Funds Dry Up For High-Tech Farm Startups.

 

"Startups that promised to make farming a high-tech business are withering, suffering from rising costs, tight financing, pests and other problems that have troubled traditional agriculture for centuries.

Investors poured billions of dollars into companies such as AppHarvest and Local Bounti that grow lettuce, tomatoes and other crops in indoor farms that use advanced technology such as sensors and robots to offset weather-related risks, use less water and produce more consistent crops.

 Shares of the two companies are down more than 95% since they went public in 2021, and in recent months at least four companies in the sector have shut down or filed for bankruptcy.

Funding has all but dried up. The industry raised a record $895 million in last year's first quarter. So far in the current quarter, the figure is about $10 million, according to research provided by the firm AgFunder.

"Their business model was selling a vegetable, but they somehow described themselves as a technology company," said Paul Sellew, chief executive of Little Leaf Farms, a Massachusetts startup that grows lettuce using high-tech greenhouses.

He says his company has avoided the sector's difficulties by making day-to-day farming the priority rather than growth. It expects to hit $100 million in sales this year and says it is profitable.

The struggles of the indoor-agriculture companies mark the latest faltering efforts by entrepreneurs to use technology to upend established industries. WeWork said it was a technology company, not a landlord. That didn't work. Carvana said it would use technology to reinvent the used-car market. Its shares are down more than 95% from their peak. Katerra was going to reinvent construction. It went bankrupt in 2021.

Farm startups have run up against the same obstacles that have long posed challenges to farmers: high costs for supplies, energy and workers. While farming indoors protects the companies from the vagaries of the weather, it doesn't eliminate pests.

There are two main types of indoor farming: modern versions of greenhouses that use energy from the sun to grow plants horizontally; and vertical farms with stacks of plants on top of one another underneath artificial lights.

Many analysts are confident the high-tech greenhouses can be operated profitably in the U.S. because they have been run successfully in Europe and Canada. Vertical farms are another story. No company has made money operating one on a large scale.

Startups in both areas pitch themselves as a green solution to the U.S. food system, which has long struggled with challenges posed by extreme weather, heavy resource usage and dependence on a few prolific regions. The newcomers have attracted funding support from top companies such as Cargill and Walmart.

The promises started unraveling last year, when rising costs made building and operating new facilities more costly than expected. Some of the steepest expenses are heating and ventilation. Lighting costs alone for vertical farms can make projects uneconomical. With profits still elusive, the businesses were vulnerable when interest rates rose and investors started shunning speculative companies.

Greenhouse operator App-Harvest ran into additional issues when pests damaged some of its tomatoes and strawberries at Kentucky facilities in 2021 and 2022. Last month, the presence of harmful listeria bacteria forced it to suspend operations at one of its greenhouses, the company said in a securities filing.

"There's a lot of frustration out there," said Deb Yates Bunnell, a 67-year-old investor who owned several thousand AppHarvest shares but sold them last summer after they fell about 25%. The retired project manager in Louisville, Ky., said her husband had cautioned her about buying a stock because she believes in the company's mission. Yates Bunnell recently bought more shares at around 50 cents. "I really wanted this company to make it," she said.

The boom in high-tech farming coincided with the surge in special-purpose acquisition companies, or SPACs. Companies that go public via SPACs can make business projections that wouldn't be allowed in normal initial public offerings.

AppHarvest went public via a SPAC at a valuation of about $825 million, projecting that sales would surge to about $25 million in 2021 and $60 million in 2022 as it opened more greenhouses. The stock soared in early 2021 alongside other speculative companies, valuing AppHarvest above $3.5 billion.

The company, which was backed by former venture capitalist and now Republican Ohio Sen. J.D. Vance, had sales of roughly $9 million in 2021 and $15 million last year. It has warned that it might not survive without significant additional funding. The company since has raised some cash by selling stock and selling one of its farms to a partner, then leasing the space back. App-Harvest's market value is down to about $75 million.

A spokesman said AppHarvest has learned from its challenges, and those lessons should help it become more efficient. The company is considering other sale-leaseback transactions, he said.

Local Bounti has raised money by selling a facility, then leasing the space back and increasing its debt agreement with its partner Cargill. The company employs a hybrid approach, using vertical farms to grow plants early in their lives, then moving them to greenhouses as they mature.

Local Bounti is confident that the funding and facility openings can make operations profitable within two years, Co-CEO Craig Hurlbert said. Local Bounti said on Thursday that a former Amazon.com executive and CEO of meal-delivery company Freshly, Anna Fabrega, will take over as its new CEO in June. The company's current Co-CEOs will shift to new leadership roles.

Indoor-farming companies that stayed private also hit lofty valuations in recent years. Vertical-farm startup Bowery Farming was valued at $2.3 billion by investors including Fidelity Investments in 2021. SoftBank, Walmart and others invested $400 million in vertical-farm company Plenty early last year. Many private companies are facing the same funding drought as those that went public. Bowery said the company was focused on continuing to grow while navigating economic uncertainty." [1]

1. Funds Dry Up For High-Tech Farm Startups. Ramkumar, Amrith; Thomas, Patrick. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 26 May 2023: B.1.