In times to come, the fulcrum of investment would hinge on the startups’ ability to prove unit economics at least on four dimensions—on one hectare of farm (which is the average farm size in India), at multiple levels of supply chain (input dealers, aggregators, processors, distributors, retailers and consumers), environmental factors (through optimisation of natural resources, especially soil, health and water) and at their own business level by becoming profitable while delivering on the first three. In order to achieve the above, six fundamental shifts are anticipated in the agritech ecosystem:
Most of the supply chain agritech startups have largely focussed in building traction and demonstrating Gross Merchandise Value (GMV) growth in the range of 2x to 4x year-on-year. Investors were willing to pay valuations as much as 3-5x GMV incentivising the founders’ disproportionate prioritisation in building top line over bottom line. However, given the hyperlocal nature of sourcing/distribution and supply chain fragmentation, the economies of scale in agriculture do not yield margins as much as in a manufacturing/services setup.
With the arrival of a funding winter this year, the agritechs are in the process of recalibrating businesses to bring Gross Margins (GM) into the positive zone and pushing them further into a double digit band. Like in other sectors, the path to profitability is becoming a hygiene factor for raising the next round of funding.
A majority of agritech models is about servicing the farmers more efficiently than the existing channels. Though this approach helped in building scale, the profit margins continue to be thin, which necessitates a product development approach.
Fortunately, there is no dearth of product opportunity in both farm-to-fork and direct-to-farm models. Building a farm-level processing infrastructure for value addition, sorting, grading, packing can help startups in building products/private labels for end customers. Likewise, there are many white spaces in the agri input supply chain to build innovative products in mechanisation tools, animal feed, biologicals etc. About 20 percent contribution of the revenue coming from own products can significantly improve margin health for a startup.
The success of platforms in the agricultural space depends on partnerships at multiple levels with a) buyers (including modern trade, ecommerce, institutional, Horeca, mom-and-pop stores) b) aggregators, traders and processors c) village-level ecosystems such as Farmer Producer Organisations (FPOs), village-level entrepreneurs (VLEs) d) academic institutions, especially state universities and Krishi Vigyan Kendras (KVKs) for field trials e) government bodies, especially the village and district administration f) financial institutions and insurance companies f) regulatory bodies for compliances and approvals g) other startups offering complementary services and products.
Startups realise it is foolish to build everything on their own. Platforms cannot scale without the right mix of partners. Startups have started to redefine the core (which they are building) and peripheral (which partners will build) parts of their business models.
The conundrum of scaling horizontally or vertically is omnipresent among agritechs. The horizontal expansion (multiple crops, geographies, customer segments) drives scale but vertical integration (going deep into few supply chains) unlocks margins.
A majority of startups have developed proprietary databases of farmers in the crops and regions they operate in. These databases typically include farmer name, contact number, farmland area, crop etc.
The proprietaryness of a farmer database will dilute with availability of public datasets such as Agristack, developed by the Government of India under the Indian Digital Ecosystem for Agriculture (Idea) framework. Linking of the farm and the farmer ID through Agristack will be able to facilitate first/last mile connect with farmers. Once these public datasets are available, the startups will be able to focus their energy on building analytical engines through AI/ML tools to improve algorithms for mass scale adoption by farmers and value chain players.
A majority of supply chain tech startups have focussed on building techstack for supply chain components such as procurement, inventory monitoring, demand aggregation, route optimisation, post-harvest loss reduction etc. Given the multi-layering of supply chain, it takes a few iterations and sometimes years to get this right. Startups who hired CTOs from the beginning have done better than others.
We are likely to see supply chain tech diversifying to rural-tech to cater to the non-agricultural needs of the farmers. Also, we will see integration of deeptech solutions in supply chain models the solutions could include an array of products for rapid soil testing, quality assaying, figuring out harvest schedules, detection of crop signature, crop yield estimation etc.
Agri-biotech is another potential high-growth category for the future, with increasing emphasis on natural farming and food safety. Climate tech, which was on the periphery of agritech, will take centrestage given the unprecedented need and opportunity to build climate-smart solutions.
To conclude, phase 3 (2022-30) of Indian agritech is likely to see more than 80-90 percent penetration among farmers. This will result in improving farm economics, generating millions of rural entrepreneurship opportunities and driving food/nutritional security for the country. Agritech startups, will continue to drive innovation agenda for the benefit of farmers as well as consumers.
The author is an investor, mentor and board member with foodtech and agritech startups in India and overseas. He works as venture partner with Bharat Innovation Fund, is co-founder of ThinkAg—a platform for accelerating adoption of innovations in agriculture and food space—and chairman for FICCI task force on agri startups. Views expressed in this article are personal.
First Published: Sep 08, 2022, 10:48
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