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Sunday, 17 September 2017 12:36

Despite gains, West Michigan’s agtech sector still struggles to attract VC investors

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Despite gains, West Michigan’s agtech sector still struggles to attract VC investors Infographic by Rachel Harper

In April, Native Traits LLC was gearing up for a $1.5 million Series B raise from venture capital investors.

The Kalamazoo-based company, which takes cold- and drought-tolerant characteristics found in historic types of corn and embeds them into modern varieties, planned to use the funds to commercialize its seed-based technology.

Despite having raised more than $1 million in past Series A rounds, Native Traits ended up ditching its plan to seek VC money. Instead, the startup decided to take its technology funding needs to the seed companies themselves.

For Native Traits’ president and CEO, Dr. James W. Friedrich, the decision came down to a simple lack of serious interest by VC firms.

“It would appear to me that unless you’re in a sector like drone technology or big data, (it) is a tough slog,” Friedrich said of generating investor interest in agtech.

While agriculture technology continues to gain the attention of investors across the country, many startups are having trouble courting investors if their products aren’t in a hot-button sector such as drones, software or other popular technologies.

Even so, 2017 is on track to be a banner year for capital raises in the agriculture technology industry in the U.S., with approximately $1 billion in total investment expected, according to financial researcher Pitchbook. In 2016, agtech received $832 million in investment, while the level hovered at just $560 million in 2015.

Michigan ranks eighth in the country for the value of deals in the agtech sector between 2010 and mid 2017, according to the Pitchbook report. But the total invested in Michigan deals in the sector was just $96 million, a scant fraction of California’s $2 billion in agtech investment during the same period.

That may help explain why some Michigan agtech companies report that, even in this seemingly capital rich environment, it’s been challenging for them to gain the attention of investors. Some firms, like Native Traits, are turning to customers and potential customers for growth capital.

Native Traits has entered into unofficial talks with one large seed manufacturer on the possibility of a strategic investment, Friedrich said, declining to name the manufacturer specifically.

“VC people tend to have a bit of a herd mentality,” he told MiBiz. “The people who are based in the seed industry, they have a longer-term view and they don’t tend to get caught up in the flavor of the month.”

Digested Organics LLC, an Ann Arbor-based startup focused on advanced water filtration equipment, faced a similar problem when it came to courting investors. Despite some interest by investor groups including Grand Angels, an angel investor network and venture capital fund in West Michigan, the company has yet to garner a serious injection of capital.

“We sell them a piece of hardware,” founder and CEO Bobby Levine said of the company’s model. “(Other companies) have a cool online dashboard and an app and all that good stuff, but (this) is more like a piece of equipment. To me it’s harder to get investors excited about that in the same way.”

Yet, Grand Angels says its investors are not ignoring those companies making equipment and other products outside of the hot agtech sector, said CEO Tim Parker. Rather, most Michigan startups simply have not matured to the point where the angel investor network or its $7 million venture capital fund is willing to make an investment.

“We look at companies that are getting close to $1 million in revenue and then we’ll come in either with our VC fund or angel investors or both and then help take them to the next level,” Parker said, noting most of the agtech companies approaching Grand Angels have been at the pre-revenue stage. “They continue to stay on our radar, and we continue to keep tabs on them, hoping that we can invest in them in the future.”

Grand Angels is currently looking for agtech companies in the software realm, but also is open to companies producing hard equipment, Parker said. For those companies making products, the key is to make sure the technology is a “game-changer” and that the company has strong intellectual property protections in place, he said.

Still, Parker notes getting the attention of investors, even if an agtech company meets those criteria, can been challenging.

“It can be hard,” he said. “A lot of those types of businesses are pretty high-capital investments for the customers, so the sales cycles can be very slow and can rely on just a few customers to ... really prove the viability of the product or the business. They’re left struggling with landing those first couple customers when they’re also needing quite a bit of capital to move the business forward.”

CULTIVATING COMPANIES FOR INVESTMENT

Despite the challenges startup agtech companies face in garnering outside investment, sources interviewed for this report are confident that investors’ interest in agtech startups will continue to grow.

“Michigan is so well-positioned to be a leader in ag technology,” said Paul Sachs, executive director of ACRE Agtech (formerly known as the Great Lakes Ag-Tech Business Incubator), a West Olive-based entrepreneurial incubator for agtech companies. “We have all of the ingredients from a strong manufacturing base,  innovative farmers and entrepreneurs and then organizations like ACRE to pull all those organizations together and highlight the strength Michigan can achieve in agricultural technology.”

Sachs plans to continue building ACRE’s close relationship with investment groups including Grand Angels. While the companies in its incubator — Digested Organics included — may not meet the criteria of investor groups now, Grand Angels does assist in mentoring efforts while the companies are at ACRE.

“One of my goals is to work with ACRE and help grow those companies to a point where they are investable for us,” said Parker of Grand Angels.

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John Wiegand

Staff writer

jwiegand@mibiz.com

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