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Farming indoors to avoid environmental challenges by utilizing technology such as solar panels and LED lighting seems promising but vertical farming companies have made some critical mistakes while also facing technological limitations.
Vertical Farm Mistake 1: High Equipment and Labor Costs
Fifth Season, among other vertical farms, chose to use robotics to cut on labor costs. Unfortunately, in addition the capital expenditures for automated systems, they ironically had to pay high labor costs for teams of robotics and software engineers.
AppHarvest, raised over $640 million, but reported net losses of $83 million through the first nine months of 2022, including a summer quarter that yielded a paltry $524,000 in net sales. The company’s total revenue for the first three quarters of last year was $10 million, but most of that was used on up to $7 million in severance payments when it fired two executives.
While on the topic of management; startups with little experience trying to figure out how to efficiently grow food with new processes is a challenge. A lawsuit filed by AppHarvest investors argued that the startup had failed to disclose problems and misrepresented its ability to succeed; the company said that its challenges were reasonable for “a young company with an inexperienced management team undertaking a massive farming endeavor for the first time.” At AeroFarms, only the VP of Sales had farming vegetable farming experience.
Vertical Farm Solution 1: Hybrid Processes
Traditional greenhouses in Mexico and Canada already grow a large percentage of the tomatoes eaten in the United States. In the Netherlands, greenhouses grow nearly a million tons of tomatoes a year, along with other crops, making the country a major food exporter despite its tiny size.
Dutch agriculture company, Agro Care, was one of the first tomato growers to supplement natural light with artificial light and has grown into one of the largest tomato producers in Europe, producing nearly 200 million pounds a year. Agro Care has greenhouses in Tunisia, Morocco and France. Because of their intensive electricity needs, they started their own small energy company. The CO2 generated is piped into the greenhouses where the plants turn it into oxygen.
With Dutch greenhouses, the overhead to run the farm is a lot lower because there’s no corporate offices. There’s an outsourced technical support staff team and outsourced IT team. The manager of the entire facility is also the head grower, who is also the person who pays payroll.
“There are many reasons why they’re doing it, but one of the reasons is because they know that Silicon Valley investors won’t invest in a farm, but they’ll invest in a tech company,” says Henry Gordon-Smith, founder of urban farming consultancy, Agritecture.
Vertical Farm Mistake 2: Wrong Financial Partners
Relying too much on technology required greater capital investment for the vertical farms. The founders, being mainly from tech backgrounds reached out to the investors that they knew: Silicon Valley VCs. This resulted in financial partners that expected to tech company returns from commodity products. One founder vented in exasperation that many investors don’t really understand this space, and that they’re often drawn to the sexiest, most revolutionary technology, rather than more incremental improvements and business models that are already proven, like lower-tech greenhouses.
AeroFarms, launched in 2004, estimated in their May 2021 investor presentation, just $4 million in 2021 EBITDA-adjusted revenue—and $39 million in losses, and continued net losses until 2025. This means interest and depreciation expenses are incredibly high. Depreciation is from the massive amount of hardware and sophisticated robotics, and interest from high rates typical of VC investors.
“There are many reasons why they’re doing it, but one of the reasons is because they know that Silicon Valley investors won’t invest in a farm, but they’ll invest in a tech company,” says Henry Gordon-Smith, founder of urban farming consultancy, Agritecture.
Vertical Farm Solution 2: Cheaper Loans from Better Partners
USDA Farm Loan Programs give low interest loans at below 5% while venture capital interest rates (also) can be as high at 25% in addition to up to 50% of equity given up.
“I thought investors understood that this was a long game,” says Chris Cerveny, a horticulturist who was head of grow science at Fifth Season. “Now all of a sudden they want a return on their investment.”
Vertical Farm Limitations
It wasn’t all mismanagement that is hurting these vertical farms. There are several factors that are unavoidable and outside the control of vertical farms.
Building: Vertical farms rely on buildings whereas traditional farms do not. As such, vertical farms are expensive to build. Fifth Season, for example, reportedly spent $27 million on its Braddock farm, which could produce around 4 million salads a year. Therefore, owners have depreciation before operations even begin.
LED Lights and Solar Arrays: LED lights are expensive. Vertical farms often start growing leafy greens first because they require less light than some other crops, but buying the lights, and paying the electric bill, is still a significant expense. Even a small, 10,000-square-foot farm might have a lighting bill over $100,000 or even $200,000 a year. Running air conditioners and other equipment adds to the energy used.
Adding renewable energy outside can help—and reduce the carbon footprint that goes along with that energy use—but putting a few solar panels on the roof can’t cover the total amount of electricity needed. In a typical cold climate, a vertical farm would need about five acres of solar panels to grow one acre of lettuce. A hypothetical skyscraper filled with lettuce would require solar panels covering an area the size of Manhattan.
COVID: Many farms faced delays by pandemic supply chain issues, so they weren’t able to grow and sell as much as expected. Raw materials, packaging, growing trays, etc. are all inputs that were not always reliably available that disrupted operations for these farms.
Read the entire article from Fast Company.
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The WOCCON Summit is an invitation-only conference that brings together entrepreneurs, allies, and thought leaders to explore ways to help women of color advance on the grow-scale-exit trajectory. The Summit will share stories about the unique entrepreneurial journey of women of color, facilitate honest conversations about allyship, and propose solutions that can lead to systemic change.
While a growing number of Black and Latinx women-led startups crossing the $1MM threshold, the majority of Black and Latinx women-led startups raise significantly less than the average funded startup. For those who have not raised over $1MM, the median seed round raised by Black women founders is $125,000 and the median seed round raised by Latinx women founders is $200,000. As of 2020, the national median seed round funding for a startup is $2.5M. Source: ProjectDiane2020
Your Startup Guru is thrilled to attend the WOCCON Summit and committed to creating a more inclusive entrepreneurial ecosystem. Capital constraint remains a defining problem for the majority of Women of Color entrepreneurs. As our post, What Angel Investors Prefer discusses, there are considerable pre-money valuation and round size discrepancies when it comes to the various demographics of entrepreneurs. This highlights a disturbing flaw in the angel investment community.
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Through meticulous industry research and market analysis, we found a growing niche that met their goals. A 5-year financial projection model comprising of an profit & loss statement, balance sheet, and cash flow statement was also created so Zavros could see how much to charge customers, when to acquire new assets and at what price, as well as overhead expense budgeting.
Equipped with a strategy, Zavros now has a clear picture of how to enter into this new business endeavor.
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Your Startup Guru created a business plan for Soul Food and Haitian restaurant, Kray Plates. Head Chef Krayla Brice launched Kray Plates as a side-business to stay afloat during the COVID-19 restaurant closures blew up into thriving and profitable pre-order take-out business in a matter of months.
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This post on Reddit talks about how an entrepreneur lost over $200k trying to start a business brings up excellent things to consider when starting a business.
Every business is different, but some key lessons that apply to almost all businesses are numbers #3, #7, and #9.
Lesson #3: Don’t Build Everything At Once
As an entrepreneur, you are likely the CEO and janitor. In other words, you have a lot to juggle and little cash to spend. Getting the core product/service to market takes precedence over spending time and money adding bells and whistles.
Lesson #7: You Can Be Either Low Frequency or Low Price, but Not Both
In other words, you can make infrequent big sales or frequent small sales, but not both. Most businesses fail because of illiquidity (i.e. not enough cash). Expenses never stop and must be paid even in between sales, so make sure you are always generating sales. A SaaS/user-base business is slightly different because the revenue model is based on data and advertising, but a similar maxim still exists.
Lesson #9: A Founder’s #1 Job is Sales
Once the CEO is done with janitorial duties for the day, it’s back to the phones making calls. For example, one of the main jobs of a partner at a law firm is increasing yearly revenue. They might not be doing contract review or picking up trash, but they are rainmaking.
See the full Reddit post below:
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Your Startup Guru Managing Director, Joon Hong, recently had the opportunity to advise the 2022 cohort in the Emerging Young Entrepreneurs (EYE) program on their pitch decks.
The National Minority Supplier Development Council’s Emerging Young Entrepreneurs (EYE) program is a year-long program uniquely designed to provide the next generation of minority entrepreneur participants ages 19-35 with support to enhance their growing business. Business owners will receive guidance from corporate sponsors, MBEs, and additional stakeholders. EYE will utilize an interactive pre and post-conference curriculum along with five days of hands-on training and practical application. Participants are provided the skills, tools, and strategies to start or grow their innovative businesses.
About NMSDC’s Emerging Young Entrepreneurs Program
Founded in 1972, the National Minority Supplier Development Council Inc.® (NMSDC®) is the longest-operating business growth engine for the broadest group of systematically excluded communities of color (Asian-Indian, Asian-Pacific, Black, Hispanic, and Native American), and our impact goes far beyond supply chain. It’s about upward mobility for the emerging majority of Americans, an equal shot at participating in the American experiment of free-market capitalism and entrepreneurship. Our work is about correcting the unequal access to wealth-building opportunities.
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