10th June, 2023 (LinkedIn) – Contrary to many other sectors, vertical farming (and broader Controlled-Environment-Agriculture) should be viewed as a community. We’re all obviously companies with shareholders to answer to so there is a sense of competition, but one company’s success is another’s gain given the lack of maturity of the sector, the need to reach certain proof-points, and in particular, the level of scrutiny the sector has undergone in recent years, at a time when demand for innovation and responses to important issues continues to grow.
I’ve also never truly believed that the addressable market for global crop production in respect of vertical farming systems will be subject to a monopolistic or oligopolistic structure – it’s too vast, complex, and geography-specific. For these reasons, again, seeing other vertical farming companies succeed – whether focused on growing or the technology behind growing – has always been my wish. We all benefit.
In recent years, many companies in our sector have either failed or are close to failing, raising serious questions for many. This is (regrettably) something that my colleagues and I predicted but is nevertheless difficult as it means people lose their jobs, supportive investors lose money, and there is a natural knock-on impact for us all. Negative press provokes negative opinions from investors and potential customers alike – and these groups invariably presume that they are always comparing apples with apples. Often this may appear to be true, but some apples will be coated in a massive amount of wax and others will be rotten to the core. None of us ever know if we’ve made the right decision until we take a bite.
In this short article, I offer my humble views on the current situation for CEA but more specifically, on the global vertical farming sub-sector. There will obviously be some agreement, as well as some pushback, but healthy dialogue is important today (more than ever).
1. Vertical farming (done correctly) may appear easy, but it’s definitely not
It requires a consistent and persistent effort across hard and soft engineering, plant sciences, and operations to continuously improve productivity – all designed around a system that supports this endeavour. The barriers to entry for growers are low and much higher for those for want to focus on technology, but you need to choose your identity and can’t do everything. Too many companies have neglected some of these areas, to their eventual detriment.
2. Smart branding and marketing are not substitutes for productivity and a defensible business model
Having a brand and system that look good are of course important to every business, but none of that matters if the fundamentals of your system or business model aren’t right. Humans are fickle and like the commonly used apple analogy, one cannot know until a bite has been taken. What can be changed is the level of honesty and openness about ‘the inside of the apple’ and indeed how it was grown (it’s impossible not to make a pun relating to vertical farming when using this example!).
3. No matter the country, no matter the demographic, the world is NOT going to be revolutionised by microgreens
Many companies (including us) used microgreens as a ‘gateway drug’ for consumers and in our case, this was due to the size of our first farm and the fact that we were situated in London – where with even hundreds of restaurants and high-income buyers on the B2C side, demand for microgreens relative to what can be grown in a productive vertical farming system is still small. This is not me saying that microgreens should disappear from the sector – it’s just clear that the market will saturate (quickly) and we’re not going to have an instrumental impact on food insecurity (no matter the nutrient claims).
4. Electricity price increases should not be the main excuse for exit
“Rising electricity prices” have been used many times over as the primary excuse for failure or the retreating from various geographies. There is no disputing the fact that rising prices have influenced unit economics, but it has been clear to us for probably half a decade that multivariate, advanced lighting is required to cope with market shocks such as this. The ideology that ‘more watts (energy) equal more crops’ is indeed true in the most basic sense, but a detailed understanding of how to use specific wavelengths at different stages of growth can at the same time reduce power inputs and significantly increase biomass without compromising crop quality or morphology, thus disproving this hypothesis, and highlighting the importance of the right technology and continuous research and development.
5. Speed to market and scale is a major mistake if the technology is wrong
Human beings are, by nature, also impressed with scale. One of the common mistakes that the sector made, was to scale too quickly, especially in the US. This occurred in many cases with readily available infrastructure and equipment from the longstanding glasshouse industry, with minimal due diligence on the even short-term potential for these systems to meet the end goal of vertical farming systems – which should be higher quality produce, at price parity, for the crops that fall within the scope of vertical farms. A vertical farm is an asset that should last between 20 and 50 years (depending on material selection) and technology selection as well as process flow are critical decisions from day one. Larger systems without proof or the ability to be agile compromise this.
6. Efficiencies achieved through modularisation is a red herring
As a company that produces both large-scale systems and shipping container farm (although less so nowadays), it’s clear that collocating say, 50 shipping containers (or growing towers) next to one another on an incremental basis does not result in anywhere near the economies of scale that one achieves through building a fully integrated indoor farm from the start. Some OPEX efficiencies can be achieved but continued replication of modular units over time places limitations on CAPEX efficiencies (that could have been realised at the start of the project). The end model and goals of the farm must therefore be considered from the start in the context of the type(s) of crop(s) that will be grown and the addressable market. But ultimately, this sector really is about scale.
7. Grains and protein-rich crops (even at scale) still have a long way to go
This should be an end goal for the sector, but let’s all be honest with ourselves and say that this is a long way off. The most basic vertical farming systems in the world could successfully grow these crops tomorrow, but the fundamental question that everyone should ask is “at what price to the consumer/buyer”? There will come a day when these crops become economically viable but this will require scale, genetic breakthroughs, a reduction in the cost of production, and capital that is multitudes higher than anything we have even come close to today.
8. Unsubstantiated claims need to stop
It’s very easy to fall into this trap, especially in a complex sector that lacks history and data. The lack of maturity of the sector has meant that there has been a natural deficiency of information and retrospective performance data, at a time when a high degree of trust has to be given to investors to grow the sector. Many chess pieces have fallen in recent years and whilst many competitors’ failures or retractions may have been down to bad luck, timing, or other reasons, it’s also clear that there has also been evidence of overstating, overpromising, or similar. But this is all unnecessary as there are already so many good things to talk about – first dates and relationships that are built on a shaky history and web of information that may be overstated often don’t end well.
9. Success metrics need to change
In previous posts and talks I have been consistent in my views that the way that the press judge success is wrong. Whether you’re a grower or a tech company in this sector, capital is needed to grow your business model – unless you have the personal cash to finance it, investors are a foregone conclusion (and a good thing). However, level of investment, whilst one metric of success, is not the key metric of success once said cash has been raised. Assessing financial performance when most companies in this sector are privately listed is a challenge, but journalists should be ‘digging deeper’ and formulating a more complex view of the sector. This would perhaps draw out some of the success stories (and there are many), instead of every article talking about the same 5 or 10 companies, with a repetitive narrative.
10. Attrition is a norm in any sector
Warren Buffet once said: “when the tide goes out, you find out who is swimming naked” and this is synonymous with what is happening in the vertical farming and broader CEA sectors now. Let’s not forget that in any sector there is a natural attrition rate, companies that survive will often change strategy to adapt to market shocks, and – especially in new sectors – the curve to profitability is not smooth, by any means. What’s important is that we all learn from failures, successes, and changes in market dynamics and not forget that the demand and underlying need for what we’re tackling will never go away.
See the original article on LinkedIn here.