When it comes to technology investing, the smart money seeks big markets with strong growth prospects. That old adage helps explain why, out of $13.5 billion invested in start-up firms by venture capitalists in the fourth quarter of 2014, more than half went to firms developing software used on mobile devices, according to tracking firm CB Insights. After all, global sales of smartphones reached 1.2 billion last year, up 20% from 2013.
Yet there’s another market so big it leaves mobile phones in the dust. The world’s farmers will need to feed 9.6 billion people by 2050, the United Nations says, and that will require a 70% increase in agricultural production. Agriculture is a $3 trillion industry increasingly driven by technology developments, but until recently it was practically ignored by venture capitalists.
That’s now changing as start-ups targeting plant and animal health begin attracting backing from venture capital funds. Some are graduating to become publicly traded companies. In February, for example, the crop genetic traits developer Arcadia registered with the Securities & Exchange Commission to raise $86 million in an initial public offering of stock.
Others have been acquired by big crop protection firms such as Bayer and Monsanto—the Apple and Google of agriculture. Two deals in particular have caught the eye of investors: Bayer’s 2012 acquisition of biobased pesticide firm AgraQuest for $500 million and the almost $1 billion that Monsanto paid for data services firm Climate Corp. in 2013.
Thanks in part to those successes, a new crop of start-ups—with names such as Symbiota, Taxon Biosciences, AgriMetis, NexSteppe, and Blue River Technology—has recently raised millions from sources including cleantech venture capital firms, the venture arms of large agricultural corporations, and even information technologists such as Google Chairman Eric Schmidt.
But even successful entrepreneurs and investors say it is easy to underestimate the complexity of the agriculture market. Farmers’ needs vary by crop and climate. Start-ups face a competitive landscape for intellectual property, and field trials and regulatory filings are costly and time-consuming. Moreover, companies must survive and grow in an industry that is dominated by a few very large players.
What the newcomers have in their favor are new ideas, which can be in short supply at the big agricultural firms despite the billions of dollars they spend on R&D.
“We eat three times a day. We have to be more efficient, and the only way we can solve this problem is by bringing in technology and innovation. And that has to come from entrepreneurs, start-up companies, and collaborative approaches from companies already in agriculture,” says Ignacio Martinez, a partner at Flagship Ventures, a venture capital firm that invests in cleantech and health care start-ups but is increasingly looking at agriculture.
Syngenta, one of those big companies, has picked up on this nascent start-up culture and wants to see it grow. “We’d love to see more innovation outside the large agriculture companies than what is there today,” says Alexander Steel, head of corporate venture capital at Syngenta.
The crop protection industry today is dominated by BASF, Bayer, Dow Chemical, DuPont, Monsanto, and Syngenta. This high degree of concentration is both a minus and a plus for start-up firms, Martinez explains. Although the giants can be difficult to compete with head-to-head for farmers’ dollars, partnering with them can bring new technologies to market and make a meaningful impact.
The big firms primarily develop and sell tried-and-true seeds, resistance traits, and pesticides, but start-ups generally avoid those areas. They have found plenty of open space for innovation in beneficial microbes, natural pest control products, stress tolerance traits, niche crops, and field automation.
Often these new approaches are cast as being environmentally sustainable by increasing yields while reducing inputs such as fertilizers, pesticides, water, and energy. That “cleantech” halo helps attract financing from investors that specialize in that sector.
Data from the Cleantech Group, which tracks venture funding, show that agricultural technology, not including software and hardware, attracted $277 million in investment in 2014, up from $266 million in 2013. Both years had dozens of individual deals. As awareness of the agriculture market spreads, investment will grow further, investors say.
“We are interested in developing technology that can disrupt the market space,” Martinez says. Flagship Ventures has an unusual method for getting its hands on disruptive technology—it forms companies inside its own VentureLabs arm. That’s how plant microbe specialist Symbiota started; the Boston-area firm emerged last November with $7.5 million in backing from Flagship.
People have been hearing a lot about the importance of the microbe communities that live both in soil and in themselves. Symbiota cofounder Geoffrey von Maltzahn explains that scientists are also learning about the collections of symbiotic microbes that live inside a plant’s tissues. “If you take any plant in the world and cut it open, every one of its internal tissues may have its own microbiome,” he says.
Over evolutionary time, plants and microbes selected each other for mutual fitness; after all, a microbe living inside a plant can’t thrive unless its host is healthy. But modern farming and plant breeding practices have broken that symbiotic connection, von Maltzahn argues. His team hypothesized that adding microbes back in would result in more resilient plants.
“Microbes potentially help them become more drought tolerant, heat tolerant, maybe even record-Boston-snowfall tolerant,” von Maltzahn says.
Investigating this potential has become markedly easier in just the past few years. In fact, von Maltzahn was drawn to the opportunity to apply to plants advances in low-cost genetic sequencing as well as his own expertise with the human microbiome. Prior to launching Symbiota, he founded Seres Health. Its drug candidate SER-109, a therapeutic mixture of bacterial spores to treat recurrent Clostridium difficile infection, saw success in a Phase II clinical trial last year.
The mixture is what microbiologists call a consortium. In the competition for resources, microbes perform better together than alone. They may have metabolisms that complement each other—by, say, obtaining energy from a cascade of breakdown products—or they may function optimally at different temperatures, helping the group survive as conditions change.
When crop field trials showed that putting selected microbe consortia together with plants had wide-ranging positive impacts, Symbiota had to narrow its targets. “The strategy has relevance across every single crop, any photosynthetic organism,” von Maltzahn claims. The company is targeting row crops including corn, soy, and wheat and looking to boost yields by as much as 10%.
One example is selecting communities that help plants grow despite less than optimal rainfall. Corn, soy, and cotton yields can be up to 50% greater when crops are irrigated, but most of them aren’t.
By targeting a crop, climate zone, and source of environmental stress resistance, Symbiota can create a product from a microbe consortium. In the near term, it plans to produce seed coatings to give farmers a method that fits with machinery and practices already in use. When the plants germinate and grow, they incorporate the microbes into their tissues.
In the long run, as farmers learn how microbes improve yield, the approach could upend markets for the seeds and fertilizers they now use, von Maltzahn says. “Microbes may become biological software for plants that can improve them much more quickly than can breeding or more potently than genetic modification can provide.”
Symbiota is far from the only agriculture start-up pursuing designer groups of microbes. In fact, another start-up has named itself BioConsortia. Led by Marcus Meadows-Smith, the former head of AgraQuest, it also uses direct selection of microbial teams to enhance row crop yields. A year ago the firm raised $15 million in a second round of funding, and it has completed field trials in corn and wheat. So far, it reports “yield enhancements with striking consistency.”
Finding the right microbes to get the desired plant health outcome requires a lot of know-how. Not surprisingly, methods for accomplishing this are a hot area of patent activity. Another microbe-minded firm, Taxon, has put a big stake in the ground based on its intellectual property.
Microbe detectives spend a great deal of time prospecting all over the globe, obtaining samples from different types of soils and plants. But finding out “who’s in there” is not easy, says Taxon founder Matthew Ashby. One approach is to culture the samples in the lab and then examine the populations. But many microbes don’t flourish in the lab.
Another way is to see what DNA is in the sample. Extracting genetic material from samples and sequencing it is routine these days, but matching up the results with specific microbial strains isn’t. It turns out that a subunit of ribosomal RNA called 16S can act like a bar code to identify tens of thousands of individual strains in a soup of DNA sequences.
“We can get a very comprehensive profile from a sample, a long list of who is there, but not how the community is organized and who is doing what,” Ashby says. To answer those questions requires a lot of data and an ability to find patterns. That’s where Taxon’s bioinformatics software comes in.
Taxon looks for useful patterns, such as where microbes are often found together and which ones tend to be associated with a given process. Microbes often found with a pathogen may be helping that pathogen, whereas if two microbes are never found together they may compete with each other. “The more you do, the better you get at it,” Ashby says.
Ashby began filing for patents back in 2000. “When we started Taxon, no one was really doing anything like this,” Ashby recalls. “It was a wonderful opportunity for us to file general, broad patents about using rRNA genes as a profiling tool to find patterns within the data.”
Taxon’s patents and its ability to generate product leads attracted DuPont, which acquired the company just last month. DuPont’s own interest in microbial discovery started when it bought Danisco in 2011 and gained the Danish firm’s capabilities in fermentation, probiotics, and industrial enzymes, says Frank DeGennaro, DuPont’s director of biologicals.
“There is just a natural linkage to our existing ability to rapidly commercialize seed traits through DuPont Pioneer or chemistry through our crop protection business,” DeGennaro explains. “We can link Taxon’s platform to our product pipeline and global market access.” With the acquisition, DuPont joins competitors such as Bayer and Monsanto in adding microbes to its portfolio via acquisition.
Another competitor, Syngenta, also invests in start-ups through the venture arm run by Steel. It helped create and launch AgriMetis, one of the few start-ups focused on making chemicals for pest control.
AgriMetis has a lot in common with innovators that are drawn to the capabilities of microbes—in fact, microbes are the inventors of many of the molecules that AgriMetis wants to make. Because microbes, plants, and fungi face similar disease and pest pressures in the environment, the chemicals they produce for defense can be used to defend commercial crops as well.
These natural products are larger and more complex than the synthetic molecules used in crop protection today, explains Simon Aspland, vice president of business development at AgriMetis. Whereas synthetic crop protection chemicals bind to one or a few sites with high affinity, his firm is developing molecules that target several sites within the cell of a pest organism.
The problem with the synthetic approach is that it is easier for a pest to evolve resistance—usually via a metabolic workaround—to a crop protection molecule that binds to just a few sites. If those sites are shared across organisms, synthetics may also weaken or kill beneficial insects or microbes. In comparison, “natural products can increase specificity and delay the onset of the development of resistance,” Aspland says.
The technologies AgriMetis relies on to find compounds and test them are similar to the high-throughput-screening techniques used in the pharmaceutical industry, though with different biological assays. Creating products based on those hits requires a combination of synthetic biology, biochemistry, and chemistry skills, according to Aspland.
Syngenta knows a lot about chemistry, pests, and plant biology, but synthetic biology is not part of its core competency, Steel acknowledges. “The large agriculture companies are either part of or derived from chemical companies; that’s where their expertise is.”
Even for a start-up, AgriMetis is still quite young; in February it raised $7.3 million in a first round of funding led by Syngenta. As start-ups mature and pursue bigger ambitions, they need to raise larger amounts of capital.
For his part, Aspland says he recognizes the risks inherent in joining with a single big company in his firm’s early stages. “The partner-customer concentration can be a double-edged sword, but we see it as a benefit to have Syngenta Ventures as an investor.” AgriMetis is organized around development partnerships with outside organizations, including contract research firms and industry players. “We don’t feel restricted in our options,” Aspland says.
Like any venture investor, Steel says he is looking in areas for which needs are not already addressed by established technologies. And finding new active ingredients to address resistance is an important and long-term need.
Crop development company NexSteppe has attracted backing from the energy sector to help it commercialize its first products. Last September, it raised $22 million in a third round of venture capital funding from investors including DuPont Ventures and Total Energy Ventures, an arm of the French oil company Total.
Earlier in its history, however, NexSteppe had more difficulty attracting investors, recalls Anna Rath, the firm’s founder and CEO. Venture capital firms were not yet familiar with agriculture, and NexSteppe didn’t have the trappings of the biotechnology companies that they did know. Instead, it uses traditional and marker-assisted breeding to develop its patented varieties.
“We are not like anything else venture capitalists traditionally invest in,” Rath says. “We are unique, and we feel that uniqueness when we explain to people what we are doing.” Now that the firm has products that prove out its concept, Rath says, the uniqueness has become an asset.
Other technologies being developed for agriculture are much less of a leap for venture investors that may have roots in Silicon Valley. Field automation and data analysis firms, for example, have attracted funding from investors such as Innovation Endeavors, started by Schmidt, the Google chairman.
NexSteppe is developing crops for industrial rather than food uses. Its focus is on sorghum, a crop that is traditionally raised for animal feed but has potential as a biomass source for energy and fuels. Its first commercial product is a line of sweet sorghum intended to fuel Brazilian ethanol mills.
One such automation firm, Blue River Technology, which raised its first venture funding last year, has introduced the LettuceBot to growers in California’s Salinas, Central, and Imperial Valleys. This camera-driven automatic plant-thinning device is pulled behind a tractor.
The company is part of a futuristic field often called precision agriculture. It relies on technologies first developed for other industries including robots, environmental sensors, satellites, drones, and, yes, even smartphones. In combination, these technologies could help farmers manage planting, pest control, fertilizing, and watering at resolutions as low as 1 cm.
The Blue River system uses real-time imaging to thin seedlings to precise row spacing. To dispatch excess lettuce plants, the LettuceBot sprays fertilizer directly on their leaves, killing them while benefiting their neighbors. Because the technology can also distinguish between desired farm plants and undesirable ones, the firm’s next big target is an automatic weeding service, says Jorge Heraud, the firm’s chief executive officer.
That ambition puts Blue River on a path to compete with widely used herbicides such as glyphosate. “Instead of broadcast spraying on all plants, we put chemicals only on the weeds we want to kill. So farmers save on chemicals and use much less of them,” Heraud explains. He adds that his dream is to work with one of the big crop protection chemical firms so he can ask, “What do you have that we can apply that is less damaging to the environment and will work in our much more targeted application?”
Heraud, an engineer, is driven by the same motives expressed by other start-up founders. He wants to increase agricultural production—for food, animal feed, and fuel—without burdening the environment. And, like his colleagues at other agriculture start-ups, he has a great deal of faith in technology-driven solutions.
“Looking a bit further out, one thing we could do is make on-the-fly prescriptions per plant. Each one might need this much chemical or this other input,” Heraud muses. “Plant-by-plant farming—we’ve been thinking about the best way to approach this. It has a huge amount of promise.”
Late last month, Tyson Foods, one of the world’s largest producers of chicken, said it would eliminate its use of human antibiotics in U.S. broiler chickens by 2017 in an effort to prevent the development of antibiotic-resistant bacteria.
Tyson’s move follows a similar announcement by competitor Purdue and pledges by fast-food chains to phase out their purchases of chicken raised with antibiotics. Tyson said its growers have already achieved an 80% reduction in antibiotic use and that it plans to expand the effort to beef, pork, and turkey. But the company acknowledged that it will have to seek out disease prevention alternatives for use on the farm.
This kind of unmet need is like clover for entrepreneurs, particularly those with animal health and nutrition start-ups. According to the Department of Agriculture, the U.S. produces more than 8 billion broiler chickens per year.
One company, Algal Scientific, is developing an ingredient derived from algae to help boost the immune systems of chickens. Geoff Horst, the firm’s chief executive officer, explains that the ingredient, the polysaccharide β-glucan, is typically found in the cell walls of pathogenic organisms such as yeast or bacteria. Eating it triggers an immune response.
“Because it activates or increases white blood cell activity, it primes the body to more quickly fight off infection,” he says. Having an “up regulated” immune system helps animals fight off infections more easily and also helps them grow faster.
β-Glucan is usually extracted from the cell walls of yeast, an expensive process that limits its use. Algal Scientific raises its special algae in large stainless steel fermenters “like a microbrewery,” Horst says. The algae are harvested and spray-dried. “We started doing trials to demonstrate that it works the same as, if not even better than, yeast-derived β-glucan,” he adds. In March, the company raised $7 million from venture capital firm Formation 8 and the feed additive maker Evonik Industries.
Another way to prevent infections is with vaccines, but the most common types have drawbacks. Those made from killed or inactivated disease organisms give only temporary protection. Meanwhile, disease organisms can evolve resistance to vaccines made from altered organisms or parts of organisms. And vaccines often must be administered via injection.
In contrast, Prevtec microbia, a biotech firm, has developed a live, unaltered vaccine to fight diarrheal diseases in piglets. The illnesses are caused by toxins produced by strains of Escherichia coli bacteria called F4 and F18. The pathogens can overwhelm piglets that haven’t received enough antibodies from their mother.
Prevtec has developed strains of E. coli that out-compete the pathogenic versions for receptors in the intestine but are harmless to piglets. Dosing is just a matter of adding the vaccine to the pigs’ drinking water. Even piglets that have already been exposed to the toxic E. coli will have dramatically reduced symptoms, according to Prevtec CEO Michel Fortin. And in seven to 10 days, the piglets’ own immune systems are able to catch up.
Prevtec faced challenges getting investors interested in its products, Fortin acknowledges. Biotech investors were confused that the vaccines were designed for animals, not people, and firms that targeted agriculture were expecting to see products for plants. “Most of the people involved in agriculture don’t understand our space,” he says.
In 2011, when the firm was finally able to raise $4 million, it chose a business structure heavy on the use of contract manufacturers that would help it conserve cash. The work is about to pay off: Prevtec has received European approval for its vaccines. Sales in the region—which produces 300 million pigs per year—will begin in June.