The GuidePost: May 2024
Are there headwinds or tailwinds for investors investing in regenerative agriculture?
Market Signals
$1.2 billion in funding: Agtech startups cumulatively raised $1.2 billion across 161 deals in the first quarter of 2024.
7 regenerative practices: A 2024 study found that seven regenerative agriculture practices are all equally effective at sequestering carbon.
10x: Forestry, agriculture, and land use are responsible for a third of global emissions—nearly 10 times the damage done by aviation.
From the Trail
Are there headwinds or tailwinds for investors investing in regenerative agriculture?
Recent macro data suggests the sector might be facing headwinds. Mirroring the trend of decreasing deal volume in all of venture capital, the AgTech space saw 20% fewer deals in Q1 2024 than it saw in the previous quarter, according to Pitchbook. A report from McKinsey last month declared a “capital drought” for AgTech, citing data that venture capital funding has declined by 60% since 2021.
But our experience tells us that there’s more to the story. And it turns out there’s data to back it up. Far from a capital drought, when analyzed over a longer-term time horizon, investments into AgTech are accelerating:
AgTech deal value experienced a 23% 10 year Compound Annual Growth Rate (CAGR).
AgTech deal count experienced an 8% 10-yr. CAGR.
AgTech exit value experienced a 15% 10-yr. CAGR.
AgTech exit count experienced a 16% 10-yr. CAGR.
It’s tempting to fixate on short-term volatility, but we’re far more interested in long-term secular trends. Zooming out, there are plenty of reasons to be optimistic. In fact, the same report from McKinsey identified major tailwinds that suggest AgTech is only just getting started.
From our vantage point after 24 investments since 2021, we’ve identified three major tailwinds that will propel the regenerative food and agriculture space forward:
Regenerative agriculture is going mainstream: 58 of the top 100 food companies in the world have established bold regenerative agriculture initiatives. Check out the first article in the “What We’re Reading” section below for more.
Strong momentum around policy: There are positive policy trends in regenerative food and agriculture. Both the Democratic and GOP visions for the the US’s $1.5 trillion farm bill include commitments aligned with the Trailhead Capital thesis.
Growing consumer awareness: Consumers are conscious of the food they consume, where it comes from, and its environmental impact. Consumers between ages 18 and 44 are 2x as likely to consider the environmental impact of food choices.
Founder Fundamentals
The essence of strategy: The word strategy has become so over-used in early stage companies that it’s now meaningless. What distinguishes a good strategy from a bad one? In his book Good Strategy Bad Strategy, Richard Rumelt outlines the essence of strategy.
At its core, strategy includes three elements:
A diagnosis that defines the challenge
An approach designed to overcome the challenge
A coherent set of actions that dictate how the approach will be carried out
There are four hallmarks of bad strategy: 1) Full of fluff. A strategy that uses lofty or complex language to create the illusion of high-level thinking but is actually missing clarity and direction. 2) Not diagnosing or facing the true challenge. Because strategy is an approach to deal with a challenge, incorrectly diagnosing or simply avoiding the core challenge will lead to wasted effort. 3) Mistaking goals for strategy. A list of goals and priorities are different from a strategy. 4) Bad strategic objectives. There are often too many strategic objectives, they’re impractical, or they’re not designed to overcome an obstacle. Book Summary: Jeff Zych (20 minutes)
What We’re Reading
Incentives for regenerative agriculture: An article in The Wall Street Journal explored how big businesses are offering farmers incentives to adopt regenerative agriculture practices to lessen their carbon footprint and enhance biodiversity and profits. Wall Street Journal (8 minutes)
The scientific approach to company building: Many of our founders have PhDs, so we liked this article from a scientist-turned-founder on helping PhDs apply a scientific approach to company building. NfX (9 minutes)
The 25 micro-habits of high-impact managers: One of our favorite practical resources for founders is First Round Review. This article highlighted small habits of great startup managers that you can put into practice this week. First Round Review (22 minutes)
Deep-dive reports on regenerative agriculture: In January, Capshift published a report on how to allocate capital in regenerative agriculture. Capshift (27 minutes)
Portfolio Updates
Clean Crop Technologies, Pete Oberle, Managing Partner of Trailhead Capital, joined the Clean Crop Board of Directors.
HerdDogg, the leader in data-driven livestock management, received an investment from Trailhead Capital.
Mad Capital launched its Perennial Fund II that provides US farmers with loans to help them transition to regenerative and/or organic agriculture.