24 September 2023 |

Not a death sentence


One of the biggest venture deals in climate this week was for Indigo Ag, which raised $250M in equity funding to continue commercializing its products, which are geared at making agriculture more sustainable. Specifically, Indigo Ag works on products including:

  • Microbial seed treatments to enhance crop health and yield. Often, this looks like applying beneficial microbes to seeds before planting.
  • Crop nutrient products designed to improve nutrient availability to crops, ideally reducing the need for synthetic fertilizers.
  • Indigo Ag has also tried to scale carbon credit-focused farming by working with farmers to implement practices that sequester additional soil carbon.

The climate challenges from agriculture are manifold. For one, agriculture is a significant source of methane emissions. By some estimates, methane emissions from cows alone have caused up to ~12% of anthropogenic global warming to date.

Of course, agriculture also drives a lot of land-use change. The expansion of beef farming, for instance, is a significant contributor to the loss of the Amazonian rainforest.

Further, fertilizer use, which has exploded in the past century to feed an ever-growing global population, adds nitrous oxide to the atmosphere, and nitrogen run-off from fertilizers also pollutes waterways and other components of various ecosystems.

All of that is to say, we need a diverse set of solutions to decarbonize agriculture while maintaining and expanding the crop yields that sustain civilization. 

Hence, all of the products Indigo Ag works on are ostensibly quite necessary. But they’re also quite difficult to develop and commercialize. Agriculture is typically a commodity business. Even if you have a solution that reduces emissions and keeps yields flat, if it costs more, it may be difficult for potential buyers to adopt. Dream state solutions are thus ones that make crops more resilient and / or increase yields while also driving emissions reductions. That makes for a more clear ROI model.

The alluring and daunting scale of challenges and opportunity in ag (via Shutterstock)

Can you get down with a down round?

I have no direct insight into how successful Indigo Ag has been in recent months at continuing to improve R&D, prove the efficacy of its solutions, and sell them. We have reason to suspect, however, that they’re at least not hitting benchmarks they set for themselves previously.

While the amount of funding is a considerable headline number, according to some reports, Indigo Ag’s latest fundraising round was a ‘down round.’ A down round is a round of funding that comes at a lower valuation than past rounds. Indigo Ag has also gone through two rounds of layoffs in the past year, which is another indication that past projections it made – which drove hiring decisions – aren’t being borne out as quickly as the company would have liked. 

While Indigo Ag’s valuation drop likely wasn’t as precipitous as some reports likely speculated a month ago, down rounds are a problematic dynamic for venture-backed businesses no matter what. Every time we see a large round of financing for a climate tech company, we cheer. But there’s more than meets the eye:

  • Forecasts: If a round was raised at a significant valuation, will the company be able to commercialize to ‘grow into’ that – i.e., warrant – that valuation? 
  • Dilution: Does the company need that much money? Or did it dilute its equity too cheaply, quickly, unnecessarily? Does it now face pressure to try to scale faster than it’s capable of?

Both bullets drive home the same, central point. Developing and then making good on the right roadmaps for scaling and commercialization can be more art than science. 

Sometimes, when things don’t go according to plan, you raise a down round. You lay off some of the staff you hired in recent years. But down rounds have compounding ripple effects:

  • More dilution: When a company raises money at a lower valuation, it typically means that the investors in the new round acquire a disproportionate ownership stake compared to previous investors. This dilutes the ownership of existing shareholders, and high dilution can be demotivating for everyone involved. 
  • Market signal: A down round is a sign of underperformance compared to past expectations. Investor value companies based on their growth potential; a lower valuation suggests that the company’s prospects aren’t as strong as potentially believed previously. This erodes confidence both internally (within the company) and externally.
  • Future prospects: Raising a down round makes it harder to secure future funding. Investors may be hesitant to invest in a company that has experienced a drop in valuation, as it raises questions about the company’s solutions, management, and business prospects. This limits the company’s access to capital and can hinder future growth prospects.

A down round isn’t a death sentence, but it can significantly impact ownership, public perception, and other stakeholders’ (investors, customers, policymakers) confidence. 

The net-net

So much of venture-backed commercialization and growth is a confidence game. When there are signs that past investor and company confidence and projections aren’t coming to fruition, it can have significant ripple effects, not just for the company, but for the industry in which it operates.

What incumbent stakeholders in agriculture have long known is coming to the fore again: making significant changes to the way the world produces food is really hard. Sugar cane and corn are two of only a few products the world produces more than a gigatonne of annually. Even as new, lower emission-production techniques come to the fore, actually shifting practices could take decades. It’s like trying to turn around an oil tanker in choppy seas. 

Given the breadth of its products and the difficulty of making change in agriculture, Indigo Ag’s business is a labyrinth of grand challenges. As other climate techs move from earlier stages to commercialization, many will find themselves grappling with similar ‘down round’ dynamics.