AVCJ Seedworks Coverage

Indian investors are excited about a growing wave of agricultural technology start-ups focused on solving practical problems faced by farmers, but achieving scale with a limited scope will be a challenge

A common sentiment among India-focused investors is that the country’s population lives in three time periods simultaneously. There is a relatively small, wealthy, and highly globalized elite; a larger urban middle class experiencing a boom like that of the US in the 1950s; and a rural population primarily working in agriculture that in many respects lives the same way as it did in the 1850s, albeit with some modern comforts.

But India’s farmers hunger for connection to the world and their community as much as everyone else – something mobile retail platform AgroStar discovered after releasing its Android app last year. The company has sold agricultural inputs such as seeds and tools since 2013, operating on a missed-call model like many other rural-focused Indian businesses. The app was developed to give customers more points of contact with the company and to stimulate engagement by fostering a community of users.

But even AgroStar failed to appreciate the level of pent-up demand for this type of service. In the last 18 months, more than one million people have downloaded the app, which AgroStar co-founder Shardul Sheth describes as a combination of Instagram, Quora, Twitter, and Amazon, and the company claims to have nearly 100,000 daily active users on the platform.

“Their aspiration to solve problems and share their joys and concerns is the same as in any other population, they just didn’t have a medium for it,” says Sheth. “The minute they realized there was a forum where they could share these questions with like-minded farmers and get their problems solved, we started to see traction that we’d not seen in the last five years.”

AgroStar is one of the most visible of a new wave of Indian technology start-ups looking to help the country’s agriculture sector overcome the inertia that has stunted its growth for years. It is hoped that focusing on specific pain points faced by farmers rather than capturing a broad user base at the beginning will lead to long-term success, but companies pursuing this approach will need patience to prove their worth.

Mean fields

India’s massive agriculture sector represents a juicy target for operators that can unlock its value. The country remains heavily dependent on farming, with more than 58% of the population reporting agriculture as the primary source of livelihood in 2018, according to the India Brand Equity Foundation (IBEF), a government-backed think tank. This compares to 2% in the US and 35% in China.

The sector is also appealing for a darker reason: its perception as a frustrating and degrading way of life offering little personal dignity or fulfilment. A survey of Indian farming households conducted by the Delhi-based Centre for the Study of Developing Societies (CSDS) in 2014 found that just 24% of children in such households wanted to go into farming when they left their families to earn their own living. Most of those respondents said their main reason was to continue a family tradition rather than for the personal appeal of farming.

“Indian agriculture, for smallholder farmers, is horribly unprofitable. It consumes water and natural resources at rates that won’t be sustainable in 50 years, and it’s one of the riskiest, most stressful professions imaginable,” says Mark Kahn, a co-founder and managing partner at early stage agriculture investor Omnivore Partners. “Our goal is to support start-ups that are trying to solve these problems.”

The farmer’s lot isn’t helped by the market being highly fragmented. Of the respondents in the CSDS survey, 60% held fewer than three acres of land, 19% had between four and nine acres, and 14% owned no land of their own at all.

This fragmentation means that most farmers can be easily wiped out by an unforeseen disease outbreak or natural disaster. Even in the best circumstances it is difficult to generate enough profit from a harvest to invest in machinery or land improvements that could drive greater operational efficiency. Consequently, the sector has seen little growth in recent years, with production of key food grains and commercial crops for 2019 largely expected to remain at the same level as 2012.

But to view Indian agriculture as tied to a primitive way of life is to ignore the opportunity it represents. Not only are farmers open to technological solutions that can improve their daily lives, but despite a lack of formal education, they are in their own way as sophisticated and tech-savvy as their urban counterparts.

Mobile first

As in many developing markets, the clearest sign of rural India’s technological advancement is the rise of the mobile phone. Starting with feature phones in the early part of the decade, mobile devices have become ubiquitous in rural India, achieving deep penetration. According to the CSDS survey, 73% of farmers owned a mobile phone in 2014, twice as many as owned a motorbike and more than four times as many as owned a refrigerator. This was also consistent geographically, with more than 50% of farmers in every region reporting mobile phone ownership.

With mobile carriers offering cheap data plans and phone manufacturers increasingly targeting low-income consumers in rural communities, industry observers expect most farmers to move to full-fledged smart phones in the next few years. This transition will open up even more possibilities for start-ups.

“If you think of tech in the context of a desktop computer or a laptop, there are very few farmers who will be comfortable with that,” says T.C.M. Sundaram, founder and managing director of Chiratae Ventures (formerly IDG Ventures India). “But with a smart phone it’s possible to do more than they could with a laptop. It’s not a threatening device, it’s something they see as their connection to the world, and they’re able to adapt to using it.”

Ease of use is one advantage of smart phones, but developers are far more excited about the technology advances that they bring with them – particularly the camera, which plays a major part in the strategies of several companies.

For instance, SeedWorks International, a portfolio company of True North that started as a developer of hybrid seeds, has sought to leverage digital technology in recent years to build a stronger relationship with its clients. Part of this approach involves the creating an artificial intelligence-based cloud analytics service that can process photos of plants taken by farmers and check for signs of disease or defective growth.

AgroStar’s platform offers a similar benefit, though less technologically ambitious. Its users upload photos to be reviewed by other members of the community, who can offer advice or answer questions based on their own experiences. In both cases, however, the idea is to build a stronger connection between the company and the customer that can strengthen its core business.

“If we can get all the data in a digital format, and also get access to the farmers through their mobile numbers or by registering them on an app, we can proactively service the farmers by not only selling them seeds, but also giving them farm advice at every stage of the crop cycle,” says Venkatram Vasantavada, CEO of SeedWorks. “We can showcase our products in greater detail without physically going to the customers, which is obviously not very efficient.”

A new crop

SeedWorks is not technically a start-up, having been founded in 1998, acquired by US-based Wand Capital in 2007, and sold to True North – then called India Value Fund Advisors – in 2016. However, like a number of recently launched Ag-tech companies, it has a close connection to the agriculture sector that was formed before it decided to expand into technology.

Many of this breed of entrepreneurs are either former agriculture workers themselves or have family and friends who still work in the fields. For investors, this marks a shift from a previous generation of India-focused Ag tech ventures, which tended to be launched by large domestic conglomerates such as Tata Group. The offerings were usually SMS-based broadcasting systems intended to provide farmers with useful information, but as there was no avenue for user feedback their advice was usually so broad as to be worthless, along with being difficult to monetize.

By contrast, recently-founded start-ups tend to start off with a narrow focus on a specific problem in agriculture before broadening their scope. For example, Eruvaka, a developer of internet-of-things (IoT) sensors for aquaculture, originated when the founder, a hardware engineer, heard that his uncle had lost a large investment in a fish farm because of an algal bloom that wasn’t detected by laboratory tests until too late.

“If you look at the people who go to the Indian equivalent of Caltech and MIT, I would say probably half of them come from small towns in rural areas,” says Omnivore’s Kahn, an investor in Eruvaka. “And while most of them follow the same path and work for the big technology firms of the world, when they want to launch their own start-ups they are still intimately aware of the challenges that were faced by their families. These are the founders that we typically look for.”

AgroStar is an exception to this trend in some ways – Shardul Sheth and his brother and co-founder Sitanshu did not launch the business because of a family connection to agriculture, having previously worked with US retailer Best Buy and KPMG, respectively. But they too started out with the goal of helping resolve a specific issue in agriculture. In this case, it was the challenges of obtaining high-quality inputs at a fair price – something they had become aware of while marketing to customers of their previous start-up, organic fertilizer manufacturer ULink.

Investors are generally excited by this new approach. It is seen as more sustainable than that of the previous generation of Ag-tech ventures because it offers farmers tangible benefits. Nevertheless, the strategy presents its own obstacles. Focusing on a specific problem or subsector can reduce distractions in early stages of development, but also means intentionally limiting the company’s competitiveness against start-ups with a broader range.

Trying to forge customer loyalty through personalized outreach is also risky. It requires investment in the communication infrastructure, and the companies normally use third-party science that must be acquired from somewhere. Moreover, recommendations are based on self-reported customer data that may not be reliable – and even with the best input, the customer may also be signed up for another service that gives him the opposite advice.

“Growers tell us that these days they get about 40 messages a day from different entities. What do you do about these messages?” says Vijay Vijayaraghavan, chairman of Sathguru Management Consultants, which takes on agribusiness projects. “Companies will alert you about the need to protect your crop and recommend certain pesticides, for example, but where is the science that’s actually driving it?”

Problems of scale

Perhaps the biggest danger is that limiting the scope of a start-up makes it harder to scale. AgroStar is one of the few Ag-tech start-ups that has managed to raise multiple rounds of funding, with Bertelsmann India Investments joining Chiratae, Accel Partners, and Aavishkaar for its $27 million Series C round this month. Investors point out that the most exciting start-ups have generally not been around long enough to raise more than one or two rounds, but scalability will likely remain a key question for most founders.

GPs are encouraged by the growing interest of overseas agricultural science players in India – Eruvaka’s most recent funding round was joined by Netherlands-based animal feed conglomerate Nutreco, and Syngenta invested in fruit and produce marketing platform Ninjacart in December, suggesting a developing exit route. However, these suitors will likely be most interested in acquiring a start-up’s customer base, which means achieving critical mass remains the biggest hurdle.

“A lot of these larger companies will see opportunity in India, but only start-ups that can quickly build a very solid critical mass will have the opportunity to exit through M&A at a good valuation,” says Vijayaraghavan. “The majority will find it challenging because even if they provide a good solution, they won’t have the customer base that would interest those companies.”