Upstream Ag Insights - September 4th 2023

Essentials news and highlights for agribusiness professionals

September 04, 2023 • Read Time: 22 minutes

Welcome to the 183rd Edition of Upstream Ag Insights!

The past week had news regarding two of the most prominent agtech companies over the last decade: Indigo Ag and Pivot Bio. 

Pivot Bio shared positive revenue news and future business prospects, while there were reports of a more somber scenario for Indigo: a cratered valuation.

This week’s Upstream Ag Professional edition includes deep dives on both of those scenarios, with Upstream Ag Insights subscribers (if you are reading this, that’s you) seeing just a fraction of the deep dive, missing out on the best insights.

This week is also the release of the first Upstream Ag Professional Video Round-up.

In this month’s exclusive Upstream Ag Professional August Video Round up, I highlight some of the most important takeaways from the month of August. The video can be viewed at this link. Topics include Solinftec and the Solix Platform, Mosaic Bioscience News, Bushel’s $26 million raise and the Implications of Crop Input Destocking.

To gain full access to deep dives, ancillary insights, video content plus more, become an Upstream Ag Professional member today:

Index for the week:

  1. Indigo Ag: Analyzing What Went into their $3.5 billion Valuation and What Went Wrong?

  2. Pivot Bio Revenue Numbers Impress. What Products and Partnerships are Next for the Organization?

    1. Sound Agriculture Fertilizer Replacement Guarantee

  3. Fractal Agriculture Launches Investment Platform

  4. Syngenta Group Reports H1 2023 Results

    1. Plus insightful video podcasts featuring individuals from Syngenta Executives, Venture Capital, Computational Agronomy teams

  5. Gene Editing: Pairwise and Bayer Start New Five-year Multi-Million Dollar Collaboration to Further Advance Short-Stature Corn

  6. Ever.Ag Acquires Roger® to Revolutionize AgTech Logistics: Streamlining Bulk Agricultural Trucking with Enhanced Data Analytics

  7. Exacta Bioscience and Ginkgo Bioworks Announce Partnership to Optimize Exacta's Crop Protection Product

  8. Hanging Up Jerseys in the Agtech Hall of Shame 

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Your Competitors Already Are.

From a CalCalistech article this week:

Agriculture tech startup Indigo AG raised a new funding round at a valuation of just $200 million last month, a 94% drop from the $3.5 billion at which it was valued two years ago.

Indigo Background

Indigo is well-known in the agriculture industry for being the highest-valued agtech company.

The valuation and more than $1.5 billion invested over the last decade were largely thanks to early CEO David Perry, who constructed an elaborate vision of Indigo’s potential to disrupt the grain value chain, reimagine how farmers bought various inputs and were paid for their grain, along with what they got paid for, being a catalyst for the carbon credit buzz within agriculture.

This led to Indigo starting various business units and acquiring others from the likes of transportation and storage capabilities, microbial products, agronomic and grain merchandising software and a carbon business. It also had Indigo expanding rapidly around the globe, with operations in the USA along with Argentina, Brazil, and Europe, plus a joint venture in India.

This led Perry to tell AgFunder News in 2020 that Indigo was “five start-ups in one.”

According to Crunchbase, by Q2 2020 Indigo had already raised over $1.2 billion and set the expectations that they were creating a direct-to-farmer relationship and were going to be able to monetize the “2-3 metric tonnes per acre of carbon” that farmers were sequestering each year.

Later in 2020 Perry stepped down from his duties and was replaced by current CEO Ron Hovsepian.

Afterward, Indigo began to consolidate their business units and focus to where they are today:

  • Biologicals

  • Carbon

  • Market+ (grain software)

What is most notable about two of these areas, Biologicals and Market+, is who they sold, what they sold and why that impacts the business valuation.

Tech Valuations and Why $3.5 billion Didn’t Make Sense

When we look at how Indigo got to it’s valuation we often hear “tech-like” valuations. I think it’s important to unpack that.

The Indigo multi-billion dollar valuation was based upon several assumptions, but to me three stand out:

  1. eliminating middlemen in the value chain

  2. software-like gross margins

  3. new, market-creating revenues (carbon)

  4. large total addressable market

Middlemen

When it comes to eliminating middlemen, this was to mean input retailers and grain companies with the assumption of Indigo being able to accrue that portion of the margin pool through a grain marketplace, connecting farmers to end commodity users and direct-to-farmer biological sales. It was assumed Indigo could access these profit pools as well as tap into other downstream pools (eg: premiums from CPG’s).

However, if we look at the challenges within the North American agriculture landscape— we know marketplaces do not work and direct-to-farmer sales are hard to scale. Acquiring farm customers directly is difficult and expensive. This led to Indigo selling the biologicals into the traditional retail channel, which means a similar margin profile to all other biological businesses and the same competitive dynamics for an essentially undifferentiated biological product.

The same goes for Market+. The software is meant for grain origination businesses which means they compete with the likes of Bushel and Barchart and instead of having their total addressable market being every farmer in the United States, their addressable market becomes only the grain origination businesses.

The Indigo business, as of August 2023, doesn’t allow Indigo to capture dollars from any other company’s profit pool in the value chain. This is “strike one” when it comes to delivering a return to their shareholders at their multi-billion dollar valuation.

Software Gross Margins

When we hear “tech multiples” or “software margins” this at it’s most basic means:

  1. 70+% gross margins

  2. Zero marginal cost (or close to zero)

Investors like software businesses because they can “build once and sell infinitely.” Once you build software and acquire a customer, the continued use of that software has a parabolic-like potential for earnings.

Let’s use the Upstream Ag Professional newsletter as a basic example. Whether I have one subscriber or 10,000, the cost to produce and distribute the newsletter is the same, meaning zero marginal cost to sell more subscriptions.

This is the idea behind software; specifically, if Indigo was to have a grain marketplace like originally conveyed, they build the software once, acquire the customer and then take dollars off of every transaction. Low marginal costs and ideally a high customer retention. This leads to high gross margins.

If we look at two segments of Indigo’s business, they have significant marginal costs.

The biological business has the need to develop, produce, market and distribute the product. All of these have incremental costs and while biologicals are known for strong margins (eg: 25% EBITDA margins according to Corteva regarding Stoller), they are not the equivalent to software margins, specifically when they are subscale (low amount of acres).

The same goes for the carbon business. Indigo takes 25% of the carbon tonne sold but then has additional costs to execute— verification being the most significant one. This includes the sampling costs and paying their market access partners (eg: Corteva).

It’s interesting to consider how positioning oneself as a “tech company” convolutes and disconnects from reality. We have experienced this extensively over the last decade in agriculture. These misvaluations were in part fueled by low interest rates and growth at all cost mentalities, but also a misjudgment of unit economics.

For example, you can technologically augment the customer experience (eg: Farmers Business Network) or leverage technology to enable a sellable product, in Indigo’s instance, to verify carbon offsets, but at the end of the day, these entities are selling something with physical constraints to execute which do have a marginal cost. Not to mention, primarily commoditized spaces.

Indigo is a tech-enabled company, just like Nutrien is a tech-enabled company or WeWork is a tech-enabled company. Given they do not have a business moat either, this means Indigo should be valued in a similar fashion to all other ag companies.

It is worth noting, in July 2022 I broke down what I thought Indigo’s valuation should be using their public carbon numbers and then, using some basic assumptions, calculated their Net Present Value, or the company valuation, to be $210 million, almost entirely aligned with the $200 million valuation announced.

(Note: I came to a similar number, though it seems their revenue is likely below the number I used in my assumptions at that time. It’s actually likely their $200 million valuation is still overly optimistic)

I point to all of this because when a company uses the same channels and has margins and marginal costs aligned with every other business in the industry, they should be evaluated in the same fashion as everyone else. This becomes strike two for Indigo’s valuation.

With that, we are led to the carbon-specific business.

For more on Indigo attempting to boil the ocean, their cap table, carbon business, what we can learn from this news and why it isn’t optimal for the industry, become an Upstream Ag Professional member.

Pivot Bio unloaded a bunch of news this week and I had the privilege to have a conversation with Chief Innovation Officer and co-founder Karsten Temme and incoming CEO Chris Abbott this week to discuss some questions surrounding the news.

I first want to start with the numbers they shared surrounding their business in the release:

  • 60% year-over-year revenue growth

  • Over $100 million in 2023 revenue

  • 95% Net Revenue Retention in their 2022 cohort and 190% in their 2020 and 2021 cohorts

  • PROVEN on over 5 million acres in 2023

  • Forecast to have double-digit market share across U.S corn acreage in 2024.

60% revenue growth, north of $100 million in revenue and touching more than 5 million acres is no small feat in the biological world.

But what catches my eye the most is Net Revenue Retention (NRR). Last year I emphasized in Upstream that customer retention is a key indicator to watch with Pivot.

NRR calculates total revenue (including expansion revenue) minus revenue churn (contract expirations, cancellations, or downgrades). Essentially, did current customers maintain spend/spend more, or did they churn/decrease spend in a year-over-year basis?

NRR is particularly useful in SaaS businesses, though it paints an important story with a physical product that has to be resold every year. In other words, high retention says a lot with a product like PROVEN and 95+% is an incredible metric for a physical goods, agricultural product.

Of note, their earliest customer cohort has a significantly larger NRR than their new customers. My original interpretation was that this is a sign that as Pivot moves towards the mainstream, they are having a more challenging time with a new customer expanding their spending to more acres.

In my conversation with Karsten and Chris, they pointed something out to me, though— they increased their pricing from the original cohort to a higher amount per acre (closer to $20/ac) which means that is a big reason as to why there is such high NRR in early cohorts.

This actually signals something more important— Pivot Bio has some pricing power. Farmers seemingly like the product and its convenience enough that they will use it even with a higher price (Note: Fertilizer prices did increase over this time too).

I checked the farmer market survey data from Stratus Ag Research to see how this NRR claim checked out (note: the below is 2022 data, not 2023, but I suspect relative consistency year to year):

Pivot’s flagship PROVEN40 liquid-in-furrow product has the highest satisfaction of any crop-agnostic nitrogen fixing product on the market, with about 58% “satisfied or very satisfied” and another 28% in the middle. Only about 13% were dissatisfied.

The above, plus the fact that PROVEN had a reasonably strong intention to reuse in the survey reinforces the high NRR numbers.

Another thing that stood out to me with PROVEN was that the “Don’t Know” camp of farmers was very small. In my mind, that is a strong indicator of the strength of the Pivot Bio staff and approach. Ensuring they follow up with the farmer, or that the channel they use does, illustrating that the product works goes a long way in establishing successful outcomes. I will come back to this point a bit later on in the future of Pivot Bio.

Lastly, Pivot forecasted “double-digit” market penetration in corn acreage. If we assume flat corn acres in 2024, that means ~94 million acres of corn (USDA number from 2023). Double-digit penetration means ~10% so we can speculate that Pivot sees itself touching over 9 million acres in 2024.

Considering their corn penetration and their 2023 numbers, this means they are forecasting ~75% acre growth year-over-year and revenue would then come in around $170-$180 million for 2024, and we haven’t even begun to see them tap into other crops (eg: wheat) with those numbers.

Overall, the numbers from Pivot Bio are impressive.

The Future

Given the revenue number, there are likely questions about whether they will look to go public soon. My suspicion is they will work to further build out two things first:

  1. Partnerships in the value chain to reinforce their staying power.

  2. More products to show a diversified revenue stream and leverage their unique distribution.

For a deep dive into patent commentary, their future partnerships, products, and more on their new CEO change, become an Upstream Ag Professional member.

When growers use Sound Agriculture's flagship product, SOURCE, on qualifying corn acres and reduce nitrogen and/or phosphorus by 25 lbs per acre, the company guarantees that yield will be maintained or the grower will be reimbursed up to $100 per acre.

Sound Agriculture offered this same program on a small scale in 2023, however, next year, they are doing it on a larger commercial scale.

Sound is one of the other main competitors to Pivot in regards to nitrogen efficiency products, though Pivot “fixes” atmospheric N (similar to a pulse crop) while Sound enhances the availability of N in the soil already.

Fractal, a US-based company, is launching a first-of-its-kind farmland equity financing platform to help solve a key gap in farm financing.

Fractal presents an interesting approach to unlocking access to capital for progressive farmers looking to expand their operations.

Input prices and equipment costs have risen rapidly which can tie up capital and hinder a farmer from being able to purchase rented land or land that is a natural extension to their operation. Fractal’s financing product allows farmers to be able to expand plus maintain control of their operation:

Unlike traditional investors that compete with farmers for land and lease it back to them, Fractal invests alongside farmers by taking passive, minority stakes in land farmers' own. Farmers receive needed capital to expand their operations, while investors access high quality farmland managed and owned by farmers to drive higher returns.

Source: Fractal

Fractal never buys more than 45% of a farmers owned land. Fractal charges the farmer an annual payment while accessing the land appreciation over time. Fractal passes returns to investors after charging them fees.

The one area of the Fractal business that stood out to me was the fact that farmers who are illustrating agronomic excellence qualify for discounts and better pricing. For example, farmers that have introduced regenerative practices (regardless of when they adopted them), qualify for a discount on their annual payments— the farmer can then stack these discounts with carbon and other climate-oriented payments.

For more on the market access of Fractal, future partnerships and how their product fits into a farmers regenerative agriculture evolution, become an Upstream Ag Professional member.

Syngenta Crop Protection was down 5% globally in H1, while ADAMA was down 15%. Seeds was up, primarily from price increases. For context, here is how their peers compared:

  • Bayer was down over 18% across their portfolio

  • BASF was down 9.3%

  • Corteva down 3%

  • FMC down 30%

  • American Vanguard down 10%

Here is the full Upstream breakdown of Q2 2023 agribusiness earnings:

Syngenta has had some insightful commentary from employees across their venture team, computational agronomy team and executive team, which are worth watching:

Pairwise and Bayer announced a new five-year, multi-million dollar agreement focused on innovations in short-stature corn. This new program leverages Pairwise’s Fulcrum platform which includes proprietary CRISPR technology plus custom gene editing tools, enabling companies to make previously impossible changes to plant genetics quickly.

The new announcement comes after the success of the companies’ initial five-year collaboration for corn, soy, wheat, cotton, and canola.

The upcoming collaboration between Pairwise and Bayer will be focused on optimizing and enhancing gene-edited short-stature corn for Bayer’s Preceon Smart Corn System.

This has important implications for the Bayer business because of the importance of short-corn for Bayer moving forward.

For a breakdown of why the partnership is important for the future of Bayer’s short-corn business and what it could mean to them as a differentiator, become an Upstream Ag Professional member.

Ever.Ag, is excited to announce the acquisition of Roger®, an industry leader in bulk agriculture commodity trucking technology and logistics. The acquisition expands Ever.Ag's unique portfolio of software, risk management resources, and market intelligence offerings.

Ever.Ag aims to improve all aspects of the value chain with software and data.

Roger, previously partially owned by Bushel, improves efficiency in the dry bulk truck process spanning scheduling to invoicing. It effectively delivers the following:

  • Transparency/visibility to truck locations while improving internal, external, origin/destination load dispatch communications, and back-office efficiency by reducing double entry through robust integrations and provides audit capabilities.

  • Real-time data analytics to understand individual carrier performance and visualize rate history.

  • Consolidated communication tools to find and negotiate with carriers.

  • Quicker invoicing by the company for delivered commodities, often 5-14 days faster than industry standard.

  • A tool to better manage the shipper's carrier liability risk and set up information.

EverAg is a neutral third-party and enables another opportunity for servicing their customers, such as ag retailers or grain origination entities. Given their ERP utilization, this enables an integration opportunity to make the user experience natural for grain customers.

While unlikely to be a short-term benefit, there are some traceability capabilities for EverAg enabled through Roger in the future.

Exacta Bioscience, and Ginkgo Bioworks announced that Exacta is leveraging Ginkgo's end-to-end agricultural R&D services to run a fermentation optimization and scale-up program to enhance one of its crop protection products, FitoRoot®, paving the way for large-scale commercialization.

The cost of goods has significant implications for which biological companies become successful and which do not. In the Upstream Ag Professional edition, I break down the strategic dynamics that arise and why there should be more focus on cost of goods instead of purely product differentiation.

Statements like “the average American farmer is about 58 years old, resulting in an overall slower shift to adopting technology” are not only lacking in nuance, but also inaccurate and possibly harmful.

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As always, Morgan Housel shares valuable frames for thinking about the world. I really enjoyed this article.

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