Weeks before the close of the third quarter, Deere & Co. (DE) announced a $305 million deal for a little-known farming technology startup Blue River Technology Inc. of Sunnyvale, Calif.
Far from a transformational deal for Moline, Ill.-based Deere, a $42 billion farming heavy equipment manufacturer best known for the iconic John Deere tractor brand, the news likely made less than a blip on the radar for the average investor.
But for institutional investors in the budding agricultural technology sector, Deere's acquisition seems to have made some waves.
"This is a very exciting exit for a sector that is deserving of showing investments can be high returning, have a material impact and create sustainability," Pontifax AgTech Management co-founder and managing partner Ben Belldegrun said in an interview with The Deal. "This deal emphasized that strategics are embracing new trends, and that's why there are compelling investment opportunities along the way."
More of What's Trending on TheStreet:
- Warren Buffett Taught Me These 5 Amazing Investing Lessons to Use in 2018
- Don't Worry About Money So Much: 4 Ways to Fix Your Finances
- Riot Blockchain's Story Seems Like Something Out of the Dot-Com Bubble
- 3 Catastrophic Events Could Sink Bitcoin
Pontifax was among a group of six investors that raised $17 million for Blue River in a Series B round in December 2015. Pontifax, Monsanto Growth Ventures, Syngenta Ventures, Data Collective, Khosla Ventures and Innovation Endeavors reportedly averaged a four times return on investment on the Blue River sale.
According to Belldegrun, investments in the agricultural technology space are gaining momentum, but exits like this are the type of catalyst that can bring more traditional asset managers into the mix. The firm has already seen a transition in its fundraising from family offices to more fund-of-funds and conventional limited partners. Pontifax completed the second close of its first food and agtech venture capital fund earlier this month with $105 million in commitments.
Alastair Cooper, a senior investment director with British private equity firm ADM Capital, agrees. ADM in May saw its first close on its agribusiness-dedicated Cibus Fund with $100 million commitments. The firm hopes to raise $500 million for the fund in time for its final close in April 2018. About 10% of the fund is earmarked for investment in businesses that are not yet profitable, which is often the case in the startup-heavy agtech world.
"We see this area as an incredibly exciting area," Cooper said in an interview. "There are just a plethora of strategies and platforms, and you know, technology has only just come to the agriculture industry relatively late compared to other industries. I think [agtech] is starting to develop as an asset class, and we're starting to understand the impact this technology can have."
- Deere's Massive $5.2 Billion Deal for a German Company May Signal Something Surprising: The BIG Deal
- Hang on to Your Cap as Deere Corrects to the Downside
However, Blue River may be among the first substantial exits in the agtech space since Climate Corp., a provider of big data tools for agriculture, sold to agrochemical and agricultural biotechnology behemoth Monsanto Co. (MON) for $930 million in October 2013.
Monsanto, which in May pulled out of a $190 million agreement to sell its high-speed precision planting technology subsidiary Precision Planting LLC to Deere, is eagerly awaiting regulators' approval on its $66 billion acquisition by German drugs and pesticides maker Bayer AG.
It's megadeals like the combination of Bayer and Monsanto, Dow Chemical Co.'s $130 billion merger with DuPont Co. and ChemChina's $43 billion takeover of Switzerland's Syngenta AG that have dealmaking in the agtech sector in a temporary period of flux. Industry followers expect these larger agriculture companies to return to M&A as a means of acquiring new technologies after they have integrated their current acquisitions and subsequently reorganized their portfolios. Unfortunately, those processes could take quite some time.
Meanwhile, investment in the agricultural technology space from a startup perspective continues to widen.
Globally, the industry saw $4.4 billion worth of investments, including a $1 billion Series H funding round for unicorn ele.me, China's largest restaurant marketplace, according to AgFunder, a marketplace for agricultural food technology startups seeking to raise investment capital from accredited investors.
In AgFunder's mid-year report, the firm suggested agtech startups were on pace to see $8 billion worth of investments by the end of the year.
When looking at the startup space, one can see large strategics including Monsanto and BASF AG are already interested in getting in on the ground floor of this technology, setting up venture capital arms of their own to invest in early funding rounds for startups, such as online grain marketplace FarmLead and biomaterials developer P2Science.
According to the second quarter VenturePulse report from accounting firm KPMG LLP, corporate involvement in global venture deals hit an all-time high in the first half of 2017, accounting for over 15% investment dollars and over 20% of deal activity.
But the issue remains in how to get private equity and strategic buyers involved in M&A in the space on a grand scale.
Beyond Deere's acquisition of Blue River, few notable deals in the agtech space have come across this year, aside from DowDupont's acquisition of farm management software maker Granular Inc. for a reported $300 million.
Perhaps most intriguing is that large agrifood companies have yet to get involved in a big way, contributing to just 2% of deal activity in the first half, according to AgFunder's report.
"There is still room for a lot more M&A to keep the sector attractive to entrepreneurs," AgFunder wrote. "Corporations that are still dragging with their innovation investment initiatives may soon face an alarming wakeup call as their competitors gain an information advantage for their M&A pipeline."
Company followers saw Deere's investment in Blue River's "see-and-spray" robot technology as a way to encourage more tractor and heavy equipment sales by reducing farmers' spending on expensive inputs like fertilizer and pesticides, and Belldegrun is encouraged that the deal broadens the potential buyer universe beyond agrifood and agrichemical companies.
But Pontifax sees a plethora of additional budding avenues for investment including indoor vertical farming, where startup Plenty Inc. recently saw a $200 million funding round from investors including the venture arm of Japan's SoftBank Corp. and Amazon.com Inc.'s (AMZN) Jeff Bezos. Aquaculture, animal health, waste management and automation also come to mind for Belldegrun.
"When we think about investing, we focus on solving problems and improving inefficiencies for growers today, or solving problems and innovation needs for strategic corporations," Belldegrun said. "We think about the exit before we make the investment -- can we work in a strategic corporate angle at some point?I don't think its something that history shows, as we haven't seen that many exits, but the market is definitely there for tech across food and agriculture. And strategic M&A here is and will be a strong driver for potential returns for the sector."
Private equity-focused ADM Capital also sees a variety of opportunities in the space. The firm, which also invests in the broader agriculture space, sees the possibilities of leveraging the capabilities of agtech startups in combining with traditional agriculture companies. For example, the company is invested in olive tree and almond production in various countries, which may benefit from the technology of an early stage agtech company focused on soil sensors the firm is now in discussions with, Cooper said.
ADM Capital is also invested in a Newark,N.J.-based startup called AeroFarms, which produces leafy greens through vertical farming in a former steel mill. The startup is capable of produce 130 times as many crops as an acre in Salinas Valley, California, Cooper explained. ADM Capital's Cibus Fund was among six investors who helped raise $40 million for AeroFarms in a Series D round in August.
"This scale of this market is going to increase significantly over the next few years, and it will begin to draw more traditional investors," Cooper opined. "Exits like that of Blue River undoubtedly improve the chances of that. It's going to take some time, but it's an area to keep an eye on at the moment."
This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.
More of What's Trending on TheStreet: