Introduction
With agriculture contributing a fifth of India’s GDP and about 40 percent to total employment, one would think investors would have—like in e-commerce and fintech startups in earlier years—been lining up to make rapid investments into agriculture technology (agritech) startups, as payment gateways and logistics started to get built. But investments in this sector fell by 45% between 2021-22 and 2022-23 fiscal years, weighed down by a hike in global interest rates and heightened investor caution amid rising uncertainty.
In recent years, the agritech sector in India has witnessed a remarkable influx of funds from impact-oriented investors. However, a closer look reveals that the growth in the number of funded agritech firms hasn't quite kept pace with the meteoric rise in total investments.
Deal Size Volatility
The number of agritech companies receiving funding is plummeting along with the investment. In 2021, there were 66 deals, up from 55 in 2020, but this number decreased marginally in the subsequent year. This divergence hints at a unique trend in the agritech sector.
In 2021, the median deal size tripled to $6 million compared to the previous year. However, in 2022, it retreated to $4 million. This indicates that while a few startups attracted substantial investments, many secured smaller deals.
Seed-stage transactions played a prominent role in the agritech funding landscape, accounting for nearly half of the deal volume. However, in terms of value, they represented less than a tenth, underscoring the prevalence of smaller early-stage investments.
Sprouting Doubts: Unearthing Concerns in Agritech Funding
1) Lack of Awareness: Agritech startups often struggle to gain visibility among investors due to the sector's traditional image. Many investors may not fully grasp the transformative potential of technology in agriculture. For the longest time, there was no tech in agritech, we only had platforms addressing inefficiencies without leveraging technology. All this has changed in the last 5 to 10 years, where the enablers of the agri economy—payments and logistics—are being built.
2) Fragmented Market: India's agriculture sector is highly fragmented, with numerous crops, regions, and practices. This complexity can deter investors who prefer more standardized markets. The Indian agriculture market is large, which makes it attractive but also “complex”. The complexities range from seasonality, regional crop diversity and a maze of players, including financiers, agri-input providers, buyers, middlemen/brokers, mandis/ FPOs/APMCs and wholesalers/ retailers in cities. The large market size is seductive but it is important to keep in mind the complexity, which means this is a multi-year problem to solve.
3) Longer Investment Horizons: Agriculture is inherently seasonal and cyclical, requiring longer investment horizons. Some investors may prioritize quicker returns over the extended timelines often associated with agritech ventures. In agriculture, the seasons vary depending on the crop you are working with and this itself can extend to three to six months. Ideation, prototyping, testing and revenue generation take longer time and investors are not willing to put their bets on these variables.
4) Lack of Scalability: Some agritech startups may struggle to demonstrate scalability beyond a regional or niche market. Investors often seek opportunities with the potential for rapid growth and scalability. Only those startups that were well funded are still getting more money as they are more stable and have well-defined short and medium-term plans, as seen through successful fundraising by the likes of Udaan, Cropin, Ninjacart and DeHaat.
5) Financing Gaps: Agritech startups may encounter funding gaps between seed-stage and scaling up. Early-stage funding is relatively accessible, but securing larger investments for scaling can be challenging. Agritech investments into pre-Series A or Series A funding have not seen problems—as the potential is strong—but there have been challenges in finding investments in Series B, C, and subsequent rounds.
Seeds of Hope
Agritech platform Arya is expecting to more than double its profit and grow the topline by around 70% to Rs 500 crore this fiscal as it focuses more on sales along with the expansion of its customer base. Arya claims to be the largest and the only profitable agritech platform focused on foodgrain storage and sale. The Noida-based startup has a revenue of Rs 298 crore, from which it earned Rs 16 crore of net income.
Agritech startups like Ninjacart, DeHaat, ReshaMandi, Vegrow are performing exceptionally well and have received substantial funding in the past years and are eyeing towards becoming the first agritech unicorn in the country. This situation underscores the fact that the agritech market in India is vast and brimming with lucrative possibilities, albeit accompanied by significant complexities. There are geopolitical apprehensions, and some perceive India as adopting protectionist measures, potentially raising doubts about whether investments in agritech will primarily stem from seasoned private equity and venture capital firms, possibly resulting in a restricted or decelerated investment flow. Does this suggest a bleak outlook? Certainly not. The sector's growth potential remains substantial.
Harvesting Success: Innovative Ways to Cultivate Funding for Agritech
1) Strengthening the market linkage - There is an urgent need to enhance the market linkage capabilities of primary agricultural credit societies (PACS) and farmer-producer organizations (FPOs). Establishing essential market linkage infrastructure, along with basic processing facilities, in various panchayats through public-private partnerships (PPP) is crucial. The success of agricultural platforms relies on collaborations across various fronts, including; Buyers, e-commerce, institutions, aggregators, traders, government bodies, financial
institutions and insurance companies. This collaborative approach is essential for the growth and success of ventures in the agricultural sector.
2) Diversifying Revenue Stream - The potential for agritech solutions to scale effectively depends on utilizing farmer connections to diversify income sources. Many companies that traditionally supplied farming inputs are now sourcing from farmers, and conversely, farm to-fork startups are providing agricultural inputs to farmers.
Shifting towards a comprehensive platform that caters to multiple farmer needs is a natural progression from the existing one-dimensional agritech models. Establishing a comprehensive platform ensures continuous involvement throughout the entire crop lifecycle. Typically, farmers sell their crops twice a year but require agricultural inputs throughout the crop cycles, be it Rabi or Kharif. Startups engaged with farmers in horticulture and dairy sectors tend to have more frequent interactions, often on a weekly or even daily basis.
3) Convergence of Agritech and Fintech - Agritech startups are revolutionizing the agricultural landscape with fintech solutions that address various financial needs. These solutions encompass working capital support for farmers and players in the value chain, financing for farm assets, and funding for related industries like dairy, aquaculture, poultry, and fibers. The potential for fintech innovation within the agricultural value chain is staggering.
Emerging startups like Upaj, Agrifi, Kivi, and IBISA are actively constructing digital platforms for farmer financing and insurance. Meanwhile, established agritech companies are incorporating digital tools to facilitate value chain financing. It is only a matter of time before a substantial portion of agricultural lending transitions to digital platforms, and agritech startups will play a pivotal role in driving this transformation.
4) Introduction of Deeptech & Climate-tech in Agritech’s sphere - In the future, the core factor influencing investments will revolve around startups' capacity to demonstrate sound unit economics across four key aspects. These include proving their economic viability on a one-hectare farm (which is the typical size in India), across multiple levels of the supply chain, considering environmental factors (by optimizing natural resources, particularly soil, health, and water), and at the company level by achieving profitability while concurrently addressing the first three dimensions.
Conclusion
The agritech sector in India is experiencing a notable influx of impact investments, demonstrating the industry's potential. However, funding dynamics, including deal sizes and stages, exhibit intriguing patterns, reflecting changing market dynamics and investor preferences. These trends provide valuable insights for both agritech entrepreneurs and investors navigating this dynamic sector.
Despite these challenges, there is a growing recognition of the potential of agritech in India. Initiatives from the government, industry collaborations, and efforts to raise awareness among investors about the transformative power of agritech are gradually bridging the investment gap. As the ecosystem matures and agritech startups continue to demonstrate their value, we can expect to see increased investment flowing into this critical sector, driving innovation and sustainability in Indian agriculture.
Written by Saroj Kumar Nayak, Harsh Agrawal
Sh. Saroj Kumar Nayak is a Professor at Indian Institute of Technology, Bhubaneswar. He is currently contributing as the Principal Advisor and Mentor at House of Startups India.
Harsh Agrawal is the Manager at House of Startups India and a Delhi-based lawyer who graduated from Dr. Ram Manohar Lohiya National Law University, Lucknow.