Before confidently investing in any business, one must understand the current state of the industry, particularly the operational risks and long-term viability of businesses operating within that sector. Seasoned investors diligently analyze their potential investments and evaluate for market capability and performance projections. However, emerging sectors, like controlled environment agriculture (CEA), are particularly challenging to predict due to the lack of industry standards and benchmarks, creating more uncertainty and a higher risk profile for investment into the industry. To help bridge this uncertainty and limit the risks, investors would be wise to lean on industry experts who conduct due diligence studies.
With the CEA industry surpassing $2.0 billion in investments across North America and Europe, Henry Gordon-Smith, the Founder & CEO of Agritecture, worries that most investors base their decisions on a risky ‘gold rush’ mentality, filled with hype and a fear of missing out. He has witnessed many investors fund startups in this sector without a robust thesis for CEA and without technical due diligence.
And with some predicting that the CEA sector will grow 5x over the next 10 years, stakeholders’ potential risk and return will continue to grow, making due diligence studies that much more important.
What is due diligence?
Due diligence refers to the practice of carefully assessing costs and risks before making an investment decision. The majority of this work is focused on identifying red flags and making recommendations that protect investors from costly miscalculations based on limited industry knowledge.
Since investors often do not have the technical background or specialized knowledge, they partner with third-party entities who are better equipped to benchmark the technology, sustainability, and revenue growth claims made by operations who may be cherry-picking data or overinflating key metrics in an effort to raise larger amounts of capital. An objective due diligence study evaluates the cultivation technology, economic feasibility, competitive advantage, commercial and marketing strategy, and management team’s ability to execute on opportunities in the broad and complex CEA market.
Why is proper due diligence necessary for the CEA industry?
Expertise is needed because every CEA project is unique and has many complexities such as rapidly-evolving technology, shifting consumer preferences, changing government policies and subsidies, and novel financing structures. Other variable factors include geographical location, local market conditions, operating teams, and available technology. Furthermore, data is notoriously inaccessible or poorly contextualized in the CEA sector, while best practices are still being established and goal posts are moving quickly. Due diligence ensures that investors understand all relevant risks by engaging with current data, knowledge, and expertise before making decisions.
What do due diligence studies entail?
Due diligence studies include a comprehensive overview of a business with close attention given to the areas that can affect a business’s long-term success and viability. When Agritecture is hired to perform such services, we conduct the following activities:
Operational History
To gain historical insights into a CEA project and its ability to meet expectations. This exercise shows whether a project complies with regulatory and industry frameworks, determining the worthiness of the investment.
Technical Benchmarking
To compare proposed investment opportunities, including proprietary technology, to other competitor systems in the market to ensure that various parameters such as yield, utilities costs, and labor are realistic and based on actual reported figures from existing CEA operations. Through the use of our own internal databases, experienced team, and partner network, investors gain a deeper understanding of the strengths and weaknesses of the proposed investment opportunity. This exercise is crucial for identifying red flags or exaggerated claims made by operators.
Executive Team & Management
To assess the individual attributes of management and to determine whether they can serve the strategic and operational business objectives. Understanding the roles that management can play as a company grows and scales guarantees sustainability and practicality. These steps are a solid foundation for any project where implementation relies on team cohesion and strong leadership.
Sales Distribution and Strategy
To discover whether a CEA project’s sales objectives and returns are realistic, especially when they look too enticing. Know about potential liabilities and roadblocks before a project launches or funds are dispensed. This portion includes assessing various offtake relationships, whether it is distributors or direct-to-consumer, that each has its own associated challenges and unit economics.
Yield Validation
To gain an in-depth understanding of the unit economics, revenue, pricing, and ROI. Yield validation covers species-specific data and site quality beyond providing an overview of expected outputs and potential cash flow. Oftentimes, many operations use yield claims from their pilot facility and extrapolate this information to a much larger facility without taking into account various contingencies that influence yield growth projections.
Technology Selection Assessment
To examine all technological components required for a particular CEA project. Based on extensive industry knowledge and our partner network, we guide companies on technology and equipment selection, and associated operational procedures that are most suitable for a given project scope and vision.
Sustainability Assessment
Assess water, labor, nutrient, substrate, and power use efficiency compared to other production systems, as well as calculations on the overall carbon footprint. This exercise is crucial for cutting through wildly unrealistic “greenwashing” claims commonly seen in the industry and empowers investors with a framework for measuring and achieving sustainability-focused goals.
How can our due diligence services benefit you?
To learn more about Agritecture’s due diligence services, fill out a simple request form! Our team’s combined 30+ years of experience and industry knowledge will give you the confidence, judgment, and clarity you need to understand risks and tradeoffs. Agritecture’s due diligence services expose you to extensive industry knowledge, internal datasets, and a dedicated team. Through comprehensive due diligence, Agritecture’s clients gain all the relevant information they require to make carefully-weighed and data-driven decisions.
