Animal agtech: a real reason to believe
Prime Future 248: the newsletter for innovators in livestock, meat, and dairy
“If I become a paid subscriber, do I get access to past editions?”
Several folks have asked this lately, and the answer is YES.
There are almost 5 (!) years of past editions — go hog wild.
I used up all my words at Animal Agtech Summit this week, so today’s newsletter is short — just one big idea that I hope leaves you as encouraged as I am.
Many words1 have been spilled recently about the Great Reset across agtech, and rightfully so. The consensus is around recalibrating valuations for exits that are more likely to be acquisitions than IPOs, raising less capital to keep startups lean and capital efficient, and planning for longer timelines to adoption, while questioning if venture capital is the right default funding mechanism.
My own takeaway after World Agritech was that there's been a resurgence of pragmatism, a re-anchoring to solve real problems, and a refresh on what value creation looks like for farmers and ranchers…all of which mean the next 5 years in agtech should deliver higher impact innovation than the last 5 years. Marvelous.
All of that is well and good, but it's future-oriented — it's a positive outlook on what the future of agtech may hold.
So let’s look at the current state of things. Even among agtech investors who want to be in animal agtech, it’s unusual to see a portfolio where livestock companies are more than 20%. There aren’t nearly as many livestock companies as crop or food companies. And questions abound about investability and exit potential, so fewer deals get done.
While many investors are looking at animal agtech with some interest and a lot of skepticism, a question popped into my mind this week:
What if animal agtech is actually as investable as any other venture category — in terms of success rate?
Let's say there have been 3-7 meaningfully successful exits since 2020. Let's say there are 3-7 companies with a line of sight to successfully exit within the next 2-3 years. And then let's say there are 3-7 companies coming behind those who will realize successful exits within 3-5 years.
If my math is mathing, then between 2020 and 2030, there's good reason to believe that 9-21 companies will have had meaningfully successful exits. Let’s call it 10-25 for round numbers.
Of course, we have to pause to define 'meaningfully successful' because not all exits are created equally2. Let's simply assume it's a 7-10x+ return on invested capital.
Ok, so back to our 10-25 companies successfully exiting over the decade. Maybe that doesn't sound that interesting at face value, but here's what hit me like a ton of bricks this week — that hit rate is probably not far off the success rate for venture-backed companies in other categories.
Here’s the thing — the success rate for any venture-backed startup category is low. Perplexity's summary of multiple sources was that only ~7% of companies that raise capital in a pre-seed round make it to Series C and beyond. While some of the other 93% exit along the way, and some become self-sustaining, the majority fail outright3.
While raising a Series C or beyond is not 100% correlated with a successful exit since plenty of companies fail after that point, or at least fail to meet expectations in an exit, it is a proxy for a greater likelihood of a significant exit. (And it's generally a proxy for the notion that the company is creating real value for real customers ✅)
Missing from my intuitive-and-not-data-driven analysis is the top-of-the-funnel number of total companies in animal agtech that have raised pre-seed rounds of capital, but it *feels* reasonable that animal agtech’s '10-25 successful companies within the decade' is a commensurate degree of success compared with the percentage of venture-backed companies that go the distance in other segments.
Animal agtech has been a much smaller space than agtech with fewer venture backable companies, even compared to agtech which is itself a tiny little sliver of the broader venture space. Since we're talking about a niche within a niche, the percentage of companies that successfully exit may be entirely on track with the success rate in other venture segments, even though the absolute number of successful companies is small.
If that’s right, then we can say with a straight face that while animal agtech has fewer total successful exits, the rate of companies with successful exits within animal agtech is right in line with the broader venture-backed space.
If that’s right, then we can stop talking about whether animal agtech is venture-backable (bottom of the venture funnel) and start talking about how to grow the category (top of the venture funnel).
If that’s right, THAT’S 👏 A 👏 HUGE 👏 DEAL
Let's say all of the above is directionally accurate, and the success rate in animal agtech is in line with the success rate in other venture-backed categories — that is a massive narrative violation and completely counter to the general perception of the category among many investors. That’s a reframe that, if justifiable, could be really critical to the trajectory of the category and the ability to attract capital and entrepreneurial talent.
The question then becomes, what needs to be true to expand the number of pre-seed, top-of-the-funnel, animal agtech companies?
I've got some ideas, but I'd love to hear yours. Drop a comment or reply to this email.
Worthwhile reads on the Great Reset in agtech:
Is Agtech Broken for Venture Capital—or Are We Asking the Wrong Question? by Sarah Nolet
The $1B Lie: Why Agtech Doesn’t Fit the VC Fantasy by Mikayla Mooney
"Looking back with concern and humility" by Rhishi Pethe, interviewing Shubhang Shankar
Identifying the Lack of Agtech Hockey Sticks by Walt Duflock
The Strategic Role of Corporate VC by Rhishi Pethe, interviewing Mark Brooks
Illustrative AgTech Insights: AgTech Investment on the Decline and What that Means by Shane Thomas
World Agritech Takeaways by Shane Thomas
Keep in mind that this is why the decision to raise venture capital in the first place is such a monumental decision and shouldn't be taken lightly because once you're on the venture treadmill, you risk losing degrees of optionality. I liked this framing around the risks:
It's not a reason to not go down the venture-backed path; it's a reason to be intentional about when and how you do it, or whether it's really necessary for the business.
It's also a great example of the idea we've touched on, that capital designs the game.
This is where sometimes the more you look at the venture model, the more foreign it seems, particularly when contrasting it with mature production agriculture industries in much of the world where debt financing is the primary growth tool and any lender who experienced 7% loan defaults — let alone 50+%! — would quickly back away from the segment entirely.
Which brings us back to the idea that a high failure rate of venture-backed companies is not a bug of the venture capital model, it's a feature. Back a lot of companies, any of which could win big, and the law of large numbers says that some of those companies will be really successful. That’s the model.