Founder Risk, Technical Risk and Market Risk in Agriculture in AgTech

It’s no mystery that venture scale returns have been a challenge to achieve in agriculture.

The reasons are well documented by many and frequently cited as things like:

I think there is truth to some of these, or have some truth built in.

At a macro level, it is interesting to look at the sectors that have been most successful taking on venture capital and what makes them different.

If we look where venture capital has produced its biggest, most consistent returns, it is in software and pharma/biotech.

The rationale might get chalked up to "those are the largest markets," which is true, but not the whole story.

I think the other aspect continually comes down to a VC’s ability to underwrite and manage risk.

I don’t mean that in the sense that “venture doesn’t work for agriculture” — I believe it can, but as many have pointed out, it is an imperfect mechanism.

I think looking at those sectors and how risk is underwritten or thought about helps us understand what makes VC investing in agriculture a challenge for VC’s is navigating that risk.

I think about venture risk in three core categories. Of course, there are others, like regulatory, timing, and geopolitical risk for example, but I think of those as cross-cutting rather than core. I'll come back to regulatory risk specifically.

1. Technical risk - the underlying technology fails to do what it promises, either because of an unforeseen issue at scale or because the breakthrough never arrives.

2. Market risk - the technology works, but the market does not need it, does not adopt it, or adopts it too slowly to deliver venture-style returns.

3. Founder risk - the founder commits fraud, has a personal breakdown, gets side tracked, can’t lead or simply does not have the wherewithal to push the company through some inevitable hurdles.

Every venture-backed company has some exposure to all three.

The interesting question is how many of the three an industry forces a company to solve simultaneously.

Software has been the most lucrative venture category in history, and it carries founder risk and market risk. Pharma and biotech have produced a pile of returns, and they carry founder risk and technical risk.

Agriculture, more than the others, forces you to solve all three simultaneously.