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The venture funding drop has intensified challenges faced by indoor farming startups, adding to the existing challenges of high operational expenses, rising energy bills, high supply costs, and pest infestations. The VC funding inflow previously kept them afloat and helped them navigate the challenges that have troubled agriculture companies for centuries. VC funding for the sector slumped to $198.4M in Q1 2023, 4.5 times less than peak quarterly totals of $895M from the same period last year, per AgFunder. In the ongoing quarter, VCs have so far invested less than $10M into indoor farming startups, indicating that funding will continue to slide even further from last month. Per Crunchbase, the indoor farming sector raked in 20% of the total $4.5B capital invested in agtech startups in 2022. Part of the initial troubles stemmed from an incorrect business model and focus, as technology can serve as an enabler but cannot upend the agriculture industry. Paul Sellew, the CEO of Little Leaf, said, "Their business model was selling a vegetable, but they somehow described themselves as a technology company." The Massachusetts-based startup grows lettuce in high-tech greenhouses. Sellew adds that his firm has avoided the operational difficulties other startups face by focusing on day-to-day farming rather than growth. Little Leaf is profitable and expects to hit $100M in revenues this year. Startups in the sector attracted funding from top investors, including Cargill and Walmart, due to the initial potential of the indoor farming sector, which positioned itself as the green solution to challenges faced by traditional farming. However, funding retreated after operational expenses started to spiral, and the cost of new facilities was higher than expected. Indoor farming can be categorized as high-tech greenhouses and vertical farms. The former have been operating profitability, unlike the latter. Vertical farming startups have suffered due to the steep costs associated with operating new facilities. Heating, ventilation, and lighting make up most of the expenses in a vertical farming startup. Per WSJ, no large-scale vertical farming company has made profits.
Four indoor farming companies declared bankruptcy or shut down in recent months. The troubles for indoor farming companies are evident by the over 95% drop in share prices of recently listed companies AppHarvest and Local Bounti, both of which went public in 2021. AppHarvest —which went public in a SPAC listing at an $825M valuation— fears that it will not be able to survive without additional funding. It initially projected sales of $25M in 2021 and $60M in 2022, enabling its valuation to surge to $3.5B after its listing. Actual sales for 2021 and 2022 came in at $9M and $15M, respectively, much lower than initial targets. The current stock prices give it a market valuation of about $75M. The company freed up some cash by selling its farms and leasing them back from the new owner through a sale-leaseback agreement. Vertical farming startup Plenty's CEO Arama Kukutai remains bullish on the industry potential, expecting the push to lower carbon emissions to benefit indoor farming startups. Last year, the firm raised $400M from SoftBank, Walmart, and others. The firm opened its first commercial vertical farm this year and expects it to be profitable within a year. |
