain Tech Landscapes. And while helpful to discover new companies and understand the scope of alternatives, these market landscapes stop short of helping investors and stakeholders to understand the alignment between maturity, adoption and investment time horizons.


For this lens, we have found various forms of the Gartner Hype Curve or Tech Adoption Curve quite useful, like the fantastic AgTech adoption curve created by the former Monsanto Growth team for commodity row crops back in 2016.


We’ve often used this approach internally to map various systems in Ag / Food Tech and glean valuable insights to help filter deal flow. Given the particular complexity of the systems and value streams within the food supply chain, this adoption curve has been especially useful to help us visualize the areas of opportunity.

Source: Culterra Capital. Note: In keeping with the four key pillars and sub-sectors of our Food Supply Chain Tech landscape, we plotted relative adoption and maturity in the First Mile (Supply-Side), Production / Food Processing, Distribution & Logistics, and Demand-Side. Download image here.


We are the first to say that this is a subjective exercise, and a sub-sector’s placement relative to another can be more art than science, but in general our extensive research revealed clear market traction and adoption trends, especially relative to capital placement.


IF YOU’RE HUNGRY THERE ARE SMALL, MEDIUM AND LARGE BITE SIZES IN THIS MARKET


Investing into the food vertical, particularly closer to Ag, production and processing, means investing in the long-game. It’s regulated, complex and is historically slow to adopt. If that is not enough, here is what else we like about it:


  • Few dedicated specialists: There has been a flurry of activity from new funds, CVC, ESG / Impact investing, but most are still primarily focused on investments at the end-points (consumers and/or ag inputs).

  • Underinvestment in modern tech: Food supply chains remain dominated by legacy specialized, or highly customized horizontal enterprise technology solutions. As tech demand and spend are increasing, there is a strong need for platforms with Food & Ag specific data sets and capabilities.

  • Early-stage plays: We see venture opportunities to develop vertical plays in strategy & analytics, robotics & automation and specialized logistics players.

  • Roll-up plays: Later-stage investors preferring de-risked technology and proven customer traction can find returns with well-executed add-ons that focus on tight integration, interoperability and investment in technical debt upgrades.


Early-stage innovators can be best-served working hand-in-hand with internal R&D teams and others who have the right mind-sets for pilots and rapid feedback loops. Whereas market-proven tech is generally the domain of later-stage investors and internally-focused procurement, supply chain, and finance decision makers. The bottom line is that all are an important part of the innovation process, but it is critical to understand where companies are on that maturity curve.


To illustrate what we mean by opportunities across the capital stack, we’ve highlighted a handful of target sub-sectors from our market analysis, overlaid with the predominant stage of equity investment given the maturity of those sub-sectors (shown below).

SUPPLY CHAIN HAS LONG TRAJECTORY OF VALUE CREATION AHEAD


Let us leave you with a few data points that illustrate why we think the prize is worth navigating the complexity.


  • Digital transformation will unlock and create entirely new market value across the $15 trillion food and ag global ecosystem, which represents ~15% of global GDP.

  • With over 400k global food processing facilities and ~8k global food and beverage companies with $100m+ of revenue, there is a clear opportunity to capture significant IT spend as digital strategies grow.

  • Tech sector investing is not slowing down. In 2020, U.S.-based Tech Venture Capital activity was $124 billion and Tech PE investment was $134 billion. For comparison, U.S.-based Ag/Food Tech companies raised about $15.5 billion in 2020, or 6% of that total.

  • Food Supply Chain Investment is still comparatively small and concentrated among a handful of mega deals.


By our estimates, the global market for Food Supply Chain Tech is sized at $150 billion and growing. When you start to unpack sub-sectors like AI spend in Food & Bev, which is expected to reach a market size of $30 billion by 2026 (a CAGR of +45%), the potential to transform this part of our aging critical infrastructure is hard to overlook.


Given the scale, urgency, and near-term catalysts, we see the food supply chain as a goldmine of opportunity for building a tech-driven unfair advantage. The next generation of leaders will need to be bold and committed to future-proof our food supply chain, and we look forward to the journey ahead.


-DOWNLOAD FOOD SUPPLY CHAIN TECH ADOPTION CURVE-


Seana Day and Brita Rosenheim are Partners at Culterra Capital, and Venture Partners at Better Food Ventures, each with 20+ years of investment, M&A, and strategy experience within the food, ag and tech verticals. Their analysis on the Agtech and Food Tech sectors are regularly used by participants in the space to understand the quickly evolving landscape. This article originally posted on Ag Funder News.