To meet the challenge of feeding a growing world in the face of strained food production resources, climate volatility and massive urbanization trends, it is necessary to link more capital with the agriculture sector. One emerging financing trend that has the ability to significantly broaden the base of the agriculture sector investment pyramid is crowdfunding.
Through crowdfunding it is possible for agriculture project sponsors to directly reach large numbers of individual investors, broadening a project’s capital structure and experimenting with more creative investment terms and conditions.
While crowdfunding has great potential, agriculture companies as well as investors considering this financing option should not lose sight of the basic considerations that apply to other forms of investments, including what the relationship between the company and an investor will be, investment risk and return and the need to match capital investment and repayment cycles with the underlying business realities of a particular project.
The article provides a brief overview of crowdfunding, looks at the use of crowdfunding in the agriculture sector and considers the potential of agriculture sector crowdfunding in the future.
Overview of Crowdfunding
Crowdfunding is a technique for financing business, artistic or other projects and initiatives by pooling often small amounts of capital from a large number of people, in many cases through fundraising platforms that are set up on the Internet.
Crowdfunding can be structured in different ways and imply different obligations and rights for the promoters of projects, the platforms over which fund raising efforts are carried out and investors. The following are some commonly used crowdfunding structures:
● Equity. In an equity crowdfunding structure, in exchange for an investment, an investor receives an equity interest in the venture funded. The terms and conditions of the equity investment generally vary on a case-by-case basis.
● Debt. In a debt crowdfunding structure, capital from individual investors is pooled and then lent to a borrower. Key terms and conditions of the debt investment are based on the general lending parameters of the platform and the risk profile of the borrower.
● Coin. In a coin-based crowdfunding structure, the investor receives a coin or right to receive a coin based on the expectation that a market will be created for the coin in which it can be valued and traded.
● Reward. In a reward-based crowdfunding structure, the investor receives some type of reward for his investment. The nature and value of this reward can vary widely.
● Donation. In a donation-based crowdfunding structure, donations are made by the investor but the investor does not receive anything in return for his investment.
Crowdfunding has grown in importance as a financing tool. The largest crowdfunding platforms, such as Kickstarter and Indiegogo, have collectively raised billions of dollars in equity financing. It has been estimated that, as early as 2020, the crowdfunding market as a whole could reach US $90 billion.
As the crowdfunding market has grown and demonstrated its viability as a financing option, more and more types of businesses have sought crowdfunding options, including fashion, insurance and real estate.
Crowdfunding and Agriculture Projects
There are now several crowdfunding platforms in the market with an agriculture sector focus. Examples of these platforms include AgFunder, Cropital, the agriculture funding platform of Symbid and Harvest Returns.
Going forward, crowdfunding has the potential to play an important role in the agriculture sector for several reasons. The first reason is that agriculture projects can require a large amount of capital that can exceed the investment thresholds of smaller investors. Crowdfunding can give smaller investors the opportunity to participate in promising agriculture ventures of different sizes and in different parts of the world.
The second reason is that crowdfunded capital has the ability to fill the often large space between debt financing and equity investment. This space exists because the time it takes to arrange equity financing often significantly exceeds what food production cycles require, risk and return mismatches and disconnects that often occur between food production and profitability cycles and investor capital deployment and capital return timing expectations.
Limited access to equity capital, and particularly equity capital at the higher end of the risk spectrum, poses a major challenge to small and medium-sized agriculture companies who need higher risk capital so that they can create cultures of innovation and take healthy risks which can allow them to offer new agriculture solutions, create production efficiencies and significantly build firm value.
A third reason is that many consumers are increasingly concerned about where their food comes from, how it was grown and the food’s quality. Crowdfunding provides opportunities for individual investors and consumers to become more directly involved in earlier stages of the food production cycle. Further, the fact that by definition all food sector investors are also food consumers creates the possibility of paying investment returns not only through capital but also through food products that the farm has produced. This can help to convert producers and consumers from people who are on opposite sides of the food chain to partners.
Issues to Consider
While crowdfunding poses great promise for the agriculture sector as a whole, agriculture companies that are considering crowdfunding as a financing option should keep in mind that, rather that constituting a silver bullet financing solution, crowdfunding for many firms will best be used as a complement to traditional debt and equity financing sources.
Further, while some types of crowdfunding do not require investment funds to be paid back, basic laws of investing economics suggest that no funding source will last for long if it is not based on a reasonably fair exchange of economic value. Accordingly companies should carefully structure capital raises so that they will lead to successful business ventures that ideally create a stage for long-term and mutually beneficial company-investor relationships.
From the investor’s perspective, the ability to invest directly in companies whose investment offerings have not been thoroughly vetted creates real investment risk. Agriculture is a sector with real risks and some companies, due to their teams, business models and commercial arrangements may be significantly better placed to manage these risks than others. Accordingly, investors must be on their guard to thoroughly analyze investment opportunities, and if necessary seek the assistance of third parties in doing so, so that investors clearly understand potential risks and returns.
Crowdfunding is set to become an increasingly important element of agriculture sector finance. This type of funding option has the potential to expand agriculture capital markets, allow agricultural firms to build value more efficiently and involve people more directly in food production. At the same time, companies as well as investors need to analyze crowdfunding options carefully to make sure they make economic sense, are carefully structured and ideally lead to mutually beneficial investment relationships.
This article was written by Darin Bifani, ONEtoONE Partner in Chile.