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March 24, 2011

When Venture Capital meets Agriculture

Economic Times recently published an article on the various types of agri-businesses are increasingly attracting VC attention. In an accompanying piece, Sandeep Singhal and Manoj Gupta of Nexus Ventures, provided their outlook on the sector.
The agriculture sector presents a tremendous opportunity, given its size and large-scale inefficiencies, but building a large company is not easy. It requires domain knowledge, as local issues such as weather, pests, soil conditions, and water availability, and global factors such as commodity price swings can play havoc with any plan. On the supply side, their business model has to support a dispersed network, with the support of field activities and the need to work in different languages. Depending on where they play in the ecosystem, the company's systems and processes should be able to handle large numbers of cash transactions and prevent fraud and leakage. All of this is further complicated by the need to manage risks related to government policy/regulatory changes and global commodity pricing.

Agriculture business can be divided into companies supporting pre-harvest and post-harvest activities. On the pre-harvest end, there are opportunities in farm inputs - high yield seeds, speciality fertilisers and pesticides. Given the issues we see on water availability, irrigation is another hot area. On the post-harvest side, warehousing and logistics presents a good opportunity for entrepreneurs, so does contract farming and agriculture processing. Other high-growth areas are information dissemination and market-making. There is also scope for spot exchanges and weather forecasting services.

An agri-entrepreneur should recognise that capital looks for the best risk-return profile, and therefore they are competing with other high-growth sectors. Traditionally, agriculture is seen as a higher-risk/low-growth sector, although the recent spike in commodity prices is focusing interest on the space. For services companies in this space, they need to show that the target market has the ability to pay and is large enough for the company to scale. There is also a need to build market differentiation and ability to scale.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in