Ask The Expert: Seth Silverman – Investing in First-mile Distribution Agtech

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Ask The Expert: Seth Silverman – Investing in First-mile Distribution Agtech

By |2019-05-16T12:58:59+00:00September 20th, 2018|

Seth Silverman is a Principal and the Director of Africa Operations for Factor[e] Ventures and previously managed Kenyan operations for the One Acre Fund. Seth has a J.D. from NYU School of Law, as well as an MSc in Civil and Environmental Engineering and a BA from Stanford University. Seth has leadership experience in climate change policy and as an international development practitioner and impact investor in energy access and agriculture development in East Africa, South Asia, and Central America. 

1. What type of financial institution is Factor(E)?

Factor[e] Ventures is a venture development firm with a mission to improve lives in the developing world. We are seed-stage technology venture specialists.  We find, validate, fund, de-risk, and grow a rich pipeline of social ventures that aim to solve profound global problems, focusing on access to electricity, agriculture, waste and resource management including sanitation, and sustainable mobility.  We make thesis-driven investments in the range of $200-700k and our current portfolio includes fourteen high impact potential ventures.  We work across the world with a presence in Nairobi, Kenya, Mumbai, India, London, UK, and Fort Collins, Colorado, USA at the Energy Institute at Colorado State University.

We are extremely hands-on and understand that we need to take technology risks and seek business model innovation in order to unlock truly scalable commercial and impact opportunities.

2. Factor[e] Ventures started with an energy access focus, but has broadened to include tech companies focused on improving first-mile distribution as a way to reduce food-loss and improve market access for agribusinesses. What led the firm to invest in such solutions?

Factor[e] began its work centered around energy access. That remains our “north star” and central to our work.  We believe that sustainable energy and related services are key to unlocking development and there is great evidence to support the relationship between energy and human development.

Working in energy access evidence how related the agriculture and energy sectors are in important ways.  And looking at the history of electrification and development, it’s obvious that improving the productivity and efficiency of agricultural systems is fundamental to addressing poverty on a national and international scale and to providing sustainable pathways for rural development.  In the least developed countries, agri-processing accounts for more than two-thirds of the manufacturing value added economy.  First-mile distribution and improved market access are crucial opportunities to drive growth in agriculture, and access to energy, distribution and logistics, markets, and finance are all important ingredients in this work.

When I joined Factor[e], I knew from my experience with the One Acre Fund, that the smallholder farmers, and the small and growing agribusinesses that support them, are the building blocks of food systems and therefore developing economies. Around 85% of farms are run by small-scale farmers and 80% of the developing world’s food is produced by small farmers. Most of the world’s poor are farmers: three-quarters of the world’s poor are based in rural areas and the overwhelming majority of those people are farmers; half of the world’s undernourished people are farmers. The fight against global poverty will be fought and won on those farms and in partnership with those farmers. Growth generated by agriculture is up to four times more effective in reducing poverty than growth in other sectors.

At Factor[e], we knew that we couldn’t afford to miss the opportunity to improve the productivity and efficiency of agricultural systems.

3. When evaluating investing in a technology or distribution company that serves the agricultural sector, what are some key things you look for?

We look at different things including:

  • The management team, that includes the founder group and also the management team that the founders have built around them. We believe a company must have a strong, diverse management team that represents all of the skills and experience the company will need to succeed and build the kind of opportunity they are chasing in terms of technology, operations, finance, and sales.
  • A deep commitment to understanding their customer (and, where different, their ‘end user’).  For example, InspiraFarms serves sustainable agribusinesses. Their solution is purpose-built precisely for those customers. The founders and management team have been working with sustainable agribusinesses for decades. All pain-points and gaps are identified so as to build a complete solution that can serve better those customers. In a similar way, Crofarm which has a founding team that previously built and sold a company with a farm-direct-to-consumer solution was built by hearing directly from their customers, in their case both the small producers they source from and the retailers through which the overwhelming majority of produce in India moves.
  • With agribusinesses and first-mile distribution businesses the main customer may not necessarily be the primary producer, but for both impact and commercial imperatives, we know that the company has to have a commitment to understanding of the primary producer.  We really look for teams with a love of farmers and an appetite to put in the time in the field to understand the landscape that the company is trying to affect because we know that makes the difference for successful enterprises.
  • A venture that “covers all the bases” and aren’t afraid of doing too much (https://ssir.org/articles/entry/in_defense_of_doing_too_much), rather than committing to what ends up being a false promise of hyper focus in under-developed agricultural landscapes. We need growing companies that cover all the bases and understand that there are multiple gaps and challenges that their customers face and that they must solve.  If they try to solve just one of them, there is a risk of not selling to their customers, not functioning commercially and not being successful. As an example, a company may have a terrific technology innovation that makes sustainable agriculture more competitive, but without a finance solution, it could remain out of reach for their customers. It’s generally not enough for a company to do one thing well in the developing markets where we seek impact and commercial opportunity.
  • More generally we look at the need, related to market size, that the venture is trying to tackle.  If it isn’t massive (potential to improve 10M lives or more), it’s not for us.  We build an understanding of the approach the venture is taking: Is it differentiable? Is it better, cheaper, faster than the incumbent approaches and alternatives and not just innovation for innovation’s sake?  Does it provide a true benefit for all critical actors such as customers and other key links? And does it do so on a time-scale that is relevant for that customer’s financial life?  Finally, can it compete with the other entities chasing that opportunity?

4. How can development finance institutions, foundations, and impact investors coordinate their investments in first-mile distribution so as to help crowd-in the private capital that will eventually be needed to scale up such solutions in developing countries?

The general concern is about whether there is a sufficient number of businesses that are primed to seize the first-mile opportunity and generally solve the challenges we see in development at scale. I don’t believe there is a shortage of social ventures or clever approaches to some of these big challenges, but there are insufficient resources available to get companies to the threshold of the growth stage where they become relevant for global private capital markets. So, entities such as Factor[e] exist primarily for the seed stage or the early development of the venture idea. That’s a good start and we feel like we fill a crucial gap, priming the pipeline of innovative, high-impact ventures for development.

However, we’ve also come to recognize that there remains a funding gap for the growth stage and we’re organizing our efforts to stay at the table through that stage and also crowd in new investors alongside us. We know that we, and companies that are operating at the intersection of impact and technology innovation in development, need to coordinate with public and philanthropic funders and development finance institutions.

For social entrepreneurs, once you have validated your idea for a social venture, you will need to pull in resources from all of these sources, public sector, philanthropic, development finance, and investment alike. It is not an easy endeavor, but it is needed to make a company grow and prove the market potential.

To build a community of scaled social ventures in development, a couple of things need to happen in coordination. First, a bias towards action among these actors. Certainly, everybody needs to do their due diligence and evaluate opportunities carefully and once all the information from the company is ready, investors (whether commercial or philanthropic) need to make decisions quickly. Most funders, especially large organizations, have several layers of process and decision-making to navigate, and that can take 12 months or more. That is just not fast enough for a start-up or early development company. As a sector, we need to find mechanisms to make decisions faster.

Also, funders have to identify the right target – stage, risk, size, etc. – for their money. From there, there is an important need and opportunity for curation. It is essential to pull investors and funders together in coordinated ‘clusters’ to back social ventures.

InspiraFarms has done a great job of this and hopefully, we have helped with some curation and advocacy among our partners. During the early stage of the company, funders such as Andrew Charitable Trust and DOEN Foundation provided critical early stage grants that helped the company to develop the core technology. These investors took the risk on an experienced team with a great idea and a concept that needed to be proved. This allowed Factor[e] to enter the scene and use R&D stage equity capital to prepare InspiraFarms for growth stage equity investment. We worked closely with the management team and existing and prospective backers to establish structured and disciplined decision-making processes, to reinforce the company’s governance structures, and to develop a design plan for technology and business model development.

At that early stage, we were able to persuade a couple of key equity investors to come in and invest alongside us before they might generally have been comfortable investing in a young company. We took the lead in terms of providing the primary support the company needed in the initial stage. These partners, Energy Access Ventures and Pymwymic, were in a great position to double down in our recent A Round financing. They knew the company well and had confidence in the opportunity, the team, the governance structure, and the plan and were well placed to put growth capital into the company. Along the way, we’ve quite crucially been joined by key partners like the Shell Foundation, which provided grant resources that helped the company bridge to the point where it was ready for growth capital. And DOEN Foundation invested again but this time as an equity partner.

Finally, we also needed critical finance partners for customers, which was really a separate fundraising process altogether. InspiraFarms brought in Montpelier Foundation and SunFunder to invest in an asset finance fund for extending payment terms to customers.

So it takes a village to coordinate investment oriented to the first mile. Organizing all the right contributors is extremely important and also highly complex and time consuming. Collectively, the development sector needs to find ways to take some of the cost out of this process and make it more replicable. It’s so important to do so. Having the right contributors in that village, each playing their role and all willing to collaborate with the type of capital and other resources they have, is essential to providing real, scalable social ventures offering solutions for development opportunities.

 5. How do you see post-harvest technologies fitting into the energy access equation? Particularly within the investments that have gone into solar mini-grids? 

I see postharvest technology and in particular cold storage technology as a critical part of the energy access equation. In many cases, there is an important overlap between postharvest technologies and solar mini-grids in particular. I think that InspiraFarms’ technology is a great example of this. Not only could an InspiraFarms cold storage and agri-processing unit provide a growing agribusiness the infrastructure it needs to access high-value markets, but, because of its thermal storage logic, the InspiraFarms unit could also provide a largely dispatchable and deferrable anchor load for a solar mini-grid.

Mini-grids generally serve people in very remote settings. Developers often find that average energy consumption is low and since these companies are in the business of selling electricity and it is difficult to build and operate energy infrastructure in hard to reach places, this reality threatens the commercial viability of mini-grids. Relative to households primarily using electricity for lighting and phone charging, InspiraFarms units’ energy consumption is higher, even though it is efficient. This is a great opportunity for increasing demand for electricity and growing revenues for mini-grids and it is also a productive and income-generating form of electricity use.

At the same time, the InspiraFarms system does not require a constant source of power as most conventional cold storage does. Through its thermal storage system, it has the ability to decouple energy production from energy consumed for cooling, according to the type of electricity that is available. Often, solar microgrids face a situation where the electric battery systems are fully charged and the sun is still shining. This means that the sunshine is “wasted,” a process known as curtailment, which often results in a loss of 20% or more of the potential solar energy resource at a site. With an InspiraFarms unit, when the sun is shining, you have a customer that can absorb the electricity as it is being produced and store it for cooling needs later on, which means it can operate effectively as a battery for your whole system. In contrast, during the night people can use their lights, radios, and TVs and charge their phones and the operator does not have to worry about meeting the instantaneous cold storage needs of the refrigeration unit it is supporting.

We are hopeful that by next year we will be able to demonstrate that potential and show an integrated model for rural development, where postharvest technologies such as InspiraFarms are the primary assets for agricultural development and energy access.

There are other postharvest technologies that are important for development and for energy access such as grinding, irrigation, drying, and other postharvest processing that are not necessarily linked to a solar mini-grid or connected to electricity in the short term. But it is extremely important to provide farmers and agricultural systems access to the energy they need to drive-in productivity and improve efficiency.

6. What do you feel is still required in the sector for increasing the level of investment? What would be your recommendations?

There are many things that are needed, but the most important one is that we need winners, companies that show and prove that there is a great opportunity in the first mile, not only in terms of impact but also in terms of economic opportunities.

We will know we are doing something right with Crofarm, InspiraFarms and the other agricultural technology ventures in which we invested, when other companies start to copy or imitate them and pursue the same opportunities that these companies have pioneered.

We need more growth capital so that the reservoir of investable companies today can actually reach the necessary business inflection points. We need investors who are resolved and steady and willing to take the risk on a market and opportunity that the current mainstream investment community has not yet appreciated.

Once we see the right combination of scale and capital and when there are real successes in the sector, we will then recognize that all the inefficiencies in tropical agriculture systems represent a massive investment opportunity. My hope is that at this point, a large amount of capital will rush into these opportunities. By then what will be critically needed is capacity building and extension services, and market creation for donor, profit-private and public sector actors.

Collectively with those leading-edge actors, companies such InspiraFarms or investors such as the ones we sit around the table with behind InspiraFarms, need to make sure that we are harvesting those lessons and making them available for key actors in the public and private sectors. At the same time as we all competitively pursue the commercial opportunities that do exist, a key lesson here is that now is a great time and the environment is ripe for collaboration and alliance among these key actors. It’s nice to be in a moment where we are demonstrating that working together is the key to success.