Mind the Investment Gap
Agriculture is an inherently risky sector for investment, and businesses targeting highly fragmented and informal smallholder markets in developing countries are taking on risk on steroids. But with 500 million farms and more than two billion people depending on agriculture for their livelihoods, this is not a market to ignore. Agribusinesses stand to gain a vast new pool of customers when they reach these farmers, as well as provide them with access to products and services they need to become reliable, life-long customers. But a dual investment gap exists in this market: agribusinesses often cannot access sufficient financing to grow and enter smallholder markets, and potential investors find that few businesses are ready for traditional investment. Agribusinesses in these markets often can’t access traditional financing and must rely on family and friends. The missing middle of this financing is both customized to agricultural production cycles and patient enough to allow for the lag between upfront market entry costs and scaling of sales revenue — and sales revenues that will be seasonal at that. In addition, despite growing interest in agriculture by venture capital and social capital, success in last mile markets is difficult, so these are not considered by everyone to be good bets for investment. Investors also find a dearth of investment-ready opportunities in the pipeline.
So how can we bridge these gaps?
Feed the Future Partnering for Innovation is working to bridge the investment gaps in several ways. First, we identify businesses to partner with using criteria similar to what investors would use, such as commercialization strategy, technology, market opportunity, cost/benefit analysis, organizational capacity and potential for scale. Second, we provide grant capital to inject funding into these businesses when they are ready for growth but may not be ready for more traditional investment like debt equity. This allows businesses to become established in smallholder markets and prove their product or service is profitable in these markets. Third, we prepare these businesses for additional, more traditional investment by providing acceleration services for business development, market research, organizational capacity, investor pitching and other areas that strengthen businesses and make them more sustainable and better able to manage investment. Not all of the businesses we work with are ready for additional investment when our partnership with them ends. But some are, and this creates a pipeline of investment-ready businesses established in the market and ready to continue scaling.
We are still looking for ways to strengthen our efforts to bridge the gaps between investors and businesses working in smallholder markets, though. How can we better connect investment-ready businesses with the right investors? How can we convince investors these businesses represent a good investment opportunity despite the riskiness of the markets in which they operate?
We don’t have all the answers and would love to hear from you! Are you an investor interested in the agriculture market? Are you an accelerator helping businesses become investor-ready? Are you a business looking for investment? Let us know what you think about how to bridge the investment gaps for agribusinesses!