Team Coral has spent a lot of time and pixels on the current climate capital stack, and the inefficiencies & misalignments of the US venture model for building the types of companies we need to exist in order to impact the ultimate problem. While we never begrudge anyone the opportunity to make a buck, the pattern of injecting capital early, demanding rapid commercialization, and denying follow-on capital to those who don’t fit the metrics of a software business is unproductive to say the least.
Today, we’re going to look at one of the most potentially impactful, deeply misaligned subsets of climate tech, along with a few suggestions to get it back on track; Let’s talk indoor farming.
The Bowery King
Yes, we’re giant John Wick nerds. Stop judging.
Bowery Farming, founded by Irving Fain in New York in 2015, is the largest operator of indoor farms in the US. It boasts some 500 employees, operates five farms in the eastern US, and has products in Walmart, Whole Foods, and numerous restaurants ranging from local cafes to chain stores. Celebrity chefs, including Tom Colichio of Top Chef fame, and world’s-best-human Jose Andres (of World Central Kitchen, a magnificent organization which we’re donating to this holiday season) invested in the company and use its produce in their Michelin Star restaurants.
And yet, the company appears to be struggling. It has gone through two layoffs over the past year, delayed opening a pair of new farms in Texas and Georgia, and reduced the size of its Series D financing by about two thirds just a couple of months ago. A Pitchbook analysis found that Fidelity, an investor and debt-holder in Bowery, has lowered their internal representation of the company’s value to about $350m, which is an 85% haircut from a previous $2.32bn value and a lot less money than the $700m that the company has raised since inception.
A note here; Private company valuations are a long, long way from an exact science. Companies are subject to consumer sentiment fluctuation in their public-market comparables, but the leveraged nature of early-stage investing generally means that the fluctuations are more drastic and can often rebound when markets stabilize. Fidelity, whose core business is in consumer financial products, is likely much more conservative in their underwriting than a Venture Capitalist. Both, and neither, are likely to be correct, whatever that means here.
Regardless of valuation specificities, the company is worth less than it was, and certainly appears concerned about cash flow. This follows larger trends in the indoor farming space. TL/DR: Carnage, and companies failing left & right.
Which seems…. A little weird?
Food
Let’s zoom out. The world needs a lot of food and will continue to need more for the foreseeable future. This requires two things; Arable, predictably yielding land, and the ability to move stuff from place to place in plenty of time for the food to not spoil and get to your plate. Climate change is globally ruining both of these things, leading to a lot of countries enacting food-isolationist policies.
A simpler example; In the US, nearly all lettuce is grown in either California (70%) or Arizona (30%), per the USDA. Is anyone confident in the abilities of those regions to continue reliable crop production? We are not. In a not particularly coincidental story, most indoor farming companies start with a varietal of lettuce as their initial cash crop.
We’re not going to belabor the point, but needless to say we think the case for indoor farming to exist is enormously compelling. Farm yields are dropping, supply chains are borderline-unmanageable, and we don’t have reliable forecasting as to the viable places to keep producing food.
Localize everything, reduce dependence on GHG-spewing fertilizer, trucking, and container ships, and make what a number of top chefs have described as a better-tasting product anyways.
So why don’t the companies work?
If it looks like a duck, and quacks like a duck, it’s a SaaS company?
Farming is a brutal business. Most farms make little-to-no profit, per the USDA, and are only profitable on a balance sheet when deducting the immense amount of unpaid labor put into the businesses by the farmers. Which, by definition, means that these critical folks are underpaid, but that’s a different piece. This is also why the government provides subsidies to the farming sector year after year, and is unlikely to ever stop (a related piece from us here).
We think it’s reasonable, as in most sectors, to posit that climate-controlled, tech enabled, semi-automated modern farms can achieve positive unit economics, but the margins will be capped to what, maybe 20% at scale?
For context, pure-play software companies reach escape velocity at around 80% gross margin, and 100% net-revenue-retention (ie, customers growing with no effort from them), neither of which a farming company will ever achieve.
Bowery has raised a lot of money, primarily from tech VCs (General Catalyst, First Round, SV Angel, Homebrew etc), which primarily invest in… software companies.
On Bowery’s “about us” page, the first two clicks reveal their messaging around BoweryOS, a proprietary farm operating system, and something about the use of AI in farming.
*deep sigh*
Profits
Look, this is a familiar model. Company raises a shitload of money from VCs, subsidizes rapid but unprofitable growth, then attempts to go public and flip into profitability at massive scale before their investors cut off the money pipeline.
This works best in asset-light businesses (Airbnb!), and can work with profitable P&Ls to prop up the rest of the operation (Uber / UberEats), but is nearly impossible otherwise. Please look up the current valuations of WeWork and Bird if you don’t believe us. Farming has neither of those advantages, and is saddled by the further need to compete for shelf space in the retailers that are critical for their survival. It’s a really hard category.
What we suggest here is something unusual in the American business landscape; Prudent growth, obsession over profitability from the earliest days, and competing in less cutthroat markets.
Hey Bowery; Go open an office and farm, then a lot of farms, in Iceland. Why Iceland? It has a high per-capita GDP, an educated and healthy population that will respond well to messaging around produce, and currently pays obscene prices for fruits and vegetables because it’s, you know, an island. Iceland also offers abundant renewable power, a short supply chain, and is accessible from NYC via many direct, daily flights.
You’ll be differentiated on better taste, quality, and nutritional value, much cheaper than any competition, and probably national heroes. Start printing cash, then duplicate the playbook in as many other hard-to-reach areas as will have you. We suggest Ireland, Norway, and Finland to start. Fill in the edges of the map instead of competing in the messy middle.
Btw, if you need a country manager in Reykjavik….