Technological Disruption Within Food Security
Having grown up in the suburbs, and residing only in South Africa’s major cities, it always seemed that the agricultural sector wasn’t given the credit it deserves. Like the oxygen we breathe, we expect the food we eat to be available when we need it, and furthermore, we expect it to be wonderfully pre-packaged and easy to convert into a meal for the family. We often neglect to acknowledge the amount of work that goes into producing food, and the complicated supply chain required to get food from the farm to our dinner plates.
Agriculture sector ranked 12th out of 20
This under-appreciation thesis continues into the Venture Capital (VC) industry. SAVCA recently released its 2020 report for VC deals concluded in 2019 in South Africa, and it is noticeable that deals in the Agriculture sector only ranked 12th out of 20 sectors in terms of deal values, or 3.4% market share. This translates into a measly R42m worth of VC deals for the Agriculture sector in 2019, although this increased from R14m in 2018. This is despite the fact that “Zero Hunger” is one of the top priorities under the United Nations Sustainable Development Goals. Furthermore, Agriculture is one of the few South African sectors that is performing well in a difficult economy, posting 3% annual employment growth in Q1 2020, and then being the fastest-growing sector with GDP growth of 15% in Q2, while the overall economy shut down and produced a contraction of 51%.
The Significance of Digital Transformation
Data is difficult to come by, but a report in August 2019, co-authored by Technical Centre for Agricultural and Rural Cooperation (CTA) and Dalberg Advisors, claims that Agritec deals in Africa totaled $143m in 2018, out of a total addressable market of $2.6bn, which talks to the huge untouched potential. South Africa’s $1m (R14m) in 2018 would have translated to a paltry 0.7% of the 2018 total Agritec deals for Africa, a continent that is seeing differing levels of Agritech adoption. Kenya, for example, was last year rated by Nesta, a UK innovation foundation, as the leading Agritech country in Africa due to its high level of mobile adoption. Nigeria’s Agritech sector, on the other hand, seems to be experiencing many of the challenges faced in South Africa, including the paucity of investment and institutional investors.
Maybe the dearth of early-stage investing in Agritech is due to investor’s perception that Agriculture is not a sleek and trendy industry in comparison to other industries such as social media or other nice-to-have technologies. It is possible that South African VC investors are deterred by land redistribution legislation. Without taking a political view on the matter, a reasonable investment thesis could be that if land redistribution happens on any large scale, and first-time farmers are brought into the fold, there will be an even greater need for technology to assist the Agriculture sector than there is currently.
Where to start in determining your approach to Digital Transformation
One of the benefits of working in VC is that you have access to a variety of innovative business ideas, as entrepreneurs attempt to solve real-world problems and create new markets. In the last few months, I have looked through funding proposals for a business using the Internet of Things (IoT) to improve the supply chain in cold storage for food, another business looking to use IoT to improve water usage and crop yields, and one trying to use alternative credit scoring to improve loan funding to farmers. It is encouraging to see innovators intentionally disrupting this sector and bringing about solutions. We are expecting to see more of these types of solutions emerge.
One of the Last Big Industry to Experience a Tech Shake-Up
Analysis by Paris based investment service company, Early Metrics, estimates that the global Agritech industry will increase at an average annual growth rate of 18% through to 2023, to be a global industry of $13.5bn. At Kingson, we look to invest in companies providing solutions to real-world problems, in fast growing industries that are ready for technological disruption. The Agriculture sector fits well into these criteria. No matter what your views on the topic of food security or whether you believe climate change is a genuine global threat or not, the Agriculture sector and the food it produces, is going to be around for as long as humans are. The sector is also one of the last big industries yet to experience a massive tech shake-up, the way Uber has changed the transport industry or Netflix has changed the media industry. We believe Agritech is an investment sector that will take off in South Africa, and Africa at large, and when it does, it will be here to stay.