Part 02:
Top Advice For CEA Investors in 2023
Last week we launched a new series – going deep on our top advice about CEA and the hydroponics industry NOW.
There are timeless essentials about plant health and economics, and we’ve spent plenty of time discussing best practices and sharing stories of grower success. But in the current environment, where most of the headlines are dominated by risky startups ending in bankruptcy, it’s important to be clear eyed and willing to learn.
High interest rates and high-profile failures in the industry do not mean that it is impossible to start an economically viable CEA farm now. In the last several months, while some see a moment of reckoning for the industry, we’ve seen many of our customers, who follow this advice, continue to thrive.
- Last week we shared our top five tips for prospective growers.
- In this post, we’ll be sharing three pieces of advice for investors in 2023.
- Next week, we’ll open up the hood and share some observations from our own success.
Our insights are forged by our daily experiences, our decades of expertise, and valuable conversations with pros who are familiar with both success and failure. Our hope is that this valuable information sets you up for success.
1. Ignore Pitches Based on Tech Evaluation
At the end of the day, agritech is still more about agriculture than it is about technology. The eventual products of all our industry’s effort are still essentially commodities. The margins are fine. We know that as an investor, you’re under pressure from shareholders to provide eye-catching returns, the kind that can often only be generated at a huge scale. So we know that there is always a temptation to have your head turned by a potential moonshot.
However, no one is going to corner the market on growing produce. No one is going to corner the market on lighting. (Especially when we have the sun!) No one is going to corner the market on automation. At least not anytime soon. If companies want a big check so that they can scale their operation or their fancy-but-unproven new tech to an unprecedented level, they need to actually prove economic viability on a small scale first. If they haven’t demonstrated economic viability on a small scale, it is a bad bet to think they can pull it off on a large scale.
We know that innovation can take a lot of capital. There are, no doubt, countless profitable opportunities and driven entrepreneurs who have a strong vision. But for the good of our industry, we need investment dollars to be directed sustainably, with increased funding following demonstrated viability. In an industry that requires discipline and extreme attention to detail, big money up front encourages carelessness and waste.
You can build a strong portfolio and generate reliable ROI by investing in farmers who know their fundamentals. You can find a competitive advantage by investing in farmers that are taking steps to improve efficiency in production and distribution or location (without reinventing the wheel). You can even support these farmers in rapidly scaling once they’ve demonstrated their reliability.
But you need to be absolutely certain that the fundamentals are there first. Because, as this current moment has shown us, you can’t take that for granted.
2. Look for Growers who Understand Fundamentals
In 2023, there are still returns to be found by investing in farming. Many of our clients are able to clear their capital expenses within a few years. Working with growers who are committed to fundamentals and who are using tried-and-true technologies is as close to a sure thing as you can get.
But what are those fundamentals, and how will you know them when you see them?
In our last article, we shared five key points.
- Some are succeeding and some are failing. Pay attention to the differences.
- Plan to meet market demand from day one
- Pay attention to unit economics
- Keep it simple
- Start small and focus on sustainable growth
We might add a sixth point for investors to look for.
Look for growers who care more about plants than they care about technology. All our tools and innovations are only valuable if they serve the needs of the plant first and foremost.
As headlines, they might sound a bit “buzzy”, but you can read the full article to learn more about what we mean by them. What’s more, pretty much all of these fundamentals, if present, will manifest themselves in proposals and business plans that are focused on plants, planning, and detail, more than claims about disruption.
3. Cultivate Relationships with Subject Matter Experts
If you’re reading an article about investing in CEA, you very likely have some experience or awareness of the field. But you’ll never have as much as someone who has spent their life growing plants. (Just as we’ll never know as much about financing as you do!)
Don’t be afraid to leverage your relationships with successful farmers, or even to build new relationships, in order to make sure you have access to the best possible advice on the feasibility of a proposal that comes across your desk. Never be afraid to verify by asking for recommendations and case studies of past success.
Here at AmHydro, we’ll be the first to tell you that we aren’t experts when it comes to some aspects like HVAC or building greenhouses, but after nearly forty years in the business, we know a lot about plants, the business, and how to make sure a project is set up for success. It will take all of us, working together, to guide this industry through a rough patch, and map out a course for the next several decades of stronger investment in sustainable agriculture.
We’ve worked with many investors and are well aware of the crucial role you play in the industry. We hope this article has been useful. If you have any further questions or feedback on what we’ve shared, don’t hesitate to reach out!
Stay tuned for next week’s article, where we’ll wrap up our analysis of the moment by sharing a bit about the practices and perspectives that have helped us to thrive in business as equipment providers and growers.
