Is Vertical Farming Entering An Ice Age?

Every Wednesday, discover an editorial on a relevant and important topic related to indoor farming.

Photo by Francesco Gallarotti on Unsplash

Good morning readers, in recent weeks many vertical farms have either entered restructuring plans or closed facilities as the current macro-environment forces them to rethink their strategies and operations to decrease their cash burn rate and become profitable. 

But, what led to this situation? What led a concept that was promised to be revolutionary to become a money pitfall? Has the decade of “easy money” where startups and entrepreneurs could take a loan at low-interest rates, or raise money from investors that had access to unlimited capital given by countries printing money been the cause of this? Or, is it because of companies trying to reinvent processes? 

Who Is Restructuring or Closing?

According to Vertical Farm daily's Rebekka Boekhout, the Dutch startup Glowfarms declared that it would stop operating after its final funding round failed. According to the company, the team at Glowfarms was overwhelmed by "external pressures" related to the macroeconomic climate (rising energy costs) since they couldn't come up with enough money to survive for the foreseeable future.

Additionally, word spread that Pittsburgh-based Fifth Season closed. Although we might speculate that macroeconomic pressure was a factor in the company's Friday closure, as reported by bizjounral.com, management did not provide any formal explanations for the decision. This year, this collapse follows another vertical farming business, Agricool.

The industry is affected by the current market conditions as illustrated by the recent layoffs initiated by leading companies, InFarm, CubicFarms CUB 0.00%↑, or Iron-Ox as they envision becoming positive cash flow/break-even. Another company, Kalera PLC KAL 0.00%↑ has had to divest some of its assets in order to accelerate its path to profitability and is now under threat of being de-listed from NASDAQ as is Edible Garden Ag EDBL 0.00%↑ or, Agrify AGFY 0.00%↑.  

This trend started approximately a year ago when Aerofarms’ SPAC deal failed to go through as AeroFarms’ co-founder and CEO David Rosenberg mentioned that the transaction was not in the best interest of the company’s shareholders.

What Led To This Situation?

The majority of indoor agricultural facilities are experiencing financial difficulties as a result of the present macroeconomic trend. While greenhouses seem to be less impacted, losses at vertical farms worldwide are rising, and a handful of businesses were forced to stop all operations.

The first cause of failure or loss is the current energy crisis experienced throughout the world, many countries have had their standard energy bill increase three-fold, and vertical farming companies have had to deal with inflation skyrocketing and their energy expenses increasing. Nonetheless, the energy problem is much more intrinsic to vertical farms as even prior to this crisis, for certain growers, energy would represent up to 80% of their operational expenditure. Indeed, most vertical farming facilities were already energy-intensive which led them to agonize once energy prices inflated as a result of the Russian - Ukrainian war and the fear of experiencing gas or electricity cuts in Europe and other countries. 

Then, another important issue is the lack of industry-wide collaboration and the tendency of most startups to reinvent existing technologies/processes. As with many technologies, in the first years, the processes or the products are expensive leading to high capital expenditure and longer returns on investments. Still, in the sector, some claim that too much emphasis is put on essentially reinventing the wheel and thus, not bringing additional value to the table. 

“It's a waste of money and valuable time to reinvent the wheel. Companies should invent what is missing and go to the best where there is a best. Collaboration is key to getting an immature tech sector mature and something Agritecture has been encouraging and facilitating for a decade.” - Henry Gordon Smith, CEO & Founder of Agritecture 

“Most VF start-ups tend to be secretive about their achievements and are trying to do everything themselves, such as R&D, training their talent, pursuing their own branding, negotiating energy contracts, retail agreements and developing their own narrative for consumers, which creates a fragmented unrecognizable landscape for the sector of VF companies that all strive to achieve the same goal but appear to want to do this all themselves (pioneers?)- only recently has there been a sobering recognition by some companies that VF is still in early stages of commercialization and that regulations are not able to help at all as there is no interaction whatsoever.” Thomas Zoellner, Secretary-General, FarmTech Society

In addition, experienced growers also claim that the research and developments are made in areas that do not make sense or where the cost of such R&D would far exceed the potential returns it would have, which, in turn unnecessarily increases capital expenditures. This is the case with Grahame Dunling, a 4th generation grower and current COO of Local Salads, Hull’s 1st vertical farm:

“Plant scientists have become the new fad in our industry, it’s one thing to study a crop in university but a whole different level to be able to grow commercial crops with consistency. Millions have been invested and spent to research plant spacing and how to grow a lettuce crop or R&D seeds. Those from a growing commercial background don’t need to do this.” Comments Grahame

Another issue linked to the fundings accessed and to the innovation programs is the Intellectual Property most vertical farming companies have and the fact that investors focus on IP as highlighted by Eric Bergeron, Managing Partner at Cultivatd:

“A lot of investors (especially VC) focus on IP as a priority so this isn't surprising. I do think the industry could do better at sharing yields and needs to develop some standards for m2 / ft2 of production etc. Ultimately we need to grow more food and our industry would move faster with more collaboration - but that is unlikely to happen given the amount of money needed to build out farms and their commitment to owning their own IP.” Comments Eric Bergeron

Furthermore to the issues cited above but undoubtedly related, the relative ease with which companies have been able to access cash to fuel their growth contributed to the current situation experienced by vertical farming companies even if they represent a slim proportion of the overall funding provided to tech companies. In an interview with CNBC, Kyle Stanford, a senior VC analyst at PitchBook, said many startup founders have only experienced an era of cheap cash, negative interest rates, and important/accessible venture capital fund which may lead to many failures in tech businesses as there has been a sudden shift from an era of “easy money” to an era of “get your KPI’s together before we give you funding”.

"We will give you more money than you want or need, but you better grow as quickly as you can and make sure any competitors in your field are burning even more money than you... and if you do that, we will give you even more money," Kyle Stanford said of the growth over the previous five years “There has been also a lot of Fear of Missing Out (FOMO) from investors that led them to invest in the wrong companies/market”. He continues

Grahame Dunling & Henry Gordon Smith agreed with this narrative as they mention the lack of knowledge from certain founders to grow crops which is the “key disadvantage and why we are seeing so many vertical farms failing to produce anything of any standard quality above microgreens” as well as the “unrealistic promises made related to the funding, setting expectations higher than what most of these companies can deliver”.

The behavior of certain investors on FOMO opportunities led them to miss on important aspects like researching the market as mentioned by Agritecture’s Director of Digital Strategy, Ricky Stephens: “With VCs providing so much of the funding in recent years, it's not surprising that we're seeing failures. It is critical to remember that the industry standard in venture capital is a 75% failure rate (no cash returned to investors). Not to mention how many VCs and other investors fail to do their due diligence. Before committing money, smart investors will hire experts (like us!) to conduct industry analysis, due diligence, and/or benchmarking. Agritecture believes that the vast majority of CEA operators (the actual growers) should not raise capital from VC. This is because the majority of these growers want to build a profitable business that serves their local or regional markets, rather than a billion-dollar behemoth with farms all over the world. There is still a significant funding gap from more traditional capital providers, but it has been obscured by the flood of VC money into the space.”

However, vertical farming is still a niche compared to other tech sectors and even other conventional agriculture funding and many investors still doubt the profitability of vertical farms and agriculture as it is not reputed for being profitable as explained by Thomas Zoellner “The truth is that VF is an ultra-niche with very little market share (produce grown) and only occasionally receives impact investments from family offices and high-risk VCs (a very small portion of the overall VC investments). Both of these financial players would not consider agriculture to be an interesting industry for them! The situation is comparable to any other innovation-driven sector with anticipated high-failure rates, unsubstantiated claims that could be perceived as greenwashing (by armchair experts), and a confusing narrative to the investor, consumer, and regulator; for now, the saying “pioneers get killed, settlers get rich” still counts and is the modus operandi.”

Outlook On The Industry

As concluded by several reports/articles written by IDTechEx, CoBank, or Agritecture, it is highly likely that the next few years will be challenging for businesses as access to capital will be scarce and under certain conditions i.e, being profitable or showing credible and viable paths to profitability. I expect that the next few months will see a much larger pool of vertical farms close operations some of them after raising millions of dollars and others after a few months of existence. Especially if companies keep on focusing on innovating and reinventing the wheel rather than focusing on becoming profitable and collaborating with other players in the sector to have a common voice and strive for a common objective. At the end of September, during the Vertical Farming Congress in Brussels, Farm Tech Society achieved that milestone by putting together leading vertical farming companies together with USDA & European Commission decision-makers to start a process of trying to understand the “needs and the wants” of the industry and enable the sector to become mature. This is echoed by Grahame Dunling and Thomas Zoellner as both mention that vertical farms like to constantly compare themselves with other sectors that are not comparable such as ‘traditional’ farming or greenhouses. 

“It will be paramount for VF companies to become an integral part of controlled environment agriculture together with Greenhouse, Mushroom, Insect, and Fish Farming, etc. The sector as a whole can create tremendously efficient decarbonized circular CEA clusters and hybrid applications that can be integrated into green infrastructure at a large scale, for example in early-stage plant production among other things, providing forestry, ornamental, and commodity growing with a technology that can actually provide economic unit economics to help scale up and improve the technology in various applications.” Comments Thomas

The energy aspect will need to be resolved as well given the current times, few companies now have actually been able to decrease the energy consumption of their facility, as simply relying on greener energy sources is not the way forward. Local Salad is a prime example of a vertical farm that has taken viable steps into decreasing its energy consumption by 40-50% by choosing the right LEDs as well as the right equipment required to grow a variety of greens and aromatics at a commercial scale. 

Crop choices can also ensure a certain future profitability as higher-value crops may, in certain circumstances, cover the high expenses incurred by vertical farming operators. Nonetheless, as Grahame Dunling puts it “Capital costs are too high to being with so you already start at a disadvantage, then add operating costs to this, you can’t just increase the costs of the product, especially in today’s climate, with ordinary peoples cost of living being so high. Nor can we just focus on high-value crops as having an abundance of high-value crops devalues the crop.” It could remain a solution for companies that are behind in terms of yields to focus on other crops than the main crops grown in CEA. “I think the companies that already know they are behind on lettuce and herbs (and there are many) should really focus on other crops” mentions Eric Bergeron.

Moreover, Henry Gordon Smith and, Thomas Zoellner pointed out these high-value crops have small markets with only a handful of potential consumers at the end of the day, they remain nice to have but are not beneficial to feed the world which is beyond most vertical farms’ mission. 

Expanding horizons would also benefit the entire sector as vertical farms are not suited everywhere and in certain areas, a greenhouse or even traditional farming methods actually makes more economic sense than a vertical farm. “Build a greenhouse where the energy prices for VF are prohibitive. We should stop trying to make vertical farming work everywhere! There are still other ways to produce food.” - Henry Gordon Smith

Concluding Notes

Vertical farms appear to be set to witness a downfall, a cyclical phenomenon in a liberal market which is nothing new but it also appears from the research conducted and the interviews that part of the problems are caused directly by vertical farming companies and the fact that, driven by a funding frenzy era, most companies were engaged in trying to reinvent processes already in place or to prove a concept that could never be proven in highly competitive environments (some people would say that they were too early on).

Moreover, the fact that most of these companies are keeping everything in-house in lieu of outsourcing or collaborating with specialized companies is also a sign that the sector is immature and needs to meet future milestones. Becoming part of the wider CEA industry could be a first step as companies would be able to leverage decades of R&D and experience to achieve better results. 

I would like to thank Henry Gordon Smith & Ricky Stephens from Agritecture, Grahame Dunling from Local Salads,Thomas Zoellner from Farm Tech Society & Eric Bergeron from Cultivatd for their valuable contribution and insights.